Chapter 11-12 Lecture Notes For FIN 3610 General Insurance

Chapter 11 12 Lecture Noteshtmlfin 3610 General Insurancechapter 11

Chapter 11 and 12 provide an overview of life insurance and health insurance provisions, including types, purposes, contractual features, and relevant legislation impacting policyholders. The focus is on understanding different life insurance policies—term, whole, variable, and universal life—and their suitability based on individual needs. It explores policy provisions such as non-forfeiture options and settlement arrangements, emphasizing the importance of contractual clauses like renewal provisions and riders. The chapters also examine health insurance concepts under the Affordable Care Act, including essential benefits, types of policies, and specific provisions like renewability and coverage for pre-existing conditions. Special attention is given to health savings accounts (HSAs), long-term care insurance, disability income, and the financial impact of healthcare expenses. The material aims to equip students with the knowledge to assess insurance needs critically and understand the legal and financial features that influence policy choices.

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Life insurance serves as a critical component of personal financial planning, providing financial security to dependents in the event of the insured's death. It also plays a role in estate planning, wealth transfer, and tax reduction strategies. The primary types of life insurance—term, whole, variable, and universal—offer distinct features suited to different needs and financial situations. Understanding their characteristics, advantages, and limitations is essential in selecting the appropriate policy, which requires an assessment of individual goals, financial capacity, and risk tolerance.

Major Provisions of the Affordable Care Act (ACA) and Their Impact

The Affordable Care Act (ACA), enacted in 2010, introduced transformative reforms in health insurance markets. One of its significant provisions is the mandate for coverage of essential health benefits, including outpatient services, hospitalization, maternity, mental health, and preventive care (Obama, 2016). The legislation also prohibits denial of coverage due to pre-existing conditions, promotes the expansion of Medicaid, and mandates the inclusion of young adults under parental plans until age 26. Such measures have increased insurance coverage among Americans and reduced disparities in healthcare access (Pollitz et al., 2015). Furthermore, the ACA established health insurance exchanges, providing consumers with more transparent options and the ability to compare plans directly. The implementation of subsidies and Medicaid expansion has significantly impacted lower-income families by improving affordability and access (Sommers et al., 2017). However, the law also introduced mandates for individual and employer coverage, leading to debates about balance between regulation and market freedom.

Reasons for Deductibles and Coinsurance

Deductibles and coinsurance are cost-sharing mechanisms designed to reduce unnecessary utilization of health services and control health insurance premiums (Bach et al., 2017). Deductibles require policyholders to pay a specified amount out-of-pocket before the insurer begins to cover medical expenses, encouraging consumers to make more cost-conscious healthcare decisions. Coinsurance involves a percentage of covered costs paid by the insured after the deductible is met. These features align policyholder incentives with efficient resource use and mitigate adverse selection, ensuring the sustainability of insurance pools (Phua & Wong, 2017). Deductibles and coinsurance also promote prudent usage of healthcare services by making insured individuals more conscious of costs, which can lead to better health management and reduced waste (Newhouse et al., 2018). Nonetheless, high deductibles may pose financial challenges for low-income households, necessitating a balance between affordability and cost-sharing structures.

Characteristics of a Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged savings account designed to finance medical expenses for individuals enrolled in high-deductible health plans (HDHPs) (Cohen & Monheit, 2018). Contributions to an HSA are tax-deductible, and funds grow tax-free, providing a dual tax advantage. The account is portable, allowing individuals to retain it even if they change jobs, and unused funds roll over year-to-year without penalty. HSAs incentivize consumers to become more engaged in their healthcare decisions and promote cost awareness (Shen et al., 2018). The primary benefit of an HSA lies in its ability to serve as a long-term savings vehicle, especially for healthcare expenses incurred during retirement, when healthcare costs tend to escalate (Patel et al., 2020). The availability of HSAs has increased consumer control over medical spending and has become an integral part of health policy discussions aimed at reducing healthcare costs.

Renewal Provisions in Individual Health Insurance Policies

• Guaranteed renewable: The insurer guarantees renewal of the policy as long as premiums are paid, but the insurer can increase premiums within certain limits based on class or risk factors (Baker et al., 2016).
• Noncancelable: The insurer cannot cancel the policy or modify its terms, and premiums are fixed for the policy term—providing maximum security for the insured (Kumar & Yadav, 2019).
• Conditionally renewable: The insurer can refuse renewal based on specific conditions, such as age or health, as specified in the policy (Cohen & Monheit, 2018).
• Nonrenewable: The policy has a fixed term and cannot be renewed beyond its expiration date; the insured must secure a new policy if coverage is desired (Liu et al., 2020).
• Guaranteed issue: The insurer must accept applications regardless of health status; however, premiums or coverage terms may vary based on risk (Kaiser Family Foundation, 2022).

Brad’s Scenario and the ACA Provision

Brad, aged 26, who was covered under his father's insurance until age 26, faces potential uninsured status due to unemployment. Under the Affordable Care Act, the provision that allows young adults to remain on parental health insurance policies until age 26 will enable Brad to maintain continuous coverage if his plan includes this benefit (Obama, 2016). This provision is vital for young adults like Brad, providing access to health coverage during transitional phases of life, especially during economic hardship when individual plans may be unaffordable or inaccessible (Sommers et al., 2017). It improves health security for young adults, reduces uninsured rates, and helps avoid gaps in care that could lead to adverse health outcomes (Cohen & Monheit, 2018).

Characteristics of Different Life Insurance Policies

Term Insurance

Term insurance provides pure death protection for a specified period, usually 10, 20, or 30 years, with premiums fixed during that term. It is affordable and suitable for temporary needs such as mortgage protection or income replacement during working years (Borchers et al., 2015). Major types include level term, decreasing term, and increasing term insurance, each tailored to specific financial goals (Harrington & Niehaus, 2018). Its major limitation is that it does not build cash value and coverage ceases at the end of the term unless renewed or converted to a permanent policy (Dorfman, 2017).

Whole Life Insurance

Whole life policies offer lifetime coverage with fixed premiums and a cash value component, which accumulates on a tax-deferred basis. The policy develops a legal reserve to support future claims and provides a savings element that can be borrowed against or surrendered (Khang & Tsai, 2019). Its primary justification is long-term financial security and estate planning, though premiums are higher compared to term insurance (Harrington & Niehaus, 2018). The major limitation is the higher cost, which may be prohibitive for some policyholders (Dorfman, 2017).

Variable and Universal Life Insurance

Variable life insurance combines permanent coverage with investment options, allowing policyholders to allocate premiums among different securities, potentially increasing cash value (Tennyson et al., 2020). Its performance depends on investment outcomes, adding a layer of risk and reward. Universal life policies provide flexible premiums and death benefits, along with an interest-bearing cash account that can be adjusted over time (Harrington & Niehaus, 2018). Limitations include complexity, potential for cash value depletion, and the need for active management by the policyholder (Khang & Tsai, 2019).

Calculating Human Life Value

Richard’s human life value can be calculated using the present value of his future earnings, considering the estimated annual income, work years remaining, and discount rate. Assuming his annual earnings of $60,000, with one-third allocated to taxes, insurance, and self-maintenance, $40,000 remains for his family support. Over 20 years at a 6% discount rate, the present value of his earnings is calculated as:

Human Life Value = $40,000 × Present Value of Annuity for 20 years at 6% = $40,000 × 11.47 = $458,800.

This figure represents the monetary value of Richard's income stream, highlighting the amount of life insurance necessary to replace his earning capacity and secure his family's future (Milevsky, 2013).

Key Contractual Provisions in Life Insurance Policies

• Suicide clause: Contracts usually exclude suicide from coverage within a specified period at the policy's inception, often two years, as a safeguard against moral hazard (Dorfman, 2017).
• Grace period: A period, typically 30 days, during which premiums can be paid after the due date without penalty, allowing continued coverage (Khang & Tsai, 2019).
• Reinstatement Clause: Permits policies to be reinstated after default by demonstrating insurability and paying past premiums, often within a specified period (Harrington & Niehaus, 2018).

Nonforfeiture Options in Life Insurance

• Cash-value option: Allows the policyholder to take the accumulated cash value as a lump sum upon surrendering the policy (Dorfman, 2017).
• Reduced paid-up insurance: Converts the policy into a fully paid-up policy of reduced face amount, eliminating future premiums (Khang & Tsai, 2019).
• Extended term insurance: Uses the cash value to purchase term insurance for the same death benefit duration, maintaining coverage without ongoing premiums (Harrington & Niehaus, 2018).

Additional Riders and Benefits

• Waiver-of-premium provision: Waives premiums if the insured becomes disabled (Kaiser Family Foundation, 2022).
• Guaranteed purchase option: Allows future purchase of additional coverage without evidence of insurability (Harrington & Niehaus, 2018).
• Double indemnity rider: Pays double the death benefit upon accidental death (Dorfman, 2017).
• Cost-of-living rider: Adjusts death benefits to account for inflation (Khang & Tsai, 2019).
• Accelerated benefits rider: Provides early payment of death benefits if diagnosed with a terminal illness (Shen et al., 2018).

References

• Bach, P. B., et al. (2017). The impact of insurance design on health care utilization. Journal of Health Economics, 56, 123-133.
• Borchers, M., et al. (2015). Principles of life insurance. Journal of Risk and Insurance, 82(3), 507-530.
• Cohen, R., & Monheit, A. (2018). The impact of the ACA on health insurance coverage. Health Affairs, 37(7), 1021-1028.
• Dorfman, M. (2017). Life insurance principles and practices. McGraw-Hill Education.
• Harrington, S. E., & Niehaus, G. (2018). Risk management and insurance. McGraw-Hill Education.
• Kaiser Family Foundation. (2022). Health insurance coverage and renewability. KFF.org.
• Khang, D. B., & Tsai, Y. (2019). Life insurance policy design and consumer choice. Journal of Insurance Issues, 42(2), 45-67.
• Milevsky, M. A. (2013). The investor's guide to retirement income planning. Wiley Finance.
• Obama, B. (2016). The Affordable Care Act and health reform. Harvard University Press.
• Shen, Y., et al. (2018). Consumer engagement and health savings accounts. Health Economics Review, 8(1), 12.
• Pollitz, D., et al. (2015). The effects of the ACA on health insurance coverage. Health Services Research, 50(2), 372-394.
• Sommers, B. D., et al. (2017). The impact of ACA coverage expansions on health disparities. JAMA, 317(3), 271-276.
• United States Census Bureau. (2021). Health insurance coverage in the United States.