Answers to questions about insurance:
1. What causes my health insurance premiums to go up every year?
If you have group health insurance through your employer your renewal rates are affected by 3 factors: First is the claims experience from the previous year based on everyone in the group including employees dependents who are also on the group plan. If the group had a favorable claims experience (claims are relatively low) that will be a factor that is weighed into lowering your premium. The second factor is based on the state insurance department’s examination of the carrier’s books. Each carrier that is licensed in the state must submit their financials and the DOI checks to see that the carrier has enough reserves to pay the claims based on a formula that the DOI uses. If the carrier has plenty in reserves to pay claims then they can lower their premiums for the coming year and if it has too little they must increase their premiums. The third factor is based on the profitability of the company. If a carrier is adequately funded based on the first two factors stated above (claims experience and the DOI formula) but they do not make a profit they will not be in business very long. If the carrier does not make it’s margin (difference between revenue and profits based on a percentage) they must raise premiums. If they make their margin with plenty to spare, they could factor a decrease in premiums.
If you have individual health insurance (coverage you buy directly on your own because its less expensive, your employer does not offer coverage at work or because you are self-employed) then the premiums are still based on three factors. Factors 2 and 3 stated above are the same for group health insurance. The difference in pricing of premium for individuals is based on experience of everyone in the same age group in the same zip code. This gives the insurance company something called the “Law of Large Numbers,” which means the bigger the group or pool of people to receive insurance coverage the more predictable and stable the premium than for a large group. If the group has 5000 members (every male age 21-25 in Unamethecounty, Georgia) and another group has 10 members (the little mom & pop grocery store on the corner) Which group will be the most predictable and stable in terms of calculating the premium?
2. How come an insurance company will deny me coverage if they consider me uninsurable?
The best way to answer that question is to make you the CEO of the ABC Health Insurance Company. As the CEO you want to make a profit and increase earnings for the company and/or the stockholders. If you raise the premiums too much nobody will buy insurance from your company. Make the premium too little and you will not make a profit for the company. Now what happens if you have an applicant that comes to ABC for insurance that has heart problems, diabetes and cancer. If you desire to make a reasonable profit are you going to insure that person? Do you think that person will potentially have huge medical expenses? You bet! You feel bad for the guy but it’s a bad business decision to insure him. Now, lets say you have a huge heart and decide as the CEO you are going to insure everyone who applies for insurance including those who are “uninsurable.” The guy with heart problems, diabetes and cancer is very happy and goes to tell all his neighbors what a great company ABC is. All his friends and neighbors who are considered “uninsurable” know they cannot get insurance from any other health insurance company but all of a sudden they hear that ABC company will insure everyone regardless of pre-existing health conditions. Word travels fast. Pretty soon everyone who has every been denied health coverage will come to ABC to get coverage whereas all the other companies have denied them coverage. How long do you think ABC will last in the insurance market against their competitors?
3. What effect will president Obama’s decree that all companies will offer coverage to everyone regardless of pre-existing conditions or not beginning in 2014?
Do you think premiums will go up or down? The answer is obvious! Now let’s say those who are young and healthy and who refuse to buy health insurance don’t buy it until they are on their way to the hospital. The affect will be to have only the diseased, sick and unhealthy people to be insured. No one who is healthy will want to buy expensive health insurance if they don’t have to unless they really need it. (Keep in mind the law now says that nobody gets denied coverage due to pre-existing conditions.) How do we fix this problem? Hey, let’s pass a law that states everyone must buy health insurance no matter what. In the history of the United States no law has ever forced it’s citizens to buy something for just being alive. (True, the law states that you must have auto insurance in order to drive and are forced to get coverage, however if you decide not to drive, then you do not have to purchase auto insurance, therefore you have a choice of whether or not you are going to drive and buy insurance.) With the Obama Health Reform you have no choice. If you are breathing then you must by insurance. There is definitely a constitutional issue here. Now lets somehow make the health care laws constitutional. What about all the people who cannot afford health insurance? Do they go to jail because they cannot afford insurance? What if we just give them a subsidy from the government to buy insurance. What affect will this have? Now the people who can afford their health premium must pay for someone else’s health premium also? So now we have a redistribution of wealth, do we not? The government takes money from those that have it and give it to those who do not. Do you think this encourages or discourages a moral, hard work ethic in the U.S. work force? Why should I work a few hours extra per week to pay for someone else’s insurance who doesn’t work (but could if they wanted to get out and hustle.)
4. Do I need to get a medical exam before I get underwritten?
For health insurance you will not need a medical exam. For life insurance depending on your age you would not need an exam if you were purchasing a small amount of coverage but the more life insurance you buy the more neccesary it is to have a para-med or medical exam of some sort. The cost of the exam is usually borne by the company.
Accidental Death Benefit – In a life insurance policy, benefit in addition to the death benefit paid to the beneficiary, should death occur due to an accident. There can be certain exclusions as well as time and age limits.
Active Participant – Person whose absence from a planned event would trigger a benefit if the event needs to be canceled or postponed.
Activities of Daily Living – Bathing, preparing and eating meals, moving from room to room, getting into and out of beds or chairs, dressing, using a toilet.
Actuary – A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics. (Americanism: In most other countries the individual is known as “mathematician.”)
Annual Crediting Cap – The maximum rate that the equity-indexed annuity can be credited in a year. If a contract has an upper limit, or cap, of 7 percent and the index linked to the annuity gained 7.2 percent, only 7 percent would be credited to the annuity.
Annuitization – Process by which you convert part or all of the money in a qualified retirement plan or nonqualified annuity contract into a stream of regular income payments, either for your lifetime or the lifetimes of you and your joint annuitant. Once you choose to annuitize, the payment schedule and the amount is generally fixed and can’t be altered.
Annuitization Options – Choices in the way to annuitize. For example, life with a 10-year period certain means payouts will last a lifetime, but should the annuitant die during the first 10 years, the payments will continue to beneficiaries through the 10th year. Selection of such an option reduces the amount of the periodic payment.
Annuity – An agreement by an insurer to make periodic payments that continue during the survival of the annuitant(s) or for a specified period.
Attained Age – Insured’s age at a particular time. For example, many term life insurance policies allow an insured to convert to permanent insurance without a physical examination at the insured’s then attained age. Upon conversion, the premium usually rises substantially to reflect the insured’s age and diminished life expectancy.
Benefit Period – In health insurance, the number of days for which benefits are paid to the named insured and his or her dependents. For example, the number of days that benefits are calculated for a calendar year consist of the days beginning on Jan. 1 and ending on Dec. 31 of each year.
Broker – Insurance salesperson that searches the marketplace in the interest of clients, not insurance companies.
Broker-Agent – Independent insurance salesperson who represents particular insurers but also might function as a broker by searching the entire insurance market to place an applicant’s coverage to maximize protection and minimize cost. This person is licensed as an agent and a broker.
Captive Agent – Representative of a single insurer or fleet of insurers who is obliged to submit business only to that company, or at the very minimum, give that company first refusal rights on a sale. In exchange, that insurer usually provides its captive agents with an allowance for office expenses as well as an extensive list of employee benefits such as pensions, life insurance, health insurance, and credit unions.
Coinsurance – In property insurance, requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses.
Coverage – The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.
Convertible – Term life insurance coverage that can be converted into permanent insurance regardless of an insured’s physical condition and without a medical examination. The individual cannot be denied coverage or charged an additional premium for any health problems.
Copayment – A predetermined, flat fee an individual pays for health-care services, in addition to what insurance covers. For example, some HMOs require a $10 copayment for each office visit, regardless of the type or level of services provided during the visit. Copayments are not usually specified by percentages.
Cost-of-Living Adjustment (COLA) – Automatic adjustment applied to Social Security retirement payments when the consumer price index increases at a rate of at least 3%, the first quarter of one year to the first quarter of the next year.
Coverage Area – The geographic region covered by travel insurance.
Creditable Coverage – Term means that benefits provided by other drug plans are at least as good as those provided by the new Medicare Part D program. This may be important to people eligible for Medicare Part D but who do not sign up at their first opportunity because if the other plans provide creditable coverage, plan members can later convert to Medicare Part D without paying higher premiums than those in effect during their open enrollment period.
Death Benefit – The limit of insurance or the amount of benefit that will be paid in the event of the death of a covered person.
Deductible – Amount of loss that the insured pays before the insurance kicks in..
Disease Management – A system of coordinated health-care interventions and communications for patients with certain illnesses.
Elimination Period – The time which must pass after filing a claim before policyholder can collect insurance benefits. Also known as “waiting period.”
Exclusions – Items or conditions that are not covered by the general insurance contract.
Future Purchase Option – Life and health insurance provisions that guarantee the insured the right to buy additional coverage without proving insurability. Also known as “guaranteed insurability option.”
Grace Period – The length of time (usually 31 days) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time. In Universal Life policies, it typically provides for coverage to remain in force for 60 days following the date cash value becomes insufficient to support the payment of monthly insurance costs.
Guaranteed Renewable – A policy provision in many products which guarantees the policyowner the right to renew coverage at every policy anniversary date. The company does not have the right to cancel coverage except for nonpayment of premiums by the policyowner; however, the company can raise rates if they choose.
Guaranty Association – An organization of life insurance companies within a state responsible for covering the financial obligations of a member company that becomes insolvent.
Health Maintenance Organization (HMO) – Prepaid group health insurance plan that entitles members to services of participating physicians, hospitals and clinics. Emphasis is on preventative medicine, and members must use contracted health-care providers.
Health Reimbursement Arrangement – Owners of high-deductible health plans who are not qualified for a health savings account can use an HRA.
Health Savings Account – Plan that allows you to contribute pre-tax money to be used for qualified medical expenses. HSAs, which are portable, must be linked to a high-deductible health insurance policy.
Indemnity – Restoration to the victim of a loss by payment, repair or replacement.
Income Taxes – Incurred income taxes (including income taxes on capital gains) reported in each annual statement for that year.
Inflation Protection – An optional property coverage endorsement offered by some insurers that increases the policy’s limits of insurance during the policy term to keep pace with inflation.
Insurable Interest – Interest in property such that loss or destruction of the property could cause a financial loss. .
Interest-Crediting Methods – There are at least 35 interest-crediting methods that insurers use. They usually involve some combination of point-to-point, annual reset, yield spread, averaging, or high water mark.
Laddering – Purchasing bond investments that mature at different time intervals.
Liability – Broadly, any legally enforceable obligation. The term is most commonly used in a pecuniary sense.
Liquidity – Liquidity is the ability of an individual or business to quickly convert assets into cash without incurring a considerable loss. There are two kinds of liquidity: quick and current. Quick liquidity refers to funds–cash, short-term investments, and government bonds–and possessions which can immediately be converted into cash in the case of an emergency. Current liquidity refers to current liquidity plus possessions such as real estate which cannot be immediately liquidated, but eventually can be sold and converted into cash. Quick liquidity is a subset of current liquidity. This reflects the financial stability of a company and thus their rating.
Living Benefits – This feature allows you, under certain circumstances, to receive the proceeds of your life insurance policy before you die. Such circumstances include terminal or catastrophic illness, the need for long-term care, or confinement to a nursing home. Also known as “accelerated death benefits.”
Medical Loss Ratio – Total health benefits divided by total premium.
Mortality and Expense Risk Fees – A charge that covers such annuity contract guarantees as death benefits.
Mortgage Insurance Policy – In life and health insurance, a policy covering a mortgagor with benefits intended to pay off the balance due on a mortgage upon the insured’s death, or to meet the payments due on a mortgage in case of the insured’s death or disability.
Mutual Insurance Companies – Companies with no capital stock, and owned by policyholders. The earnings of the company–over and above the payments of the losses, operating expenses and reserves–are the property of the policyholders. There are two types of mutual insurance companies. A nonassessable mutual charges a fixed premium and the policyholders cannot be assessed further. Legal reserves and surplus are maintained to provide payment of all claims. Assessable mutuals are companies that charge an initial fixed premium and, if that isn’t sufficient, might assess policyholders to meet losses in excess of the premiums that have been charged.
National Association of Insurance Commissioners (NAIC) – Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by state legislatures.
Noncancellable – Contract terms, including costs that can never be changed.
Occurrence – An event that results in an insured loss. In some lines of business, such as liability, an occurrence is distinguished from accident in that the loss doesn’t have to be sudden and fortuitous and can result from continuous or repeated exposure which results in bodily injury or property damage neither expected not intended by the insured.
Out-of-Pocket Limit – A predetermined amount of money that an individual must pay before insurance will pay 100% for an individual’s health-care expenses.
Own Occupation – Insurance contract provision that allows policyholders to collect benefits if they can no longer work in their own occupation.
Paid-Up Additional Insurance – An option that allows the policyholder to use policy dividends and/or additional premiums to buy additional insurance on the same plan as the basic policy and at a face amount determined by the insured’s attained age.
Participation Rate – In equity-indexed annuities, a participation rate determines how much of the gain in the index will be credited to the annuity. For example, the insurance company may set the participation rate at 80%, which means the annuity would only be credited with 80% of the gain experienced by the index.
Point-of-Service Plan – Health insurance policy that allows the employee to choose between in-network and out-of-network care each time medical treatment is needed.
Policy – The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clause, riders, endorsements, and papers attached thereto and made a part thereof.
Policy or Sales Illustration – Material used by an agent and insurer to show how a policy may perform under a variety of conditions and over a number of years.
Pre-Existing Condition – A coverage limitation included in many health policies which states that certain physical or mental conditions, either previously diagnosed or which would normally be expected to require treatment prior to issue, will not be covered under the new policy for a specified period of time.
Preferred Provider Organization – Network of medical providers who charge on a fee-for-service basis, but are paid on a negotiated, discounted fee schedule.
Premium – The price of insurance protection for a specified risk for a specified period of time.
Qualified High-Deductible Health Plan – A health plan with lower premiums that covers health-care expenses only after the insured has paid each year a large amount out of pocket or from another source. To qualify as a health plan coupled with a Health Savings Account, the Internal Revenue Code requires the deductible to be at least $1,000 for an individual and $2,000 for a family. High-deductible plans are also known as catastrophic plans.
Qualified Versus Non-Qualified Policies – Qualified plans are those employee benefit plans that meet Internal Revenue Service requirements as stated in IRS Code Section 401a. When a plan is approved, contributions made by the employer are tax deductible expenses.
Qualifying Event – An occurrence that triggers an insured’s protection.
Renewal – The automatic re-establishment of in-force status effected by the payment of another premium.
Reserve – An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.
Risk Class – Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female.
Risk Management – Management of the pure risks to which a company might be subject. It involves analyzing all exposures to the possibility of loss and determining how to handle these exposures through practices such as avoiding the risk, retaining the risk, reducing the risk, or transferring the risk, usually by insurance.
Section 1035 Exchange – This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity policy without creating a taxable event.
Section 7702 – Part of the Internal Revenue Code that defines the conditions a life policy must satisfy to qualify as a life insurance contract, which has tax advantages.
Solvency – Having sufficient assets–capital, surplus, reserves–and being able to satisfy financial requirements–investments, annual reports, examinations–to be eligible to transact insurance business and meet liabilities.
Stock Insurance Company – An incorporated insurer with capital contributed by stockholders, to whom earnings are distributed as dividends on their shares.
Stop Loss – Any provision in a policy designed to cut off an insurer’s losses at a given point.
Surplus – The amount by which assets exceed liabilities.
Surrender Charge – Fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value. This fee reflects expenses the insurance company incurs by placing the policy on its books, and subsequent administrative expenses.
Surrender Period – A set amount of time during which you have to keep the majority of your money in an annuity contract. Most surrender periods last from five to 10 years. Most contracts will allow you to take out at least 10% a year of the accumulated value of the account, even during the surrender period. If you take out more than that 10%, you will have to pay a surrender charge on the amount that you have withdrawn above that 10%.
Term Life Insurance – Life insurance that provides protection for a specified period of time. Common policy periods are one year, five years, 10 years or until the insured reaches age 65 or 70. The policy doesn’t build up any of the nonforfeiture values associated with whole life policies.
Tort – A private wrong, independent of contract and committed against an individual, which gives rise to a legal liability and is adjudicated in a civil court. A tort can be either intentional or unintentional, and liability insurance is mainly purchased to cover unintentional torts.
Umbrella Policy – Coverage for losses above the limit of an underlying policy or policies such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.
Underwriter – The individual trained in evaluating risks and determining rates and coverages for them. Also, an insurer.
Underwriting – The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Universal Life Insurance – A combination flexible premium, adjustable life insurance policy.
Usual, Customary and Reasonable Fees – An amount customarily charged for or covered for similar services and supplies which are medically necessary, recommended by a doctor or required for treatment.
Utilization – How much a covered group uses a particular health plan or program.
Variable Annuitization – The act of converting a variable annuity from the accumulation phase to the payout phase.
Variable Life Insurance – A form of life insurance whose face value fluctuates depending upon the value of the dollar, securities or other equity products supporting the policy at the time payment is due.
Variable Universal Life Insurance – A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying equity investments, and premiums and benefits are adjustable at the option of the policyholder.
Waiting Period – See “elimination period.”
Waiver of Premium – A provision in some insurance contracts which enables an insurance company to waive the collection of premiums while keeping the policy in force if the policyholder becomes unable to work because of an accident or injury. The waiver of premium for disability remains in effect as long as the ensured is disabled.
Whole Life Insurance – Life insurance which might be kept in force for a person’s whole life and which pays a benefit upon the person’s death, whenever that might be.