Life Insurance, Annuities and Health Insurance

1. INFORM+INSPIRE Life Insurance, Annuities and Health Insurance David T. Russell, Ph.D. Director, CSUN Center for Risk and Insurance March 14-15, 2013 The Griffith Insurance Education Foundation

2. Agenda • Overview of Life/Annuity/Health Market • Overview of Life Insurance Products • Overview of Annuity Products • Overview of Health Ins Products • Regulation Of Health Insurance • Review of PPACA The Griffith Insurance Education Foundation

3. Life/Annuity/Health Insurance • US Life/Health/Annuity Market: $1.24t • CA Life/Health/Annuity Market: $166b • Life Insurance Market Has Zero Growth • Annuity Market Growing Nicely • Life Insurers Continue to Gather Assets • Being ID’d as “Systemically Important?” • Health Insurance Market in Flux The Griffith Insurance Education Foundation

4. The Players in CA (2011 Prems) • 1. Anthem Blue Cross • 2. John Hancock • 3. Met Life Investors (Annuities) • 4. Prudential • 5. Met Life • 6. Lincoln National The Griffith Insurance Education Foundation

5. Why Buy Life Insurance? • Cover Risk of Premature Death • Protect Survivors’ Lifestyle • Fund Plans After Death (Ex: College) • Guarantee Debtsand Settlements • Protect Knowledge/Skills of Key People • Investment Features • Tax Benefits(Always Under Review) The Griffith Insurance Education Foundation

6. Life Insurance Products • Whole Life Insurance • Term Life Insurance (No Cash Value) • Universal Life Insurance • Variable Life Insurance • Variable Universal Life Insurance • Other The Griffith Insurance Education Foundation

7. Term vs. Cash Value • Term: “Renting” Insurance • Protects Only for Term of Policy • Must Be Renewed, If Needed • Cash Value: “Owning” Insurance • Provides Permanent Protection • Usually Accumulates Cash Value • Higher Premiums Earlier in Life The Griffith Insurance Education Foundation

8. mortality curve (~term) Level Prem (Whole) Term Life Versus Whole Life: Premiums $ under payment overpayment x 120 Age The Griffith Insurance Education Foundation

9. Term Life Insurance • Carries Low Prems that Rise Over Time • Builds No Cash Value • Favored by Most “Experts” • Must Be Renewed at Increasing Rates • Employer-Provided Ins is Group Term The Griffith Insurance Education Foundation

10. Whole Life Insurance • High, Level Premiums for Life • Permanent Coverage-No Need to Renew • Builds Cash Value • Earns Interest/Dividends Tax Deferred • Allows Policy Loans or Policy Surrender* • Variable Life Allows Investment Choices *If cash value exceeds surrender charges. The Griffith Insurance Education Foundation

11. Universal Life • Combination of Whole and Term Ins • Permanent Protection • Premiums are Flexible • Can Build Cash Value if Prems Paid • Carries Higher Fees • Variable UL Allows Investment Choices The Griffith Insurance Education Foundation

12. Life Insurance Pricing • Driven by Interest Rates • Driven by Mortality Factors • Age • Gender • Smoking • Family History • Health (Medical Records, Medical Exam) • Other (Hobbies, Mkt Competition) The Griffith Insurance Education Foundation

13. Life Insurance Contract Terms • Incontestible Clause • Suicide Clause • Reinstatement • Grace Period • Convertible The Griffith Insurance Education Foundation

14. Current Life Insurance Issues • Policy Replacements • Twisting & Churning • Sales of Unsuitable Products • Characterizing Life Ins as “Savings” • Life Insurance “Settlements” • Tax Benefit Under Attack (Again) The Griffith Insurance Education Foundation

15. Annuities • Annuity = Stream of Regular Payments • Life Annuity: Stream Lasts for Life • Cannot Outlive a Life Annuity • Second-to-Die/Joint Annuity: Two Lives • Social Security is a Joint Annuity • Annuities Primarily Used for Retirement • Annuities Often Purchased with 401(k) $ The Griffith Insurance Education Foundation

16. Types of Annuities • Fixed Annuities • Provides Fixed Return (Guarantees) • Inflation Adjustment Available, at a Cost • Indexed and Variable Annuities • Returns Depend on Performance of Stocks • Life Annuities vs. Period Certain Option • Life Annuities End at Death; Period Certain Options Protect Family if Death The Griffith Insurance Education Foundation

17. Annuity Pricing • Sensitive to Two Main Factors • Interest Rates • Mortality (Age and Gender) • Expenses and Commissions • Closer to Death Means More per Month • Premiums Often Funded w/401(k) • Premiums Can Exceed $1 million The Griffith Insurance Education Foundation

18. Why Regulate Annuities? • Most Annuities are Deferred • Insurer Gets $ Up Front and Invests • Payout May Last for Decades • Buyers Uninformed, Life Savings at Risk • Large Upfront Commissions May Result in Unsuitable Sales • Annuity Assets Exceed $1 trillion The Griffith Insurance Education Foundation

19. Annuity Facts • Regulation: Fixed vs. Indexed vs. Variable • Fixed & Indexed Regulated by State • Variable Annuities Regulated by SEC • Indexed Annuities May Transition to SEC • Suitability—Some Sales Not Advisable • Sell an Annuity to a 76 yo Cancer Survivor? • Adverse Selection with Annuities The Griffith Insurance Education Foundation

20. CA Health Ins Regulation • Most CA Health Plans Are Overseen by Department of Managed Health Care • Legislative Oversight by Assembly Committee on Health • Some Plans Sold by Life Insurers Remain Under DOI Jurisdiction • Rates Must Be Filed for Public Comment, but Rate Changes Need Not Be Approved The Griffith Insurance Education Foundation

21. Health Insurance Plans • Preferred Provider Organization (PPO) • Contracts w/Certain Providers who Discount • Health Maintenance Org (HMO) • Total Control of Member Health • Point of Service Plan (POS) • Elements of HMO (Some Choice of Provider) • Fee For Service (Major Medical) • Allows Most Choice of Provider The Griffith Insurance Education Foundation

22. Group Health Insurance • Most People Receive Group Health Ins Through Employers’ Plans • Benefit of Scale/Expense Savings • No Adverse Selection-Everyone Covered • Low Risks Cannot Opt Out • Usually Employer Subsidized • For Now, Group Ins Not Taxable The Griffith Insurance Education Foundation

23. Other Sources of Health Insurance • Social Security (Medicare) • Part A (Hospital); Payroll Tax (1.45% + Match) No Additional Premium if 40 Quarters of Work • Part B (Medical) $104.90* Monthly Prem in 2013 • Part D (Rx) Premium (average $40*month 2013) • Medicaid (Medi-Cal) • State-Run, Federally-Subsidized Ins for the Poor • Medicare Supplement (“Medigap”) • Private Plans that Fill in Gaps in Medicare The Griffith Insurance Education Foundation

24. PPACA Key Provisions • Patient Protection & Affordable Care Act • Expansion of Medicaid: Cover Individuals < age 65 with AGI up to 133% of Poverty Level (~$14,200 Individual, $29,300 Family of 4) Effective 1/14 • Individual Mandate: Must Carry Health Ins 2014 or Pay Penalty $695 - $2,085, Based on Income (1/14) • Employer Mandate: Employers of 50+ Workers Pay $2,000 Penalty for No Health Ins (1/14) • Medical Loss Ratio: 80% of Premiums (85% for Large Group Plans) Must Be Spent on Claims and Quality Improvements; Rebate the Excess to Consumers The Griffith Insurance Education Foundation

25. PPACA Key Provisions • State Health Exchanges: Individuals and Businesses < 100 Employees Can Access Exchange Market (1/14) • Federal Support for Creation of the Exchanges • Premium Subsidies For People with Incomes Up to 400% of the poverty level ($44k Individual, $92k Family of 4) and No Employer Plan • Subsidy for Insurance Purchased through Exchange • This Will Reduce Adverse Selection Concerns • Premium Tax Credit forSmall Businesses Who Buy Ins The Griffith Insurance Education Foundation

26. PPACA Key Provisions • Coverage Requirements • Children Covered to Age 19 Despite Preexisting C. • No Annual or Lifetime Limits on Coverage • Children Covered to Age 26 on Parents Plan • Must Include Well Care with No Copay/Deductibles • Premiums • Limits Plan Increases, Compress Rate Differences • Prohibit Rescission for “Honest Mistake” The Griffith Insurance Education Foundation

27. Health Exchange Plans The Griffith Insurance Education Foundation

28. INFORM+INSPIRE Any Questions? Feel free to contact me: David T. Russell, Ph.D. California State University, Northridge (818) 677-2438 David.Russell@csun.edu The Griffith Insurance Education Foundation