Insurance Fundamentals
for Policymakers
Insurance Fundamentals for Policymakers
Four assignments:
• Insurance Principles
• Insurance Coverages: Property and Casualty
• Insurance Coverages: Life and Health
• Insurance Regulation and Legislation
Insurance Coverages: Life and Health
Topics
• Types of Life Insurance
• Introduction to Annuities
• Health Insurance Plans
Types of Life Insurance
Life and health insurance help protect individuals’ and
families’ assets in the event of death, illness, or accident.
Some life insurance contracts also provide a means of
savings.
Types of Life Insurance
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Term life
Whole life
Universal life
Variable life
Variable universal life
Specialty products
Life Numbers…
 Probability of death for 20-35 year-old:
 In U.S.:
 X out of 1,000
 $100,000 of LI coverage:
F*S
 .001 * $100,000 = $____
 $1 per $1000 of face amount
 Price for pure protection
Term Life Insurance Pricing
mortality
curve
(~term)
$
or
p(l)
x
time
100
Term Versus Permanent Pricing
$
or
p(l)
under
payment
overpayment
x
time
100
Term Life Insurance
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Coverage for specified period
No cash value
Policy value paid to beneficiary on insured’s death
Premium escalates with age
Renewable
May be convertible to whole life
Whole Life Insurance
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Lifetime protection
Accrued cash value
Unchanged premiums
Loans on cash value
Universal Life Insurance
• Separate protection, savings, and expense components
• Earns higher of minimum interest rate or market interest
rate
• Flexibility—premiums, access to cash value, and
additional insureds
• Risks—policy lapse, growth variability
Variable Life Insurance
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•
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Choice of investment accounts
Level premiums
Variable investment performance
Tax-free investment account changes
Variable Universal Life
• Value based on insurer’s account performance
• Choice of accounts
• Significant expense loadings and mortality cost charges
Other Types of Life Insurance
• Current assumption whole life
• Second-to-die (survivorship)
• First-to-die (joint)
Life Insurance Type Features
Taxation of Life Insurance Products
• Death Benefit
– Not taxable to beneficiary
– No limit as to face amount
– True for all types of life insurance contracts
Taxation of Life Insurance Products
• Cash Value Life Insurance [CVLI]
– Product has two components
– Protection and savings or cash value
– Cash value accumulates over time – credited with interest
• ‘Inside buildup’
Taxation of Life Insurance Products
• No federal income tax for a policyholder with respect to any earnings
on CVLI
• True if the life insurance contract meets the definition of a life
insurance contract under Section 7702 – must have the appropriate
balance between death protection and cash value
Taxation of Life Insurance Products
• Policy Loans
• Borrow cash value – interest charged
• Interest is not deductible if policy is Single Premium Whole Life or
Endowment Contracts
Introduction to Annuities
Annuities are designed to transfer to an insurer the
contract owner’s risk of outliving his or her income.
The Risk
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We’ve worked and saved $1 million
The Risk: We might live a (really) long time and outlive
our assets
In most countries:
 65-year-old men and women can expect to live to
81 and 85
 1/3 women and 1/5 men born today will live beyond
90
How Long Will Retirement Assets Last?
Life Insurance vs. Annuities

Think of as opposite of LI
 Life insurance addresses the risk of dying too
soon—mortality risk
 Annuities address the risk of living “too long”—
longevity risk
Parties to Annuity Contracts
 The insurer
 The contract owner
 The person insured under the annuity (annuitant)
The beneficiary is typically not a party to the contract.
Purpose of Annuities
• Tax-efficient retirement savings—Accumulated cash value is tax
deferred.
• Income that cannot be outlived
• Guaranteed death benefit
Payment Guarantees
Guarantees vary by annuity:
 Straight life annuity
 Life annuity with period certain
 Refund annuity
Health Insurance Plans
Various types of group and individual healthcare
plans are available in the private,
nongovernmental market.
Traditional Health Insurance Plans
 Based on fee for service, or indemnity
 For individuals or groups
Blue Cross and Blue Shield Plans
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Separately regulated
Basic and major medical expense coverage
Managed-care plans
Direct payment to providers
Managed-Care Plans
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Negotiated provider fees
Reduced consumer costs
Limited consumer flexibility
Coverage of standard services
Managed-Care Plan—HMO
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Covers only network-provided services
Fixed, prepaid fee
Copayments for routine visits
Primary physician preapproval of specialist
HMO preapproval of some treatments and services
Oversight of tests and treatments
Managed-Care Plan—PPO
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Choice of providers
Lower medical costs and deductibles
No primary physician required
Costlier than HMOs
Managed-Care Plan—EPO
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Lower premium
Insurers’ access fee for use of network
Fee schedules for medical service levels
Exclusive-network-use requirement, except for
emergencies
Managed-Care Plan—POS
• Coverage for use of out-of-network specialists
• Members receive some POS coverage for using out-ofnetwork providers but must handle paperwork
Medicare
Medicare Advantage managed-care options
– HMOs
– Provider-sponsored organizations
– PPOs
– Medical savings accounts
– Private fee-for-service plans
– Special-needs plans
Consumer-Directed Health Plans
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Lower premiums, higher deductibles
No deductibles for preventive care
Use of HSA or HRA to help pay deductibles
Informational decision-making tools
The Affordable Care Act
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Insurers cannot decline to insure children with
preexisting medical conditions
Adult children (to age 26) can be covered under
parent’s plan
No lifetime dollar limits on essential benefits, phase-out
of annual limits
Insurers must spend set percentage of premium on
direct care or quality improvement
Summary
 Life insurance can provide financial security for survivors
of an insured who dies
 Annuities can protect holders against outliving their
income
 Health insurance plans cover routine and major medical
costs