Webinar Speakers
Presenter –
Dr. James M. Carson
Daniel P. Amos Distinguished Professor of Insurance
University of Georgia
Moderator –
Frank Tomasello
Program Director
The Griffith Foundation
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Insurance Fundamentals for
Policymakers
Four assignments:
 Insurance Principles
 Insurance Coverages: Property and Casualty
 Insurance Coverages: Life and Health
 Insurance Regulation and Legislation
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Insurance Coverages: Life and
Health Topics
 Types of Life Insurance
 Introduction to Annuities
 Health Insurance
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Big Picture 1:
• Next few decades, age 65+ adults in U.S. will
grow from 14% to 20% of population
• By 2050, the number of age-65 adults will
be ~90 million, out of 440 million in the U.S.
(twice the current number)
• Big reason: Baby boomers (‘46-’64) have
started reaching this milestone
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Big Picture 2:
• As the US population ages, important issues
emerge
• Social Security & Medicare funding
• Changing demographics impact how families
plan for:
• Possible early death
• Health care expenses
• Retirement (work until age 70, 80, ….?!)
• Given these challenges, let’s consider issues
related to life insurance, annuities, and
health insurance
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Life Insurance:
Why Would Someone Buy It?
•
•
•
•
•
•
•
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Replace Lost Income/Maintain Lifestyle for “The Living”
Pay Debts/Provide for College Education
Fund Payment of Estate Taxes
Provide Bequests to Loved Ones or Charities
Fund Buy/Sell Arrangements
Protect Against Death of Key Individuals (“Key Man”)
Access Investment Features and Tax Deferral
Unlike other types of insurance (e.g., auto), life insurance
generally is limited to one claim!
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Types of Life Insurance
 Term life (plain/simple, no “savings”
feature/account)
 Cash Value life
 Whole life (term ins. + savings)
 Universal life (UL)
 Variable Life (VL)
 Variable Universal life (VUL)
 Specialty products (e.g., Equity-Indexed UL, etc.)
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Term Versus Cash Value Pricing
mortality
curve
(~term)
$
or
p(l)
“under
Payment”
level
premium
“overpayment”
x
time
100
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Term Life Insurance
 Coverage for specified period
 No cash value
 Policy value paid to beneficiary on insured’s
death
 Premium escalates with age
 Renewable at end of each term
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Whole Life
 Lifetime protection
 Accrued cash value
 Level (fixed) premiums
 Loans on cash value available
13
Universal Life
 Separate protection, savings, and expense
components
 Minimum guaranteed interest rate, plus
possibly higher interest rate
 Flexibility—premiums, access to cash value
 Risk—policy lapse (if not enough premium
or too low interest rates)
 Think of in spreadsheet terms 
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Universal Life
Age
Year
Premium
Mort
Charge
Expense
Charge
20
1
$500
$100
$20
$380
$23
$403
$0
21
2
$500
$100
$20
$783
$47
$830
$0
22
3
$500
$102
$20
$1,208
$72
$1,280
$0
23
4
$500
$103
$20
$1,657
$99
$1,757
$0
24
5
$500
$105
$20
$2,132
$128
$2,260
$0
25
6
$500
$107
$20
$2,633
$158
$2,791
$279
Interest
Balance @ 6%
$100,000 Face Amount
Cash
Value
Surr
Value
Comparison: Term v. Whole v. UL
Term Life
Whole Life
Universal Life
Premiums
Rise Over Time
Fixed for Life
Flexible
Cash Value
None
Rises Over Time
Varies w/Prems + Int
Coverage
Temporary
Permanent
Continues as Long as
Cash Value > 0
Commissions
Low
High
High
Investment
Return
N/A
Low Guarantee,
Plus Some Possible
Increment
Low Guarantee, Plus
Credits That Vary With
Interest Rates
Expenses
Low sometimes
Medium sometimes High sometimes
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Variable Life





Choice of investment accounts/funds
Level premiums
Variable investment performance
Tax-free investment account changes
Expense loadings and mortality cost charges
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Variable Universal Life
 Flexibility in premiums and death benefit
 Policyholder makes investment choices from
menu of funds
 Death Benefit guarantee
 Expense loadings and mortality cost charges
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What do you think?
What are some common pricing factors for life
insurance in general?

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Life Insurance Pricing Factors
• Age
• Gender
• Tobacco Use
• Medical History
• Family History
• Driving Record and Risky Avocations
• Interest Rates
• Competition / Price Information (internet!)
• http://www.jstor.org/stable/10.1086/339714
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QUESTIONS?
21
Other Types of Life Insurance
 Current assumption whole life
 Second-to-die (survivorship)
 First-to-die (joint)
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Introduction to Annuities
• 80 is the new 60
• “People always live
forever when there is any
annuity to be paid to
them.” Jane Austen
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How Long Will Your Money Last?
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Introduction to Annuities
• Purpose: to provide an income that cannot be
outlived
• Give insurer $100,000 at age 65, they’ll pay you $700 /
month for life
• Insurer takes on longevity risk and investment risk
• Annuitant / Payee takes on risk of dying too soon
• Live to 104, good deal; Die in 6 months, not so good
• Insurer not so concerned with poor health of
applicants for annuities
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Annuities—Mechanics
• Longevity risk is pooled by insurer
• Insurer can predict the approximate number of
annuitants who will be alive at the end of each year
• Some individuals will live a very long time
• Some individuals will die early
• The unliquidated contributions of those who die early
can be used to provide payments to those who live a
long time
• Some people uncomfortable with big “forfeit” (if die
“early”). Thus, few people annuitize, and even fewer
annuitize without some form of minimum guarantee
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Purpose of Annuities
 Tax-efficient retirement savings—
Accumulated cash value is tax deferred.
 Income that cannot be outlived
 Guaranteed death benefit
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Payment Guarantees
The income guarantees vary by annuity:
 Straight life (“pure”) annuity
 Life annuity with period certain (e.g. 10 yrs)
 Refund annuity
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Annuities—Life Income Options
with $100,000 Premium @ age 65
Period Certain
Age
None
10 Years
20 Years
Refund
50
$462
$456
$434
$436
55
$520
$507
$466
$479
60
$598
$570
$496
$532
65
$703
$645
$522
$600
70
$845
$728
$539
$685
Note: Male age 50 equals female age 55, and so on. Amounts are higher and lower for
various insurers.
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What do you think?
For the same premium amount, (ex:
$100,000), who receives a higher amount of
monthly income at age 65, men or women,
and why?
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QUESTIONS?
32
Types of Annuities:
Fixed Annuity
• Immediate or Deferred
• Accumulation period
• Guaranteed rate – minimum rate credited (ex: 3%)
• Current rate – based on market conditions (ex: 5%)
• Liquidation Period
• Upon annuitization, pays periodic income payments
that are guaranteed and fixed in amount
• Issue of inflation and loss of value over time
33
Types of Annuities:
Equity-Indexed Annuity
• Fixed, deferred annuity that
• Allows participation in growth of stock market
• Provides downside protection against loss of
principal if held to term
• Participation rate – percentage of growth in
stock index credited to account (e.g., 25% to
90%)
• Guaranteed minimum value (ex: 90% of
premium accumulated at 3%)
• Fees / Expenses can be relatively high
34
Health Insurance Plans
Various types of group and individual healthcare plans are available in the
private, nongovernmental market.
35
Brief History of Health Insurance
in the U.S.
• Health insurance largely non-existent before Great
Depression
• Blue Cross – run by hospitals, guaranteed a certain
number of hospital days per year in return for annual
premium
• Blue shield – for physician payments
• Private health insurance took off during/after WWII
• During price controls, firms were allowed to offer health
benefits to compete for workers  led to growth in employerbased health coverage
• Tax benefits of group coverage 
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Tax Treatment of Group Health
Insurance
• Deductible at corporate level
• Not taxed at individual level by federal or state
income tax, or Social Security tax
• A major reason for the predominance of an
employer-based health insurance system
• Some debate as to changing / limiting the tax
benefits
• Consider that the value of life insurance as employee
benefit is taxable above a threshold
37
QUESTIONS?
38
Traditional Health Insurance Plans
 “Indemnity” plans, based on fee for service
 For individuals or groups
39
Blue Cross and Blue Shield Plans
 Separately regulated
 Provide basic and major medical expense
coverage
 Basically managed-care plans that provide
direct payment to providers
40
Managed-Care Plans in General
 Negotiated provider fees
 Reduced consumer costs
 Limited consumer flexibility
 Coverage of standard services
41
Managed-Care Plan—HMO
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




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Managed-Care Plan—PPO




Choice of providers
Lower medical costs and deductibles
No primary physician required
Often costlier than HMOs
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Managed-Care Plan—EPO




Lower premium
Insurers’ access fee for use of network
Fee schedules for medical service levels
Exclusive-network-use requirement, except
for emergencies
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Managed-Care Plan—POS
 Coverage for use of out-of-network
specialists.
 Members receive some POS coverage for
using out-of-network providers but must
handle paperwork.
45
Consumer-Directed Health Plans
 Lower premiums, higher deductibles
 So-called “High Deductible Health Plans”
 No deductibles for preventive care
 Use of HSA, FSA, or HRA to help pay
expenses/deductibles
 Informational decision-making tools
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The Affordable Care Act of 2010
 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 (>80%) of
premium on direct care or quality improvement.
 “Cadillac Tax” – threshold of $27,500 and excise
tax of 40%, on horizon for 2018
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Summary
 Life insurance can provide financial security
for survivors of an insured who dies.
 Annuities can protect people against “living
too long.”
 Health insurance plans cover routine and
major medical costs.
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Insurance Fundamentals for Policymakers
For more information, please contact:
The Griffith Insurance Education Foundation
720 Providence Road, Suite 100
Malvern, PA 19355
Phone: 855-288-7743
Email: PPE@griffithfoundation.org