Retirement Inflation

Why should I consider purchasing an annuity?

Annuities can serve many useful purposes.

If you are in a saving-money stage of life, a deferred annuity can:

• Help you meet your retirement income goals. Employer-sponsored plans such as a 401(k), 403(b) or Keogh are an important part of planning for retirement. However, contributions to these plans and to IRAs are limited, and they might not add up to enough for the retirement income you need, especially if you started saving for retirement late or had contributions interrupted—perhaps due to job changes and/or family responsibilities. Moreover, your social security and defined-benefit pension (if you have one) may provide less than you need to retire. Remember that the purchasing power of defined-benefit pension income is eroded by inflation.
  
  
• Help you diversify your investment portfolio. Investment experts routinely advise that, to get the best return for a given level of risk, you should diversify your investments among a number of asset classes. Fixed annuities, in particular, offer a unique asset class—an investment that is guaranteed not to decrease and that will actually increase at a specified interest rate (and, often, potentially more). The guarantees are supported by the claims-paying ability of the insurer.
  
  
• Help you manage your investment portfolio. Investment experts routinely advise that, whenever your investments in various asset classes get too far from the percentage allocations you prefer, you “rebalance” to the original formulation, by shifting funds from the classes that have grown faster to the ones that have grown more slowly. If you do this with mutual funds, you pay capital gains taxes; if you do it in a variable annuity, you don’t pay capital gains taxes. When you eventually withdraw money from the annuity (which could be many years after the rebalancing), you pay tax then at the ordinary income rate.

If you are in a need-income stage of life, an immediate annuity can:

• Help protect you against outliving your assets. Social security pays retirement income for as long as you live, as do defined-benefit pension plans. But the only other source of income available that continues indefinitely is an immediate annuity.
  
  
• Help protect your assets from creditors. Generally the most that creditors can access is the payments from an immediate annuity as they’re made, since the money you gave the insurance company now belongs to the company. Some state statutes and court decisions also protect some or all of the payments from those annuities.

Source: Insurance Information Institute

Planning for Long-term Care?

Did you know?

 By 2020 one out of six Americans will be over 65, that is 20 million more senior citizens than today.    (1)

• The number of individuals 85 and older (which is currently 3.5 million) will double to 7 million by 2020, and will double again to 14 million by 2040.     (1)
• 52% of all women and 33% of all men who are now 65 will spend their last years in a nursing home.     (2)
• Home health care costs $25.32 per hour on average.      (3)
• A day in a nursing home costs $194 per day or $70,912 on average in the US.     (3)
• A private one-bedroom unit in an assisted living facility has an average annual cost of $32,294.  Connecticut (Bridgeport area) has the highest annual cost of $57,556, while North Dakota and Arkansa were the lowest at about $21,000).     (3) 
• The average stay in a nursing home is 2.4 years.      (4)
• 73% of Americans incorrectly think that Medicare is the primary funding source for long term health care.       (5)
• 60% of Americans who reach age 65 will need long-term care at some point in their lives.      (6)

  1 Aging in the United States, published by the Bureau of the Census
  2       New England Journal of Medicine
  3      Genworth Financial Research survey February 2006
  4        Metlife 2005 Survey
  5      Gallup Organization Inc. Public Attitudes on Long Term Care: The EBRI Poll. August, 1993; 15.
  6          Centers for Medicare & Medicare Services (CMS)

It’s a common misconception that either Medicare or major – medical insurance will cover LTC expenses. Medicaid covers LTC only after a person “spends down” his or her assets to qualify for assistance. Families are at risk of forfeiting hard-earned assets to pay for a loved one’s long-term care needs.

Long-term care (LTC) is best defined as ongoing nursing, social, and rehabilitative personal care, or services provided in a nursing home, one’s own home, or an alternative site, such as an assisted-living facility. Many people underestimate the costs of LTC and don’t plan adequately for their future. Planning for LTC is crucial to retirement security plans because without it, individuals may be faced with insurmountable long-term care costs that can quickly deplete their life savings.

As baby boomers get closer to retirement age, there’s been a shift in public policy, with more focus on assuring the solvency of such programs as Medicare and Social Security that provide life security to Americans. In so doing, both Democratic and Republican lawmakers have signaled that it’s critical for Americans to assume personal responsibility for planning their long-term care and security.

Q: What is long-term care insurance?

A long-term care insurance policy pays you a daily benefit to cover the cost of long term care. Long term care is ongoing care for people with chronic disabilities. It includes custodial care — assistance with activities of daily life like eating, bathing and getting dressed — in a nursing home, an assisted living facility or in the patient’s own home.

Q: Do you need it?

This type of care isn’t covered by regular medical insurance policies or by Medicare, and it can be enormously expensive. The average cost of a year in a nursing home today is almost $71,000 while the average nursing stay is 2.4 years.  Government studies indicate that 60% of Americans who reach 65 will eventually need some type of long term care.  Long-term care insurance is essential if you are concerned about protecting your assets and maintaining your financial independence throughout your life.
It’s a common misconception that either Medicare or major – medical insurance will cover LTC expenses. Medicaid covers LTC only after a person “spends down” his or her assets to qualify for assistance.  In fact, 73% of American incorrectly believe that Medicare is the primary funding source for long term care.   Families are at risk of forfeiting hard-earned assets to pay for a loved one’s long-term care needs.

Q: What to look for in long-term care insurance?

Good Benefit Triggers

Benefit triggers are what cause benefits to start being paid. Your policy benefits should be triggered if you need assistance to perform at least two of the activities of daily living (ADLs), which include bathing, dressing, eating, toileting, continence, transferring (moving from a bed to a chair) and taking medication. Another trigger should be “cognitive impairment,” which means coverage applies if you are mentally impaired (with Alzheimer’s disease for example) even if you’re physically able to take care of yourself.

Home Health Care Coverage

You will want to make sure your policy pays benefits for care at home as well as in an institution such as an assisted living care facility or a nursing home.

Guaranteed Renewable

This feature ensures that you will be able to continue your coverage without undergoing additional medical exams.

Inflation Riders

An inflation rider will increase the benefit amount by either a simple or compound inflation rate each year the policy is in effect. This can be a costly feature, but it is protection against the rising cost of long term care. It provides that the policy is much more likely to pay an adequate benefit in the future.

Q: How much coverage do you need?

Policy daily benefits can provide up to $300 a day. How much you need depends on what costs are in your area for assisted living facilities, nursing home and home health care as well as how much you could pay for from other resources, like savings and investments.

Disability Insurance

Q: If I cannot afford to buy both life insurance and disability insurance, which coverage should I buy?

A. Both life insurance and disability insurance are important and vital to the financial security of most individuals. In some instances, however, financial resources are inadequate to purchase the needed amounts of both types of insurance. Generally speaking, throughout the typical working lifetime (e.g., ages 20-65), the probability of an individual suffering a major disability (e.g., a disability lasting 3 months or longer) is considerably greater that the likelihood of dying. The probability of a young worker suffering a major disability is as much as 6 (or more) times the probability of dying; the multiple is still 2 or more even at the higher working ages. These relative probabilities would suggest that the purchase of disability income insurance is a more important purchase than is the purchase of life insurance. Another factor supporting this view is that, in the case of disability, total expenses of the family unit will also be higher due to the costs of caring for the disabled worker.

Q: How much disability insurance should I own?

A. The recommended amount of disability income insurance generally ranges from 60-70 percent of pretax income. The applicable percentage for higher-income persons is usually somewhat lower than the percentage recommended for lower-income individuals, due primarily to differences in income taxes. Amounts considerably less than full replacement of earnings are recommended due to a reduction in income taxes and decreases in commuting and other work-related costs that are likely to occur in the event of disability. On the other hand, medical, rehabilitation and certain other expenses are often higher for disabled individuals creating a need for larger amounts of replacement income. In determining how much disability income insurance to buy, any benefits payable under Workers’ Compensation, Social Security, and employer-provided disability benefits under pension or group insurance plans should also be considered. Whether the disability benefits themselves are subject to income taxation should also be factored into this determination. The assistance of a professional insurance adviser normally should be sought in making this determination.

Q: What type of disability income insurance is best; insurance covering short-term disabilities only or policies that cover long-term disabilities?

A. Assuming that only one of these types of disability insurance products will be purchased, sound risk management principles would suggest the purchase of long-term disability (LTD) insurance. LTD insurance protects the insured against disabilities that may last many years, or even a lifetime, and thus provides protection against large losses of potentially catastrophic magnitude. Although long-term disabilities occur less frequently than disabilities of a relatively short duration (e.g., several weeks or even a few months), the loss of income for a short duration can be more easily absorbed by the family unit than can an income loss that lasts for several years or longer.

Q: What are the primary differences between short-term disability (STD) and long-term disability (LTD) insurance policies?

A. These two types of insurance coverage differ most importantly in terms of the length of the elimination (waiting) period, the length of the maximum benefit period, coordination of the benefits payable under the policy with benefits payable under social insurance programs (e.g., Social Security and Workers’ Compensation), and the “definition of disability” incorporated into the contract language.

Q: What is an elimination, or waiting period and how does its definition differ between STD and LTD insurance policies?

A. The elimination, or waiting period in disability insurance refers to the length of time between the onset of a qualifying disability and the point in time when benefits under the disability insurance policy first become payable. In STD plans, waiting periods may range from 0 days to 3, 7, 10 or 14 days, depending on the specific insurance policy and the cause of disability. Disabilities resulting from accidents often are subject to shorter elimination periods (e.g., 3 or 7 days) than are disabilities caused by sickness. In LTD plans, elimination periods generally range from 3 to 6 months for disabilities arising from both accidents and illnesses.

Q: What is a maximum benefit period and how does its definition differ between STD and LTD insurance policies?

A. The maximum benefit period in disability income insurance refers to the maximum length of time during which benefits will be payable to an insured with an ongoing, qualifying disability. By definition, STD insurance policies are those policies whose maximum benefit period does not exceed two years (24 months) in length. Typically, however, STD insurance provides coverage for benefit periods lasting a maximum of 13 or 26 weeks. In contrast, LTD insurance policies typically provide benefits (contingent on continued disability, of course) for as long as 5 years, to age 65 or 70, or even lifetime.

Q: What types of “definitions of disability” are commonly included in STD and LTD insurance policies?

A. Some disability income insurance contracts provide coverage only for “total and permanent” disabilities. Others provide coverage for “total and permanent” disabilities, “partial disabilities,” and “temporary” disabilities. Some policies providing “partial” disability coverage require that the “partial” disability be proceeded by a period of “total” disability. Since these terms are often confusing, with their definitions differing somewhat from one policy to the next, it is recommended that insureds discuss this issue at length with their insurance adviser.

Q: In addition to coverage of partial or total disabilities and temporary or permanent disabilities, what other aspects of a “definition of disability” are important to consider when purchasing disability income insurance?

A. The way in which a disability is defined, especially as it relates to the inability of the insured to perform a particular occupation, is exceedingly important. Several insurers market policies that define total disability in terms of the inability of the insured to perform the usual and customary duties of his or her “own occupation”–the job the insured was doing at the time of the injury or onset of sickness. Other policies define total disability in terms of the inability to perform the regular duties of “any occupation.” “Any occupation” is often defined as a job for which the insured has the necessary skills and training and, possibly, at a salary commensurate with the one in which the insured was employed at the time of the incident. The “own occupation” definition is more liberal to the insured and is frequently recommended over an “any occupation” definition. Sometimes a “split definition” is used which incorporates an “own occupation” definition for an initial period (e.g., 2 years), followed by an “any occupation” definition thereafter.

Q: Are disability insurance policies available that do not express the eligibility for disability benefits in terms of an “occupational” definition?

A. Some insurers market disability insurance policies that define disability not in terms of a particular occupation, but rather simply in terms of the amount of income actually lost. Under these contracts, if an insurable event occurs such as an accident or illness, then disability benefits are payable to the extent that the insured suffers a loss of income that exceeds a threshold amount, e.g., a loss of 20 percent or more of the individual’s earnings prior to the happening of the insured event. When the threshold amount is exceeded, the policy pays a benefit that is based on the percentage of total “prior earnings” lost due to the disability.

Q: Do all disability insurance policies cover losses arising from both accident and sickness?

A. No. Some policies cover only disabilities arising from an accidental injury, providing no coverage for disabilities caused by sickness. A careful reading of the contract is recommended to determine the extent of coverage provided under the disability insurance policy that you are considering purchasing. Sound risk management suggests the purchase of a policy that covers disabilities arising from either an accident or an illness.

Q: What specific causes of disability, if any, are generally excluded from coverage in disability insurance contracts?

A. Generally, injuries that are intentionally self-inflicted or caused by war or an act of war are excluded. Disability policies may also include a “preexisting conditions” exclusion whose purpose is to exclude from coverage, during an initial period (e.g., the first one or two policy years), a disability arising from an undisclosed health condition that was both present within a prescribed time period prior to policy issuance and required medical treatment or otherwise caused symptoms that normally would require medical care. Through the “military suspense provision,” coverage under a disability insurance policy is suspended during any period that the insured is on active duty in the military.

Q: The terms “noncancelable” and “guaranteed renewable” are often used when referring to disability income insurance policies. What do these terms imply, and how do they differ?

A. “Noncancelable” policies provide insureds with the right to renew their policies each year, typically to age 65, by the timely payment of the required premium. A guaranteed premium is stipulated in the contract and may not be changed by the insurer. During the noncancelable period, the insurer is precluded from canceling the contract or otherwise making any unilateral change in the policy benefits. “Guaranteed renewable” contracts also provide insureds with the right to renew their policies to age 65 (typically) through the timely payment of the premium. However, under “guaranteed renewable” policies, the insurer retains the right to change premiums if it does so for all insureds in the same rating class. The insurer is not permitted to cancel the policy or unilaterally amend the policy benefits during the period that the policy is guaranteed renewable. Further, under both types of contracts, the insurer is not permitted to increase the premiums, on a selective basis, only for those insureds whose health status has deteriorated. Because of the premium guarantee feature, “noncancelable” policies may be somewhat more expensive than “guaranteed renewable” policies. In general, disability policies containing a “guaranteed renewable” or a “noncancelable” feature provide better protection to an insured, albeit possibly at a higher cost, than do “conditionally renewable” or other similar types of disability insurance policies that give the insurer a right to refuse to renew coverage for reasons stated in the policy (and typically also give the insurer the right to increase premiums and change benefits so long as these changes apply to all insureds in the same class).

Q: What factors affect the premium cost for disability income insurance?

A. A number of contract features and options affect the premium cost for disability income insurance. Several of the more important factors are (1) the amount of weekly or monthly benefit purchased, (2) the length of the elimination (waiting) period, (3) the length of the maximum benefit period, (4) whether or not the disability insurance benefits are coordinated with social insurance benefits, (5) the occupational class of the insured, (6) the definition of disability, and (7) whether the policy is noncancelable or guaranteed renewable.

Q: How do the lengths of the waiting (elimination) period and the maximum benefit period affect the premium cost of disability insurance?

A. The elimination (waiting) period in disability income insurance serves the same purpose as a deductible in medical expense, automobile and other types of insurance. It eliminates initial, or “first-dollar,” benefits from coverage under the insurance policy. As such, longer waiting periods result in lower premiums. There is a similar, but opposite, relationship between varying maximum benefit periods and the premium cost for disability income insurance. As the length of the maximum benefit period increases, total premium cost also increases. When limited dollars are available to purchase disability income insurance, it is generally recommended that longer waiting periods be selected so that longer maximum benefit periods can be afforded. Of course, the amount of cash reserves available to the insured as a “safety net” should also be factored into the determination of the length of the waiting period that is selected.

Q: Why is it frequently true that group long term disability (LTD) insurance purchased at work is less expensive than individually purchased LTD insurance?

A. There are a number of reasons why group LTD may be purchased by employees at a lower premium cost than what these same individuals can purchase on their own, away from their place of employment. First, an employer often contributes toward the premium cost of group LTD coverage, thereby reducing the out-of-pocket cost to employees. Secondly, group LTD insurance plans almost always coordinate their benefits (i.e., plan benefits are reduced) with any disability benefits payable under Workers’ Compensation or Social Security. In contrast, individual disability income insurance typically pays benefits in addition to any benefits payable under social insurance programs. Third, individual policies often contain a longer maximum benefit period, a “noncancelable” feature, a “cost-of-living” benefit rider, and an option to purchase additional insurance–expensive features not always found in group LTD policies. Fourth, marketing and sales, administrative, underwriting and other expenses are usually lower for employer-provided group insurance than for insurance purchased individually from an agent.

Q: What is the federal income tax treatment surrounding benefits received from a disability insurance policy?

A. The answer to this question depends on who paid the insurance premiums. If the insured paid the premiums with after-tax dollars, then the disability benefits should be received income tax-free. In contrast, if an employer paid part or all of the premiums then an equivalent portion of the benefits are generally taxable to the insured (in this instance, however, an income tax credit may be available to the insured). In any event, your tax adviser should be consulted with respect to the probable income tax treatment of any disability income coverage that you currently have or are contemplating purchasing.

Q: Where can more information on disability insurance be obtained?

A. A free copy of the Consumer’s Guide to Disability Insurance can be obtained from the Health Insurance Association of America, 555 13th Street N.W., Suite 600 East, Washington, D.C. 20004-1109.

Life Insurance Basics

Q: What’s the purpose of life insurance?

Life insurance is usually purchased by individuals to cover loss of income in case of death and to assist with subsequent expenses such as medical and funeral bills, child care costs, college expenses, and the costs associated with day-to-day living, such as mortgage and rental payments. Death is not always necessary for an insurer to pay the value of an insurance policy, however; some policies contain features providing retirement income and cash savings. Life insurance may offer both protection and savings.

Q: What types of life insurance are available?

There are many varieties of life insurance policies, but most can be divided into three basic types: term, whole life and endowment.

1) Term life insurance offers protection for a set number of years at a fixed premium and generally offers no savings feature or cash surrender value. The face amount of a term life insurance policy is generally payable only if the insured person dies during the period during which he or she is covered by the policy. Term life premiums are usually the least expensive, but at the end of the policy term, the policy usually may be renewable at the insured person’s current age and at a higher rate. Some term life insurance policies contain a “convertible” feature, whereby the term policy can be converted to a whole life policy, usually without a medical examination.

2) Whole life insurance (also known as straight life or ordinary life) provides lifetime protection with limited savings values. Premium rates are generally constant throughout the life of the policy contract, and the premiums are payable as long as the insured person lives. Full payment of benefits is made upon the death of the insured person, or at attainment of age 97, 98, 99 or 100, depending on the insurance company. Whole life insurance provides good protection at relatively low cost. The insurer retains the policy’s accumulated savings, but the policy has a cash surrender value, against which the insured person may borrow or which he or she may receive if the policy is allowed to lapse. “Limited-payment life insurance” is a variation of whole life insurance; premiums are paid for a set number of years, such as 20 or 30 years, or to age 65, after which protection continues for life without further payments. The face value of the policy is paid upon the death of the insured person.

3) Endowment life insurance policies are issued for varying periods of time (10, 20 or 30 years, for example) and emphasize savings rather than protection. If the insured person lives longer than the endowment period, he or she receives the face value of the policy. If he or she dies during the policy period, the face amount is paid to his or her beneficiary or estate. Endowment life insurance usually costs more than term or whole life insurance. It is commonly used to provide retirement income.

Q: What is variable life insurance?

Variable life insurance is designed to address inflation. Variable life insurance policies guarantee a minimum amount will be paid upon death, but they might pay more, as the insurer invests reserve monies from insurance policies. The cash value of the policy at its maturity depends upon the value of the investments made by the insurer.

Q: How are life insurance premiums determined?

In addition to being based on the type of policy issued, premiums are determined by insurers through the use of mortality tables. These tables are statistical analyses of the deaths of a given group of individuals, beginning at birth and extending until all members of the group are dead. For example, a mortality table will show the likelihood of death in terms of the number of deaths per thousand persons and in terms of the expectation of death at each age. So your age is a top factor in determining your life insurance premium. Other factors include your health, occupation and hobbies.

What are the Rules for an FSA plan?

1. The choices you make have to be made prior to your effective date on the Plan.
2. If you do not have services rendered within the plan year that will allow you to use your spending account funds, you will lose those funds.  IRS regulations allow an additional 2 ½ months to spend the funds remaining in your account if permitted by your Plan Document.  Any funds left after that period will be forfeited.
3. There can be NO change for a Plan Year without a life-changing event.  You will have the opportunity to change your elections annually, prior to each year.  (Note, your Health Care FSA account can only be changed annually regardless if you have a life-changing event unless specifically permitted by your Plan Document.)
4. Life changing events are defined by the IRS as:
   • Your marriage
   • Your divorce or legal separation
   • Birth or adoption of your child
   • Death of spouse or dependent
   • Termination of your dependent relationship
   • Change of job status by you or your spouse
   • Significant changes in coverage or premium
   • A Qualified Medical Child Support Order (WMCSO)
   • Entitlement or Loss of Medicaid or Medicare Coverage
   • Change in Residence (out of area)

Medical Insurance Basics

Q: What are the principal types of medical expense insurance coverage?

Medical expense insurance is broadly classified into two principal types of coverage: base (or basic) plans and major medical plans. Base plans generally consist of either hospital expense coverage, surgical expense coverage, or both. Basic hospital and surgical expense plans generally provide coverage on a first-dollar basis (i.e., no deductible) and provide 100 percent reimbursement of covered expenses, up to a relatively low maximum of $10,000, $25,000, $50,000 or $100,000. Major medical plans, in contrast, apply a deductible to initial expenses, generally ranging from $250 to $1,500 per calendar year. After the deductible is satisfied, major medical plans typically reimburse 80 percent of eligible expenses to a maximum out-of-pocket   e.g., $1,000 to $5,000. Expenses are then reimbursed at 100% to a lifetime maximum of $1,000,000 to $5,000,000; some plans also provide unlimited lifetime benefits. Other major medical plans reimburse eligible expenses at 90 or 70 percent.
Major medical plans typically cover a broad list of medical expenditures, including hospital expense, surgical expense, physician (non-surgical) expense, private duty nursing, diagnostic X-ray and laboratory services, prescription drug expense, artificial limbs and organs, ambulance services, and many other types of medical expenses when prescribed by a duly licensed physician. Thus, in comparison with basic plans, major medical plans provide much broader coverage, with higher limits, but these plans require the insured to share in the cost of medical care through deductibles and coinsurance (i.e., 20 or 30 percent of eligible expenses above a deductible amount).

Q: What types of expenditures are commonly excluded under major medical expense plans?

Although providing very broad coverage, major medical plans typically contain a number of exclusions. Common exclusions include medical expenditures arising from:

1. convalescent or custodial care;
2.  cosmetic surgery unless required to correct a condition resulting from an injury or a birth defect;
3. occupational injuries and illnesses that are otherwise covered under a Workers’ Compensation law; and
4. routine dental and vision care (care required for treatment of an injury and dental and eye surgery are frequently covered, however). Other common exclusions relate to benefits provided by government agencies (e.g., VA hospitals) and expenses paid under other insurance programs, including Medicare.

Q: Even though major medical plans provide broad coverage, insureds still incur certain “out-of-pocket” costs. What are these costs?

An insured’s “out-of-pocket” costs under major medical expense plans include the deductible, cost-sharing amounts arising from the operation of the coinsurance clause, and medical expenditures that are deemed by the plan to be in excess of “reasonable and customary” charges. Only charges that are “reasonable and customary” for a specific type of service, in a particular location or geographic area, are eligible for reimbursement under medical expense plans. The definition of “reasonable and customary” may vary somewhat from one medical expense plan to another.

Q: What is the coinsurance clause in medical expense plans and how does it work?

Coinsurance, sometimes called “percentage participation,” requires the insured to share in the cost of medical care. Under an 80/20 coinsurance provision, the medical expense plan pays 80 percent of eligible medical charges above any deductible. The insured is required to pay the remaining 20 percent. Other coinsurance arrangements, e.g., 70/30 or 90/10, are sometimes used. In the event of large or catastrophic medical expenses, an insured might suffer severe financial hardship due to the operation of the coinsurance clause. To compensate for this possibility, many major medical expense plans contain a coinsurance cap, or stop-loss limit. This provision places a limit on the insured’s out-of-pocket costs in a given year arising from the operation of the coinsurance clause. The size of the coinsurance cap generally ranges from $2,000 to $3,000, depending on the plan, although limits as low as $1,000 are sometimes used. Once the coinsurance cap has been reached, all eligible expenses above this amount are paid in full, up to the plan’s overall limit of coverage.

Q: What is the difference between coinsurance and copayment?

On occasion, these terms have been used interchangeably. However, it is preferable to define the two terms differently, despite their similarity of purpose. Under a copayment or copay provision, the insured usually is required to pay a set or fixed dollar amount (e.g., $30, $15, or $10) each time a particular medical service is used. Copayments are applied to each office visit and to each prescription that is filled.  Co-pays are not generally applied to the maximum out-of-pocket cost.

Q: What is a preexisting conditions clause and what is the effect of its inclusion in major medical expense plans?

A preexisting condition is often defined as a medical condition (i.e., an injury or illness) that required treatment during a prescribed period of time, e.g., 3 or 6 months, prior to the insured’s effective date of coverage under the major medical expense plan. Sometimes, a preexisting condition is defined to include medical conditions that were known to the insured, even though no treatment was provided during the prescribed period. A preexisting conditions clause excludes coverage for preexisting conditions for possibly as long as 12 months after the effective date of coverage. Because the definition of a preexisting condition, and the provisions of the clause itself, may differ considerably from one plan to another, it is recommended that newly insured individuals (and prospective insureds) completely familiarize themselves with this policy provision.

Q: How does the medical expense coverage offered by Health Maintenance Organizations (HMOs) differ from the coverage provided under basic and major medical expense plans?

Basic and major medical expense plans are generally classified as indemnity contracts. These plans indemnify, or reimburse, the insured for medical expenses incurred and typically require the completion and filing of claim forms. In addition, these plans usually contain deductible and coinsurance cost sharing provisions and may restrict coverage for certain types of medical care expenditures. Indemnity plans, however, provide the insured with substantial freedom relative to the choice of physician, including whether a primary care physician or a specialist will be seen. In contrast, HMO coverage emphasizes comprehensive (including preventive) care and typically contains very few exclusions, no (or small) deductibles, and nominal copayments. However, there is much less freedom of choice of physician under traditional HMO coverage since the patient is typically required to be under the care of a primary care physician who serves as a “gatekeeper.” In this role the primary care physician determines whether the services of a specialist are needed, in addition to determining what other medical services are required for treatment. Some HMOs today offer a point-of-service option, whereby patients may opt for indemnity type coverage (with a deductible and coinsurance) when they desire medical treatment outside the HMO network.

10 Tips to Cut Your Medical Costs

At most companies, both the employer and employees contribute to the cost of their health plan. Remember, your physician should be your primary source of information for any decisions you make regarding medical services.

1. Stay healthy. A healthy lifestyle along with regular preventive care can help keep your health care costs low. Exercise and good nutrition contribute to a healthier life.
2. Use home health care remedies whenever possible. You can reduce the cost of health care for yourself and others by solving health problems at home when appropriate.
3. Choose a family doctor. Visiting your regular doctor or primary care physician (PCP) is more cost-effective than seeking care from several different specialists.
4. Avoid unnecessary medical tests. In certain situations the cost and risk of medical tests can, outweigh the benefits. Sometimes tests are given simply as a standard hospital procedure. You do not have to take any test. Before consenting to a test, ask:
   • What is this test is for?
   • How will it help me get better?
   • How much will the test cost?
   • Could it be done for less somewhere else?
   • Is there a less costly test that could provide the same information?
5. Control your drug costs. It is important to ask questions and learn the benefits and risks of your prescribed medications. Don’t expect a prescription for medicine each time you visit the doctor. You can help keep costs low by finding out how the medication will help you, whether there is a generic or similar, less expensive version of the drug, and whether you can try a sample first.
6. Be prepared before you see a specialist. Specialists have in-depth training and experience in particular areas of medicine and can give you the care and information you need for a major medical problem. In general, specialists’ care is more expensive. You can help get the most out of specialty care through good communication and preparation. Before you see a specialist, understand what your primary doctor’s diagnosis is and what your primary doctor wants the specialist to do. Ask about your options for treatment, keep your regular doctor involved and have test results sent to both you and your primary doctor.
7. Use emergency services only for emergencies. Modern emergency services are invaluable in trauma or life-threatening situations, but are inefficient for routine care. Emergency room services can be many times more expensive than care received at your regular doctor’s office. When deciding whether to go to the emergency room, use your best judgment. In case of a true emergency, immediately go to the emergency room. Call ahead to let them know you’re coming and notify your regular doctor if possible. Your family doctor can provide the emergency room staff with important medical information.
8. Consider alternatives to hospitalization. If you need hospital care, keep your stay as short as possible. Hospital stays account for more than a third of your health plan premiums. Whenever possible, have tests done on an outpatient basis, use home nursing services and ask about hospice programs for the terminally ill. In certain situations, some health plans pay for home equipment and home nursing visits as an alternative to hospital care. Doctors are often very supportive of this option because they know most patients are more comfortable at home. If you are facing a hospital stay, ask your health carrier whether it can help you get the support that will allow you to return home sooner.
9. If it’s safe, wait. Sometimes physicians are afraid patients will think they’re not doing their best if they don’t take action right away. But, in many situations the old standby “take two aspirin and call me in the morning” is valid advice. On the other hand, waiting until a mild condition becomes serious can be both unpleasant and costly. Let your doctor know you’re willing to wait, if that’s appropriate. He or she may consider it helpful to know you’re willing to let time and nature take their course, but only if it’s safe to do so.
10. Learn as much as you can about your medical needs. By conducting your own medical research, you may discover more options and be better prepared to decide which course of action is best for you. You can start your research by asking your doctor for information or calling the hospital’s medical library or using medical resources available on the web.

What is an MSA – Medical Savings Account?

A Medical Savings Account permits eligible individuals to establish a tax-deferred medical savings accounts (MSAs) to pay medical expenses in conjunction with a high-deduction health plan through a trust or custodial account. On January 1, 1997 a pilot program began that was limited to four years and 750,000 policies under the program. The pilot program must be extended by the IRS/US Treasury Department on a periodic basis.

To be eligible for an MSA, an individual must be either employed by a small employer with 50 or fewer employees that establish a high deductible health plan, or a self-employed person covered by a high deductible health plan.   In 2003 the Health Savings Account (HSA) was created.   Since HSAs are a more widely available and improved version of the MSA, the original program is by and large obsolete.  MSAs are still available, but there are only a few institutions that will open new MSA accounts.  Today, they are called Archer MSAs.

Health Savings Account (HSA) Basics

What is an HSA?

A Health Savings Account is a consumer-managed, tax-favored alternative to traditional health insurance created for the purpose of paying medical expenses. To open an HSA, you must be covered by a High Deductible Health Plan (HDHP).  Except for preventive care, you must meet the annual deductible before the plan pays benefits. Preventive care services are generally paid either before you meet your deductible, after you meet a smaller deductible or on a co-payment basis.   

Once you are enrolled, you own and have complete control over the money in your HSA. You make the decisions on how you want it spent, not a third party or a health insurer. You also get to decide how and where you want to invest this money to grow your account.

What are the benefits of an HSA?

• Your own HSA contributions are tax-deductible.
• Interest earned on your account is tax-free.
• Withdrawals for qualified medical expenses are tax-free.   
• Unused funds and interest are carried over, without limit, from year to year.
• You own the HSA and it is yours to keep—even when you change plans or retiree.

Who is qualified to obtain an HSA?

You must be covered by a High Deductible Health Plan (HDHP) to take advantage of HSAs. You also must not receive coverage under another health insurance plan, not be enrolled in Medicare,and not be someone else’s dependent.

Health Savings Account (HSA) FAQs

How does an HSA work?

An HSA works in conjunction with high deductible health insurance. Your HSA money can be used to help pay the health insurance deductible and qualified medical expenses not covered by the health insurance, including dental and vision. Your HSA account earns tax-free interest and, in some plans, can be used for different types of investments such as mutual funds or money market accounts.  Your HSA is administered by a trustee/custodian.

What are the deductible and out-of-pocket expense limits for HDHPs in 2010?

The minimum deductible is $1,200 for self-only and $2,400 for families; for out-of-pocket expenses, the maximum is $5,950 for self-only and $11,900 for families.  A family is two or more people.

What is the difference between an aggregate deductible and an embedded deductible?

Most HSA plans have what is referred to as an aggregate deductible, which means there is one large family deductible that must be met before anyone in the family is covered. (I.E. If a family deductible is $3,000, there must be $3,000 in claims paid out of the client’s pocket before any family member is covered.)

An embedded deductible has a family deductible however, “embedded” within it is an individual deductible. Usually the individual deductible is half or one-third of the family deductible. Embedded deductibles are what people are generally used to when they have a traditional PPO health plan.

What expenses qualify for reimbursement from my HSA?

Most expenses for medical, dental and vision care will be reimbursed under your HSA with some exceptions such as cosmetic surgery and health club dues. A list of reimbursable expenses is available on the IRS Web site, www.irs.gov.

Does making HSA contributions through my company save me money in other ways?

If your employer offers a Section 125 plan (also known as a “cafeteria plan”) that allows you to contribute to your HSA account through payroll deductions, you will avoid paying the employee share of the federal FICA tax on the amount you contribute. You also will reduce your tax liability and payments.

What are the tax deductible contribution limits?

For 2010, federal law limits annual contributions to $3,050 for self-only and $6,150 for families.  Catch-up contributions are $1000 for individuals 55 & over until Medicare enrolled.  Prior to 2007, annual contribution maximum was limited to the lesser of the HDHP deductible or the statutory contributory amount.

How do HSAs differ from Flexible Spending Accounts?

Unlike a Flexible Spending Account, unused money in your HSA isn’t forfeited at the end of the year; it continues to grow, tax-deferred. HSA contributions are always yours to keep.

Can my HSA be used for dependents not covered by the health insurance?

Generally speaking, it can be used to pay for the unreimbursed medical expenses of your spouse or dependents.  A Health Savings Account (HSA) can be used to pay for “qualified medical care expenses” of:  The insured,
His or her spouse, or Dependent children.

Can I use my Health Savings Account for nonmedical expenses?

Yes, but you have to pay income tax and a 10% penalty for a nonmedical withdrawal prior to age 65.  At age 65, you only pay income tax on the amount of the nonmedical withdrawal.

Can I make a Rollover from an IRA into an HSA?

The Tax Relief and Health Care Act of 2006 (HR 6111) was designed to improve Health Savings Accounts (HSAs).   These changes are significant and could make it more attractive for plan sponsors to offer HSAs, and more attractive to plan members to choose them.  One of the provisions included in HR 6111 permits a one-time tax-free irrevocable rollover from an IRA into an HSA.  The amount of the rollover cannot exceed the annual H S A contribution limit (which varies depending on whether person has self-only or family HDHP coverage).   Important Note:  Failure to maintain eligibility for the H S A contributions for a period of 12 months following the IRA transfer would result in income tax and a 10% penalty on the transfer.  

Once I turn 65, what happens to the money in a Health Savings Account?

Once you hit 65, the amounts can be used for health expenses and to pay certain insurance premiums like Medicare Part A & B, Medicare HMO and the employee’s share of retiree medical insurance premiums. It cannot be used to purchase a Medigap policy. It can also be used for medical expenses Medicare does not cover. If used for medical expenses, the amounts come out of the account tax free. If used for other expenses, the amount received will be taxable at ordinary income tax rates.
 
Are health insurance premiums eligible under my HSA?

Generally, health insurance premiums are NOT “Qualifying Medical Care Expenses” except for the following:

• Qualified long-term care insurance
• COBRA health care continuation coverage
• Health care coverage while an individual is receiving unemployment compensation
• In addition, for individuals over age 65, premiums for Medicare A or B, Medicare HMO, and the employee share of premium for employer-sponsored health insurance.
• Premiums for Medigap policies or Life insurance policies are NOT qualified medical expenses.