Medical Expense Insurance

Medical expense insurance provides financial protection against the cost of medical care by reimbursing
the insured, fully or in part, for these costs. These are called reimbursement plans. It includes many kinds
of plans that cover hospital care, surgical expenses, physician expenses, medical treatment programs, outpatient
care, and the like. Medicare supplement insurance and long-term care insurance, two types of health insurance
coverage designed for the elderly, are also examples of medical expense insurance plans.

Disability Income Insurance

Disability income insurance is designed to provide a replacement income when wages are lost due to a
disability. It does not cover the medical expenses associated with a disability. Rather, it provides the
insured with a guaranteed flow of periodic income payments when disabled.

Accidental Death and Dismemberment Insurance

Accidental death and dismemberment insurance (commonly referred to as AD&D insurance) is the
purest form of accident insurance. It provides the insured with a lump-sum benefit amount in the event
of accidental death or dismemberment under accidental circumstances. Typically, AD&D coverage is a
part of group insurance plans.

Within each of the previous three categories are many forms and variations of coverage that have
evolved to meet unique insurance needs. Even the type of health insurance provider can make a
difference in the basic makeup of any of these kinds of coverages. Each of these basic coverages, as well
as the many types of health insurance providers, will be discussed in later chapters. They are introduced
here to help acquaint you with the health insurance field in general.

►HOW HEALTH INSURANCE IS PURCHASED

As is the case with life insurance, health insurance is available to individuals and families through
individual or group plans and policies. This also includes blanket and franchise policies. Short term policies
(interim coverage) can be purchased on an interim basis when in between jobs or waiting for a new policy to start.
Individual health insurance is issued by commercial insurers and service organizations as contracts
between the insured and the company. Though all companies have standard policies for the coverages
they offer, most allow individuals to select various options or benefit levels that will most precisely meet
their needs. Individual health contracts require an application and the proposed insured usually must
provide evidence of insurability.

Group health insurance, also issued by commercial insurers and service organizations, provides coverage
under a master contract to members of a specified group. Like group life, group health plans are
available to employers, trade and professional associations, labor unions, credit unions, and other
organizations. Insurance is extended to individuals in the group through the master contract. This
normally does not require individual underwriting nor evidence of insurability. The employer or the
association is the policyowner and is responsible for premium payments. The employer may pay the
entire premium or may require some contribution from each member to cover the insurance cost.
Generally speaking, the provisions and coverages of group health insurance contracts are more liberal
than individual health contracts. Health insurance is also provided through state and federal
government programs. At the state level, Medicaid is available to assist low-income individuals in
meeting the costs of medical care. The federal government offers health insurance protection through
Medicare and OASDI disability provisions, components of the Social Security system.

►CHARACTERISTICS OF HEALTH INSURANCE

Though closely related to life insurance in purpose, health insurance differs from life in several
important ways. A review of the distinguishing characteristics of health insurance will set the stage for a
more in-depth discussion to follow in later chapters.

Renewability Provisions

Life insurance (particularly whole life insurance) and annuities are characterized by their permanence.
These policies cannot be cancelled by the insurer unless the policyowner fails to make a required
premium payment. Even term life policies are guaranteed effective for the duration of the term, as long
as premiums are paid. Health insurance is not as permanent in nature. Health insurance policies may
contain any one of a wide range of renewability provisions, which define the rights of the insurer to
cancel the policy at different points during the life of the policy. There are five principal renewability
classifications: cancellable, optionally renewable, conditionally renewable, guaranteed renewable, and
noncancellable. Generally speaking, the more advantageous the renewability provisions to the insured,
the more expensive the coverage.

Premium Factors

Like life insurance, health insurance is funded by the regular payment of premiums. Unlike life
insurance, there are relatively few payment options available with a health policy. For example, health
policies do not offer any sort of limited payment option, as one would find with a 10-year pay or paid-up
at 65 life policy. Health insurance policies are paid for on a year-by-year basis. Except for the
noncancellable type of policy cited previously, health insurance premium rates are subject to periodic
increases. Health premiums can be paid under one of several different payment modes, including
annual, semiannual, quarterly, and monthly. Monthly premiums are often paid through some form of
preauthorized check method, by which the insurer automatically obtains the premium directly from the
policyholder's checking account.

There are various factors that enter into premium calculations for health insurance. These include
interest, expense, types of benefits, and morbidity. Morbidity is the expected incidence of sickness or
disability within a given age group during a given period of time. It is to health insurance what mortality
is to life insurance. Other health insurance premium factors are claims experience, age, sex, and
occupation of the insured.

Participating Versus Nonparticipating Policies

Health insurance policies may be written on either a participating or nonparticipating basis. Most
individual health insurance is issued on a non-participating basis. Group health insurance is generally
participating and provides for dividends or experience rating.

Group health plans issued by mutual companies usually provide for dividends, while stock companies
frequently issue experience-rated plans. A group policy that is experience-rated may make premium
reductions retroactive for 12 months. Premium increases for such policies are not retroactive.
Experience-rated refunds may be contingent upon renewal of the master policy, but the payment of
dividends usually is not contingent upon renewal.

Cost-accounting formulas are complex and vary from insurer to insurer. The two major factors that
influence whether or not dividends or experience-rated refunds are payable are expenses and claims
costs of the insurer. If these cost items are less than anticipated, the group policyowner benefits by
receiving a dividend or refund credit. If expenses and claims costs are higher than expected, the group
policyowner may not qualify for a dividend or refund credit.

Reserves

Reserves are set aside by an insurance company and designated for the payment of future claims. Part
of each premium is designated for the reserves.

Claims

The role of the health insurance claims examiner differs somewhat from that of the life insurance claims
examiner. In the case of life insurance, most claims are fairly well defined-the amount of insurance
coverage is readily determined by the policy and benefits are payable if the insured has died. With
health insurance, the claims process is not as clearly defined. Medical expense insurance, for example, is
typically based on a contract of reimbursement, meaning that the benefit an insured receives is not
fixed but instead is dependent on the amount of the loss. Its purpose is to reimburse the insured for the
amount of loss sustained (within limits) and are normally exempt from income taxes. This is in contrast
to life insurance, AD&D, and disability income insurance that are all valued contracts, which pay the
amount stated in the contract if a defined event (such as death or disability) occurs. The health claims examiner
must also decide if a loss has actually occurred. This is especially challenging in disability income cases, where
a subjective assessment of "disabled" can create misunderstandings.

• If health benefit levels are too high, overutilization of the plan may result

Uses of Health Insurance

Individuals need to have a comprehensive health insurance plan in place to insure against the financial
consequences of illness or disability. Similarly, health insurance also is necessary to protect a business
against the risks it faces, including losses due to a key employee's death or disability. Businesses also
commonly offer health insurance as part of an employee benefits program. In this chapter, we will take
a closer look at some of the ways in which individuals and businesses use health insurance.

►A PROPER HEALTH INSURANCE PROGRAM

What is a "proper" health insurance program? That question cannot be answered without first
addressing several preliminary issues. Is the insurance intended for an individual, family, or a business?
Is coverage currently available from a group plan or social insurance program? How willing is the
policyowner to assume some responsibility for medical care expenses (through policy deductibles and
coinsurance) in exchange for reduced premiums? These and other questions must first be answered
before reaching a conclusion as to the "right" health insurance program.

►INDIVIDUAL NEEDS FOR HEALTH INSURANCE

At one time it was acceptable to expect one's family to provide support when illness or disability struck.
Those days are now long past. Today, we all must prepare for and assume the responsibility of covering
the cost of medical care. Unless one is independently wealthy, the prospect of covering costs out-of-
pocket is not an attractive one. The loss of one's health can have wide-ranging consequences. Not only
does the cost of medical care come with a high price tag, but the loss of income that often accompanies
a disabling illness or injury can compound the devastating effects of the health loss. Current
demographics, which show that most families have both parents working, emphasize the need to
consider both parents’ income needs when designing a complete health insurance program.

Medical Expense Insurance Needs

While it is difficult to measure the importance of one type of insurance over another, it is fair to
presume that a health insurance program must begin with an adequate amount of medical expense
insurance. Without proper protection devoted to these potential costs, even the most basic medical
care can quickly exhaust an individual’s savings. A catastrophic claim can spell financial disaster. At one
time, most medical policies were the basic medical expense type.

Today it is more common to find most Americans covered under some form of a major medical policy or
a service plan such as an HMO. If the policyowner can afford the cost, an ideal policy is a combination
plan in which a basic plan is enhanced by a supplementary major medical plan. Under this approach, the
insured obtains the "first dollar" benefits of the basic plan and also has the expansive protection offered

by the major medical plan. Most policyowners are concerned with the cost of their health insurance
and find that some financial sacrifice may be required. For example, an individual major medical plan
with a $100 individual deductible is going to cost more than a comparable plan with a $500 deductible.
A plan with an 80/20 coinsurance provision will cost more than a comparable plan with a 75/25
coinsurance provision. The question the policyowner must answer is, "Am I willing to assume more of
the cost risk of possible future claims in exchange for the definite cost savings offered by a plan with a
higher deductible or coinsurance limit?"

Group Versus Individual Coverage

More Americans are protected under a group medical expense policy than an individual policy. The
benefit to the group member (even assuming the plan is contributory) is the significantly less out-of-
pocket cost than a comparable individual plan. The group plan participant can take comfort in knowing
that even if he should terminate employment, continued coverage is guaranteed through the conversion
privilege built into every group health policy.

Disability Income Insurance Needs

The importance of protecting one's earnings is sometimes overlooked in the insurance needs analysis
process- a regrettable fact for the many people who become disabled every year. Americans too often
assume that Social Security will provide the income necessary to survive if disability strikes. This is an
unfortunate assumption. Not only is the definition of "disabled" to qualify for Social Security benefits
extremely narrow, but there is no assurance that the benefits will meet the disabled person’s needs.

Social Security disability income should only be viewed as a possible source of income to augment a
personal plan. Whether the personal plan is based on a group or individual policy, it should be
regarded as the primary source of income if earnings are lost due to disability.

Policyowners can control the premium cost of a disability income plan by electing a longer elimination
period than might otherwise be desired. The length of the benefit period also has a direct impact on the
premium. Because of the favorable tax treatment given to individually funded disability income policies,
a plan that provides about 60% of pre-disability gross earnings can be considered sufficient. This is
because disability income benefits are income tax-free if the individual insured paid the premiums. An
individual who earns $3,000 a month may only take home $2,000 after taxes. Consequently, a disability
plan that provides a monthly tax-free benefit of $1,800 would likely be sufficient.

• To discourage malingering and false claims for disability, an insurer sets limits on the amount of benefits
an insured can collect from two disability policies with the same insurer

In the case of group disability income plans, the group member has little choice as to the level of
benefits provided. The plan document must have a schedule of benefits that identifies what the
participant will receive if disabled. However, the group member benefits to the extent the employer
contributes to the disability income premiums. If both parents in a family are actively employed, then
disability income must be considered for each. If each parent's income is indispensable for the
financial support of the family, then it is safe to assume that the loss of either income would present a
financial problem.

►BUSINESS NEEDS FOR HEALTH INSURANCE

Many health insurance producers have found a niche servicing the business market. The reason for this
is because the health insurance needs of the business market are as great as the needs of individuals.
Business uses of health insurance can be broadly divided into two categories: employee benefit plans
and business continuation plans.

Employee Benefit Plans

While the term employee benefit plan can encompass a wide variety of benefit offerings (life insurance,
pension or profit-sharing plans, vacation pay, deferred compensation arrangements, funeral leave,
sick time) it is rare when it does not include some kind of provision for health insurance or health benefits.
Large and rapid increases in the cost of health care are likely the primary reasons for the popularity of
employer-sponsored health plans. Many people rely on these plans as their sole source of health
insurance.

Group Health Insurance

As we have learned, a group health plan can consist of medical insurance, disability income insurance,
accidental death and dismemberment insurance-alone or in any combination. It is not uncommon to
find all of these coverages included in a single group insurance plan. By providing its employees with a
plan for health insurance, an employer derives a number of benefits:

• The plan contributes to employee morale and productivity.
• The plan enables the employer to provide a needed benefit that employees would otherwise
 have to pay for with personal after-tax dollars (this helps hold down demands for wage
 increases).
• The plan places the employer in a competitive position for hiring and retaining employees.
• The employer can obtain a tax deduction for the cost of contributing to the plan.
• The plan enhances the employer's image in both public and employee relations.

Cafeteria Plans

Many times, employer-provided health insurance benefits are part of a cafeteria plan. As its name
implies, cafeteria plans are benefit arrangements in which employees can pick and choose from a menu
of benefits, thus tailoring their benefits package to their specific needs. Employees can select the
benefits they value or need and forgo those of lesser importance to them. The employer allocates a

certain amount of money to each employee to "buy" the benefits they desire. If the cost of the benefits
exceeds the allocation, the employee may contribute the balance on a pretax basis (contribution is not subjected
to any taxes) Without a Section 125 Plan in place, the contribution would be considered taxable income to the
employee. Taxation of cafeteria plans is regulated by Section 125 of the Internal Revenue Code, thus sometimes
cafeteria plans are referred to as a Section 125 plan.

• An S-Corp owner with a greater than 2% share is INELIGIBLE to participate in a Section 125 Plan

The types of flexible benefits usually available under a cafeteria plan include medical coverage,
accidental death and dismemberment insurance, short-term and long-term disability, life insurance, and
dependent care. Some plans provide for "choices within the choices": an employee may have the option
of selecting from various levels of medical plans or choosing from among a variety of HMOs.

Business Continuation Plans

Just as life insurance provides a way to help a business continue in the event an owner or key employee
dies, health insurance also serves continuation purposes in the event of a disabling sickness or injury. It
does so through the following plans:

Business Overhead Expense Insurance

Business overhead expense insurance is designed to reimburse a business for business expenses and
payroll in the event the business owner becomes disabled. It is sold on an individual basis to
professionals in private practice, self-employed business owners, partners, and occasionally close
corporations. Overhead expenses include such things as rent or mortgage payments, utilities,
telephones, leased equipment, employees’ salaries, and the like. This includes all the expenses that
would continue and must be paid, regardless of the owner's disability. Business overhead expense
policies do not include any compensation for the disabled owner. They are designed to help the day-to-
day operation of his business continue during the period of disability. The benefits payable under these

kinds of policies are limited to the covered expenses incurred or the maximum that is stated in the
policy. For example, assume Dr. Miller is the insured under a business overhead expense policy that
pays maximum monthly benefits of $4,500. If Dr. Miller became disabled and actual monthly expenses
were $3,950, the monthly benefits paid would be $3,950. If Dr. Miller's actual expenses were $4,700,
the benefits payable would be $4,500. The premium for business overhead insurance is a legitimate,
tax-deductible business expense. The benefits when paid, however, are treated as taxable income.

Disability Buy-Sell Plans

A disability buy-sell agreement (sometimes called a disability buy-out agreement) operates in much the same way as a life insurance buy-sell agreement. In this case, the plan sets forth the terms for selling and buying a partner's or stock owner's share of a business in the event of disability and is no longer able to participate in the business. It is a legal, binding arrangement funded with a disability income policy. Unlike typical disability income insurance plans that pay benefits in the form of periodic payments, the buy-out plan usually contains a provision allowing for a lump-sum payment of the benefit, thereby facilitating the buyout of the disabled's interest.The policy proceeds are normally received tax-free. If the owners desire, the plan often permits the buyout to occur through the use of periodic income payments. Benefits payable under a disability buy-sell policy are paid to the company or another shareholder.

Disability buy-sell plans are characterized by lengthy elimination periods, often as long as two years. The
reason for this is simple: because the plan involves the sale of a disabled partner's or owner's interest in
the business, it is important to be quite sure that the disabled person will not be able to return to the business.

A disabled partner can represent a double liability. The remaining partners must not only pick up
the slack left by the disabled partner's absence, but usually must pay an income as well. It is
understandable why the disability buy-sell plan is popular with business owners.

Key Person Disability Insurance

Just as key person life insurance indemnifies the business for the lost services of a key person, so does a
key person disability income policy. This type of coverage pays a monthly benefit to a business to cover
expenses for additional help or outside services when an essential person is disabled. The key person
could be a partner or working stockholder of the business. The key person could also be a management
person who is personally responsible for some very important functions, such as a sales manager.

The key person's economic value to the business is determined in terms of the potential loss of business
income that could occur, as well as the expense of hiring and training a replacement for the key person.
The key person's value then becomes the disability benefit that will be paid to the business. The benefit
amount may be paid in a lump sum or in monthly installments. Generally, the policy's elimination period
will be 30 to 90 days, and the benefit period will be one or two years. The business is the owner and
premium payor of the policy. Benefits are received by the business tax-free because the premium paid is
not tax deductible.

Group Health Insurance

Most of our discussion of health and accident insurance so far has focused on individual coverage.
However, 90% of those with private insurance are covered through group plans through their
employers.

Group health insurance, like individual health insurance, can be tailored to meet the employer's needs.
By its very nature, however, group insurance has several features that set it apart from individual plans,
including the nature of the contract, the cost of the plan, the form of premium payments, and eligibility
requirements. In this chapter, we will examine the characteristics of this type of insurance protection
and review the favorable tax treatment given to group plans.

►NATURE OF GROUP HEALTH INSURANCE

Like group life, group health is a plan of insurance that an employer (or other eligible group sponsors)
provides for its employees. The contract for coverage is between the insurance company and the
employer. A master policy is issued to the employer. The individual insureds covered by the policy
are not given separate policies. Instead, they receive certificates of insurance and an outline or booklet
that describes their benefits. Generally speaking, the benefits provided under a group health plan are
more extensive than those provided under an individual health plan. Group health plans typically have
higher benefit maximums and lower deductibles.The limited period of time during which all members may
sign up for a group plan is called the enrollment period. A new employee must sign an enrollment card during
the open enrollment period.

• The period of time during which a new employee is ineligible for group Health insurance coverage is called the probationary period

Characteristics of Group Health Insurance

The characteristics of group health insurance are similar to those of group life. These include eligibility
standards for groups and for individuals within the groups, method of premium payments (contributory
versus noncontributory), lower cost, predetermined benefits, underwriting practices, conversion
privileges, and preexisting conditions provisions. Let's briefly review each.

Eligible Groups

To qualify for group health coverage, the group must be a natural group. This means that it must have
been formed for some reason other than to obtain insurance. Qualifying groups include employers,
labor unions, trade associations (associations in the same industry), creditor-debtor groups, multiple
employer trusts (employers in the same industry), lodges, and the like.

State laws specify the minimum number of persons to be covered under a group policy. One state may
stipulate 15 persons as a minimum number, while another state may require a minimum of 10. (Ten
lives is the most typical minimum requirement.)

Individual Eligibility

Like group life, group health plans commonly impose a set of eligibility requirements that must be met
before an individual member is eligible to participate in the group plan. It is common to find the
following requirements:

• Minimum of one to three months employment service
• Full-time employment status
• Working people age 65 or over generally must be offered the same health benefits offered to younger employees

Contributory Versus Noncontributory

Group health plans may be contributory or noncontributory. If the employer pays the entire premium,
the plan is noncontributory. If the employees share a portion of the premium, it is contributory. Most
noncontributory group health plans require 100% participation by eligible members, whereas
contributory group health plans often require participation by 75% of eligible members. The reason
for these minimum participation requirements is to protect the insurer against adverse selection and to
keep administrative expenses in line with coverage units.

Lower Cost

Benefit for benefit, the cost of insuring an individual under a group health plan is less than the cost
of insurance under an individual plan. This is because the administrative and selling expenses involved
with group plans are far less.

Predetermined Benefits

Another characteristic of group health plans is that the benefits provided to individual insureds are
predetermined by the employer in conjunction with the insurer's benefit schedules and coverage limits.
For example, group disability benefits are tied to a position or earnings schedule, as are accidental death
and dismemberment benefits.

Underwriting Practices

Generally speaking, the approach in underwriting group health plans is the same as underwriting group
life plans: the insurer evaluates the group as a whole rather than individuals within the group. Based on
the group's risk profile, which is measured against the insurer's selection standards, the group is either
accepted or rejected. However, there are some changes taking place with regard to underwriting group
medical expenses plans, especially for small groups. Whereas for large group medical plans it is common
to accept all currently eligible members and new members coming into the group, this is not necessarily
true any longer for smaller groups. In smaller groups the presence of even one bad risk can have a
significant impact on the claims experience of the group. Consequently, most insurers today reserve the
right to engage in individual underwriting to some degree with groups they insure.

As the term implies, individual underwriting is the process of reviewing a group member's individual risk
profile. Most commonly this is done on two occasions: when a group is first taken on by an insurer and
when a group member (e.g., an employee) tries to enter the plan after initially electing not to
participate. In the latter case, the underwriter's objective is to reduce the risk of adverse selection. In the

former case, individual underwriting is only done on members for whom the initial application
indicates a potential risk problem (such as a preexisting condition). If the member is found to represent
too great a risk, the insurer often retains the right to reject the member from participating in the plan or
at least charge an increased premium (or exclude coverage for the specified condition). It is important to
note that if an insurer does reserve this right of individual underwriting, most states require the insurer
to explain in the policy how it will exercise this right.

Rarely is an entire group rejected on the basis of one bad risk, unless the group is very small. The
underwriter reviews a number of factors to determine whether or not the group should be accepted. In
spite of the many differences between types of groups, there are certain general groups of underwriting considerations.

General Groups of Underwriting Considerations

General groups of underwriting considerations are applicable to all or most types of groups, such as:

• Reason for the group's existence (purchasing group insurance must be incidental to the
  group's formation, not the reason for it)
• Stability of the group (underwriters want to see a group of stable workers without an
excessive amount of   "turnover")
• Persistency of the group (groups that change insurers every year do not represent a good risk)
• Method of determining benefits (it must be by a schedule or method that prevents
individual selection of   benefits)

• How eligibility is determined (insurers want to see a sickness-related probationary period, for example,
  to reduce adverse selection)
• Source of premium payments, whether contributory or noncontributory (noncontributory plans are
 preferred because they require 100% participation, which helps spread the risk and reduces adverse selection)
• Prior claims experience of the group
• Size and composition of the group
• Industry or business with which the group is associated (hazardous industries are typified by
  higher-than-standard mortality and morbidity rates)

Conversion Privilege

Group health plans that provide medical expense coverage universally contain a conversion privilege for
individual insureds. This allows them to convert their group certificate to an individual medical expense
policy with the same insurer, if and when they leave their employment. Insurers are permitted to
evaluate the individual and charge the appropriate premium, be it a standard rate or substandard rate.
However, an individual cannot be denied coverage even if he/she has become uninsurable. The
employee must make application for a converted policy within a given period of time (usually 31 days)
depending on the state. During this time, the individual remains insured under the group plan whether
or not a conversion ultimately takes place. Conversion privileges generally are reserved for those who
were active in the group plan during the preceding three months.

► Health Insurance Portability and Accountability Act (HIPAA)

HIPAA provides the ability to transfer and continue health insurance coverage for millions of American workers and their families when they change or lose their jobs.

The HIPAA Privacy Rule provides federal protection for an individual’s health information and gives patients an array of rights with respect to that information.

The HIPAA Security Rule provides technical safeguards to assure the confidentiality, integrity, and availability of electronic protected health information.

HIPAA requirements

• HIPAA requires employers with 20 or more employees to allow former employees to continue benefits under the employer's group health insurance

• HIPAA imposes requirements on health care providers with respect to disclosure of protected health information

• Notice of information practices must be given to a policyholder at least every three years

• When an insured individual leaves an employer and immediately begins working for a new company that offers group health insurance, the individual is eligible for coverage upon hire

• HIPAA states that a group health policy renewal can be denied when participation or contribution rules have been violated

• HIPAA provides that the 10% excise tax for early withdrawal from IRAs will not apply to the extent a withdrawal is used for medical expenses that exceed 7.5% of the individual's adjusted gross income

• HIPAA limits the ability of a new employer plan to exclude coverage for preexisting conditions

• HIPAA rules apply to all types of group health plans EXCEPT disability income plans

Pre-existing conditions

HIPAA has changed the rules governing preexisting conditions for all group health plans (excluding disability income). HIPAA portability rules allow individuals who change from one group medical plan to another to reduce or eliminate any pre-existing conditions excluded under the new plan. The individual is therefore eligible for coverage upon hire.

Pre-existing conditions, under HIPAA, are defined as health issues that existed, were treated, or diagnosed within 6 months prior to employment. An enrollee’s pre-existing conditions for a health benefit plan may be excluded for up to 12 months (18 months for late enrollees). A late enrollee is an individual who elects coverage after the initial eligibility period.

Creditable coverage

Under HIPAA, an individual’s waiting period for pre-existing conditions is reduced when he or she has “creditable coverage.” Creditable coverage is previous coverage under another group or individual health plan when there has not been a break in coverage of 63 days. The 63-day period begins when the individual’s previous coverage ended. It ends when coverage under your plan begins, or, if earlier, when your group’s waiting period for eligibility begins.

►GROUP HEALTH INSURANCE COVERAGES

All of the types of health insurance coverages discussed in this text (medical expense, disability income,
and accidental death and dismemberment) are available for group plans.

• Group health insurance contracts providing coverage for employees in more than one state are
 usually controlled by the laws of the state where the master contract is issued.
• Working people age 65 or over generally must be offered the same accident and health benefits
  offered to younger employees

Let's now focus on the features of these coverages when they are part of a group plan.

Dental Care and Vision Care

Dental care coverage is designed to cover the costs associated with normal dental maintenance (such as annual checkups, teeth cleanings etc) as well as oral surgery, root canal therapy, and orthodontia. The coverage may be on a "reasonable and customary charge" basis or on a dollar-per-service schedule approach. Deductible and coinsurance features are typical (though some policies will cover routine cleaning and exams at 100%), as are maximum yearly benefit amounts, such as $1,000 or $2,000.

Vision care coverage usually pays for reasonable and customary charges incurred during eye exams by
ophthalmologists and optometrists. Expenses for the fitting or cost of contact lenses or eyeglasses often are excluded.

Group Basic Medical Expense

The three standard forms of basic medical expense insurance- hospital, surgical, and physicians’
expenses- are available for group insurance. In addition, a number of newer coverages have been
developed in recent years, including dental and vision care, prescription drugs, home health care,
extended care facilities, diagnostic x rays, and laboratory services. Some of these specified coverages,
such as vision and dental care, are available only on a group basis.

A group basic medical expense plan can combine two or more of these coverages or it may consist of
only one type of coverage, such as hospital expense only.

Group Major Medical Plans

Like individual major medical plans, group major medical plans may be offered as a single, extensive
plan (comprehensive major medical) or superimposed over a group basic plan (supplemental major
medical). Participants are usually required to satisfy an initial deductible with comprehensive plans and
either a corridor or an integrated deductible with supplemental plans.

Benefits provided by group major medical plans are usually more extensive than those of individual
plans. For example, it is not uncommon to find group plans that offer individual benefit maximums of $1
million. Others do not set any maximum benefit limits. Also, deductibles are usually lower for group
plans, typically ranging from $250 to $500, whereas deductibles for individual policies can be $1,000 or
more. There are two other characteristics of group medical expense plans that distinguish them from
individual plans. These are the coordination of benefits provision and the treatment of maternity benefits.

Coordination of Benefits

The purpose of the coordination of benefits (COB) provision, found only in group health plans, is to
avoid duplication of benefit payments and over insurance when an individual is covered under more
than one group health plan. The provision limits the total amount of claims paid from all insurers
covering the patient to no more than the total allowable medical expenses. For example, an individual
who incurs $700 in allowable medical expenses would not be able to collect any more than $700, no
matter how many group plans they are covered by.

The COB provision establishes which plan is the primary plan, or the plan that is responsible for
providing the full benefit amounts as it specifies. Once the primary plan has paid its full promised
benefit, the insured may submit the claim to the secondary provider for any additional benefits payable.
In no case, however, will the total amount the insured receives exceed the costs incurred or the total
maximum benefits available under all plans.

Coordinating benefits is appropriate for married couples when each is covered by an employer group
plan. For example, John and Cindy, a young married couple, each are participants in their own
company's health plan and are also covered as dependents under their spouse's plan. John's plan would
specify that it is the primary plan for John. Cindy's plan would be his secondary plan. Likewise, Cindy's
plan would specify that it is the primary plan for Cindy. John's plan would be her secondary plan.

COBRA Continuation of Benefits

Participants in group medical expense plans are protected by a federal law that guarantees a
continuation of their group coverage if their employment is terminated for reasons other than gross
misconduct. Practically speaking, the law protects employees who are laid-off but not those who are
fired "for cause." This law, known as the Consolidated Omnibus Budget Reconciliation Act of 1985
(i.e., COBRA), requires employers with 20 or more employees to continue group medical expense
coverage for terminated workers (as well as their spouses, divorced spouses, and dependent children)
for up to 18 months (or 36 months, in some situations) following termination. Some important points
about this law should be noted. It is not the same as the policy conversion privilege by which an
employee may convert a group certificate to an individual policy. COBRA permits the terminated
employee to continue the group coverage. COBRA permits the terminated employee to elect to continue the group coverage within 60 days of termination. The benefits under COBRA continuation coverage will end if
the employer terminates all group health plans.

COBRA Continued Coverage for Former Employees

The following events would qualify for extended medical expense coverage under COBRA for a
terminated employee:

• Employment is terminated (for other than gross misconduct): 18 months of continued coverage
  (or up to 29 months if disabled)
• Employee's hours are reduced (resulting in termination from the plan): 18 months of continued coverage
  (or up to 29 months if disabled)

• Employee dies: 36 months of continued coverage for dependents
• Dependent child no longer qualifies as "dependent child" under the plan: 36 months of continued coverage
• Employee becomes eligible for Medicare: 36 months of continued coverage
• Employee divorces or legally separates: 36 months of continued coverage for former spouse

The law does not require the employer to pay the cost of the continued group coverage. The terminated
employee or surviving dependents are responsible to pay the premium, which may be up to 102% of
the premium that would otherwise be charged. (The additional 2% is allowed to cover the insurer's
administrative expenses.) The schedule of benefits will be the same during the continuation period as
under the group plan.

Group Disability Income Plans

Group disability income plans differ from individual plans in a number of ways. Individual plans usually
specify a flat income amount, based on the person's earnings, determined at the time the policy is
purchased. In contrast, group plans usually specify benefits in terms of a percentage of the individual's earnings.
Like individual plans, group disability can include short-term plans or long-term plans. The definitions of
"short-term" and "long-term" are different for group and individual.Group short-term disability plans
are characterized by maximum benefit periods of rather short duration, such as 13 or 26 weeks. Benefits
are typically paid weekly and range from 50% to 100% of the individual's income.

Group long term disability plans provide for maximum benefit periods of more than two years,
occasionally extending to the insured’s retirement age. Benefit amounts are usually limited to about
60% of the participant’s income.

If an employer provides both a short-term plan and long-term plan, the long-term plan typically begins
paying benefits only after the short-term benefits cease. Often, long-term plans use an "own
occupation" definition of total disability for the first year or two of disability and then switch to an "any
occupation" definition. Most group disability plans require the employee to have a minimum period of
service, such as 30 to 90 days, before he is eligible for coverage. In addition, most group plans include
provisions making their benefits supplemental to workers' compensation benefits, so that total benefits
received do not exceed a specified percentage of regular earnings. In some cases, group disability plans
actually limit coverage to nonoccupational disabilities because occupational disabilities normally qualify
for workers' compensation benefits.

Group AD&D

Accidental death and dismemberment insurance is a very popular type of group coverage, frequently
offered in conjunction with group life insurance plans. It may also be provided as a separate policy, in
which case it is normally paid for entirely by the employee. Such employee-pay-all plans are called
voluntary group AD&D because plan participation is voluntary. Benefits may be provided for both
occupational and nonoccupational losses or for nonoccupational losses only. Voluntary group AD&D
typically provides benefits for both types of losses.

Like individual AD&D, group AD&D pays a principal sum upon the insured's accidental death (or loss of
any two body members). A capital sum is payable upon the accidental loss of one body member. Some
group AD&D plans specify a higher death benefit if the insured dies while on company business. Group
AD&D, unlike group life and group medical, normally does not include a conversion privilege.

Other Types of Group Health Plans

There are four additional types of plans worth noting: blanket health insurance, franchise (or wholesale)
health insurance, credit accident and health insurance, and health savings accounts.

Blanket Health Plans

Blanket health insurance is issued to cover a group who may be exposed to the same risks, but the
composition of the group (the individuals within the group) are constantly changing. A blanket health
plan may be issued to an airline or a bus company to cover its passengers or to a school to cover its
students. No certificates of coverage are issued in a blanket health plan, as compared to group insurance.

Franchise Health Plans

Franchise health plans, sometimes called wholesale plans, provide health insurance coverage to
members of an association or professional society. Individual policies are issued to individual members
and the association or society simply serves as the sponsor for the plan. Premium rates are usually
discounted for franchise plans.

Credit Accident and Health Plans

Like credit life plans, credit accident and health plans are designed to help the insured pay off a loan in
the event they are disabled due to an accident or sickness. If the insured becomes disabled, the policy
provides for monthly benefit payments equal to the monthly loan payments due.

Non-occupational Health Plans

A policy that does not cover injuries sustained while at work, because those injuries are covered by workers compensation.

► Health Savings Accounts (HSAs)

The Medicare Prescription Drug and Modernization Act of 2003 established a new way for consumers to
pay for medical expenses: health care savings accounts (HSAs). An HSA is a tax-favored vehicle for
accumulating funds to cover medical expenses.

Eligibility

Individuals under age 65 are eligible to establish and contribute to HSAs if they have a qualified high-
deductible health plan.

Contribution Limits

Annual contributions of up to 100% of an individual's health plan deductible can be made to an HSA.
Individuals who are 55 to 65 years old can make an additional catch-up contribution.

Tax Treatment

Earnings in HSAs grow tax-free and an owner can make tax-free withdrawals to cover
current and future qualified health care costs.

Qualified health care expenses include amounts paid for:

• Doctors' fees
• Prescription and nonprescription medicines
• Necessary hospital services not paid for by insurance
• Retiree health insurance premiums
• Medicare expenses (but not Medigap)
• Qualified long-term care services
• COBRA coverage

Qualified medical expenses are expenses incurred by the HSA owner, the spouse, and dependents.
Nonqualified withdrawals are subject to income taxes and a 20% penalty. HSAs are fully portable, and
assets can accumulate over the years. Upon death, HSA ownership may be transferred to a spouse tax free.

►TAX TREATMENT OF GROUP HEALTH PLANS

As an incentive for employers to provide health insurance benefits to their employees, the federal
government grants favorable tax treatment to group plans. Let's briefly review this treatment.

Taxation of Group Health Premiums

Employers are entitled to take a tax deduction for premium contributions they make to a group
health plan, as long as the contributions represent an "ordinary and necessary business expense." By
the same token, individual participants do not include employer contributions made on their behalf as
part of their taxable income.

As a general rule, individual premium contributions to a group health plan are not tax deductible.
The deduction is limited to the amount exceeding 7.5% of adjusted gross income. Any premiums the individual
contributes for group disability or group AD&D coverage are not considered qualifying medical expenses when
determining this excess.

Taxation of Group Health Benefits

Any benefits an individual receives under a medical expense plan are not considered taxable income
because they are provided to cover losses the individual incurred. It is a somewhat different story with
disability income plans. Disability benefit payments that are attributed to employee contributions are
not taxable, but benefit payments that are attributed to employer contributions are taxable.

Accidental Death and Dismemberment Insurance

The third major type of health insurance coverage is accidental death and dismemberment (AD&D)
insurance. It pays benefits in the event of a fatal accident or if dismemberment results from an
accidental injury. Although the circumstances under which benefits are paid are somewhat limited, it is
a widely used form of insurance protection and often is attached as a rider on a basic life or health
insurance policy. AD&D policies are widely used in group insurance plans as well. In this chapter, we will
examine the typical features of and benefits provided by AD&D policies and some of the other more
specific forms of AD&D policies.

►NATURE OF AD&D POLICIES

Accidental death and dismemberment insurance is the primary form of pure accident coverage. As such,
it serves a somewhat limited purpose: it provides a stated lump-sum benefit in the event of accidental
death or in the event of loss of body members due to accidental injury. This latter includes loss of hands
or feet or the loss of sight in one or both eyes. ("Loss of body member" is typically defined as actual
severance from the body, though it may include loss of use, depending on the policy.) Separate benefits
for hospital, surgical, and other medical expenses are generally not included in AD&D policies, although
some may pay a medical reimbursement benefit up to a stated amount.

►AD&D BENEFITS

Because an AD&D policy pays a specified benefit to the insured in the event of accidental death or
dismemberment due to accidental injury, it is necessary for the policy to make distinctions between
these two contingencies and to define the benefits accordingly. Consequently, AD&D policies make
benefits payable in two forms of payment.

• Principal Sum. The principal sum under an AD&D policy is the amount payable as a death
benefit. It is the amount of insurance purchased- $10,000, $25,000, $50,000, $100,000, or
more. The principal sum represents the maximum amount the policy will pay.

• Capital Sum. Another form of payment payable under an AD&D policy is the amount payable
for the accidental loss of sight or accidental dismemberment, or the capital sum. It is a specified
amount, usually expressed as a percentage of the principal sum, which varies according to the
severity of the injury. For example, the benefit for the loss of one foot or one hand is typically
50% of the principal sum. The benefit for the loss of one arm or one leg is usually two-thirds of
the principal sum. The most extreme losses (such as both feet or sight in both eyes) generally
qualify for payment of the full benefit, which is 100% of the principal sum.

Let's say, for example, Kevin has an accidental death and dismemberment policy that pays $50,000 for
accidental loss of life and the same for accidental loss of two limbs or the sight in both eyes. Thus,
$50,000 is the policy's principal sum. The same policy pays $25,000 for accidental loss of sight of one eye
or dismemberment of one limb. Therefore, $25,000 is the policy's capital sum. Some AD&D policies

provide for payment of double, triple, or even quadruple the principal sum if the insured dies under
specified circumstances. A double payment is referred to as double indemnity. If three times the
principal sum is payable, it is called triple indemnity. However, do not let these terms confuse you.
AD&D policies, because they pay a stated benefit, are valued contracts. They are not contracts of indemnity.

Accidental Means versus Accidental Results

As we learned in the last chapter, an insurance policy that provides benefits in the event of an injury due
to an accident must define "accident." In all cases, an accident is "external and violent," but accidental
death and dismemberment policies (like disability income policies) make a distinction between injuries
due to accidental means and those due to accidental results (or it’s sometimes referred to as
“accidental bodily injury”).

By way of a review, policies that base their benefit payments on accidental means require that both the
cause and the result of an accident must be unintentional. Policies that use the less restrictive accidental
results (or “accidental bodily injury”) definition stipulate that only the injury resulting from an accident
must be unintentional. If Ted, the insured under an AD&D policy, intentionally jumps from the roof of
his house after fixing his antenna (instead of climbing down the ladder) and so severely injures his leg
that it must be amputated, he would be paid the appropriate percentage of the capital sum only if his
policy used the "results" definition. If his policy used the "means" definition, no benefit would be
payable because Ted intentionally performed the action (i.e., the jump) that resulted in the injury.

As noted in the discussion of disability income policies, most states require that policies that provide
any form of accident benefit, as do AD&D policies, base the definition of "accident" on the results
definition, not the means definition.

►OTHER FORMS OF AD&D

Accidental death and dismemberment coverage is made available in a variety of ways. It can be
purchased by individuals as a single policy or it may be a part of an individual disability income policy.
Quite typically, however, it is an aspect of a group insurance plan (either group life or group health) or it
may in and of itself constitute a group plan. Usually, AD&D benefits are payable whether the injury
resulted on or off the job.

By their very nature, AD&D policies are somewhat narrow, providing benefits only in the event of death
or dismemberment due to an accident. There is another type of AD&D coverage, even more narrow in
scope, which provides protection against accidental death or dismemberment only in the event of
certain specified accidents. These are limited risk policies and special risk policies.

Limited Risk Policies

As noted previously, limited risk policies set forth a specific risk and provide benefits to cover death or
dismemberment due to that risk. For example, an aviation policy provides benefits for accidental death
or dismemberment if death or injury results from an aviation accident during a specified trip. An

automobile policy provides benefits for accidental death or injury while riding in a car. Travel accident
covers most kinds of travel accidents, but only for a specified period of time, such as one year.

Special Risk Policies

A distinction should be made between limited risk and special risk policies. A special risk policy covers
unusual hazards normally not covered under ordinary accident and health insurance. An actress who
insures her legs for $1 million or a pilot test-flying an experimental airplane who obtains a policy
covering his life while flying that particular plane are both purchasing special risk policies. However, a
traveler who purchases an accident policy at the airport to provide coverage while she is a passenger on
a commercial airlines flight is purchasing a limited risk policy.

►BENEFICIARIES

Qualifications

The beneficiary of an Accidental Death and Dismemberment (AD&D) insurance policy is the person or entity designated in the policy to receive the death proceeds. There are few restrictions on who may be named a beneficiary of a life insurance policy. The owner of the policy is the ultimate decision maker and may change the beneficiary at any time, unless designated as irrevocable. However, in the underwriting process, the underwriter may consider the issue of insurable interest. When the policyowner lists themselves as the beneficiary, they will require proof of insurable interest.

Who can be beneficiaries?

►Individuals
► Businesses
► Trust  (Provides management of the proceeds; Policy proceeds may be reduced by trust administration fees)
► Estates (Creditors have rights to life insurance policy proceeds when the beneficiary is the insured's estate)
► Charities
► Minors  (Guardian may need to be appointed)

Types of Beneficiaries

A beneficiary can be either specific (a person identified by name and relationship), or a class designation (a group of individuals such as the “children of the insured”). If no one named or if all beneficiaries die before the insured dies,
death benefit will go to insured’s estate.

By Order of Succession:

► Primary: First in line to receive death benefit proceeds
► Secondary (contingent): Second in line to receive death benefit proceeds
► Tertiary: Third in line to receive death benefit proceeds. If no one named, death benefit will go to insured’s estate

Distribution by Descent

Per Stirpes: (meaning by the bloodline) In the event that a beneficiary dies before the insured, benefits from that
policy will be paid to that beneficiary’s heirs.

Per Capita: (meaning by the head) Evenly distributes benefits among all named living beneficiaries.

Changing a Beneficiary

Revocable Beneficiary – The policy owner may change the beneficiary at any time without notifying or getting
permission from the beneficiary

Irrevocable Beneficiary – An irrevocable designation may not be changed without the written consent of the
beneficiary. The irrevocable beneficiary has a vested interest in the policy, therefore the policyowner may not
exercise certain rights without the consent of the beneficiary.

Special Situations

Simultaneous Death: If the insured and the primary beneficiary die at approximately the same time for a common
accident with no clear evidence as to who died first, the Uniform Simultaneous Death Act law will assume that the
primary died first, this allows the death benefit proceeds to be paid to the contingent beneficiaries.

Common Disaster Provision: With a common disaster provision, a policyowner can be sure that if both the
insured and the primary beneficiary die within a short period of time, the death benefits will be paid to the
contingent beneficiary. It also states that the primary beneficiary must outlive the insured a specified period of
time in order to receive the proceeds.

Spendthrift Clause: Prevents a beneficiary from recklessly spending benefits by requiring the benefits to be paid in
fixed amounts or installments over a certain period of time. A spendthrift clause would have no effect if the beneficiary receives the proceeds as one lump sum payment.

►A spendthrift clause is also a statement in a settlement agreement that indicates that the proceeds of the policy will be free from attachment or seizure by the beneficiary’s creditors

Facility of Payment: Typically found in industrial policies, it allows the insurance company to pay all or part of
proceeds to someone not named in the policy that has a valid right. This is usually done on behalf of a minor.