health insurance

Pros and cons of catastrophic health insurance

2012/04/11 – pm 1:47

Amid rising health insurance costs and a tough economy, a growing number of consumers and employers are turning to high-deductible health plans (HDHPs), often known as “catastrophic health insurance.”

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These plans feature lower-than-average premiums in exchange for higher-than-average deductibles, and many on the market today are paired with tax-advantaged health savings accounts (HSAs).

Under a high-deductible health plan, you pay for all your medical expenses – except for qualified preventive care – up to the annual deductible. After that, some plans pay 100 percent of your covered medical expenses. Others initially pay a share of your medical bills – such as 80 percent – before paying 100 percent when you reach an out-of-pocket maximum.

Your premiums do not count toward your deductible or your out-of-pocket maximum.

These plans are sometimes referred to as catastrophic health insurance plans, but the name is a bit of a misnomer. Under health care reform, the plans must cover 100 percent of preventive care, even before you pay the deductible.

In addition, many of the plans cover a full range of health care services – not just hospital and emergency medical costs you might associate with catastrophic care.

The HSA health insurance option

HSA-qualified, high-deductible health plans are a popular option today. Made possible by a federal law that went into effect Jan. 1, 2004, these plans are coupled with a health savings account that lets you set aside pre-tax money to use for medical care today or in retirement.

“More and more consumers are looking for ways to save money on health care and on taxes, so they’re taking another look at HSAs,” says Ellen Laden, a spokeswoman for Golden Rule Insurance Co., which underwrites individual health insurance plans for UnitedHealthcare.

Golden Rule pioneered the first medical savings account in 1993, a forerunner to the HSA. Just under 30 percent of Golden Rule’s individual customers choose HSA-eligible plans, and Laden says the company is seeing an uptick in interest.

Consumers shopping for affordable individual health insurance were the first to gravitate toward HSA-eligible plans, followed by small employers, says Dennis Triplett, CEO of UMB Healthcare Services in Kansas City, Mo., which services health spending accounts, including HSAs.

“Now we’re seeing interest from larger businesses,” says Triplett, who also chairs the HSA Council at America’s Health Insurance Plans (AHIP).

The number of Americans covered by “health savings account/high-deductible health plans” totaled 10 million in January 2010, up from 8 million the previous year and 6.1 million in January 2008, according to a May 2010 report by AHIP. Large-group coverage was the fastest-growing market for the products from January 2009 to January 2010, rising by 33 percent, AHIP says.

Triplett says that in the last year, his company saw a 40 percent increase in the number of HSA accounts it services.

How these health insurance plans work

Not all high-deductible health plans can be paired with an HSA. To qualify for HDHP status in 2011, the plan must have a deductible of at least $1,200 for an individual and $2,400 for a family. Out-of-pocket maximums can be no more than $5,950 for an individual and $11,900 for a family.

You can contribute up to $3,050 per year in pre-tax dollars to an HSA as an individual or up to $6,150 as a family. You can save an additional $1,000 in the account if you’re 55 or older.

The money in the account grows tax-free, and in some cases companies that service the accounts provide investment options such as mutual funds to promote further savings growth, Laden says.

When you withdraw the funds, you do not have to pay taxes so long as the withdrawals you take are for qualified medical expenses, such as the HDHP’s deductible or medical costs not covered under the plan, including dental and vision care. You can also use the accounts to save for long-term care not covered by Medicare.

Laden says she knew one man who poured as much as he could into his HSA to pay for orthodontic bills he knew he’d eventually face for his children.

“All three little girls were thumbsuckers, and he knew they’d need braces,” she says.

HSA funds can also be used for non-medical expenses, but you’ll pay a 20 percent tax penalty on top of income taxes on any money you withdraw for non-medical expenses before age 65, Laden says. You pay only ordinary income tax – no penalty – on withdrawals for non-medical expenses after age 65.

An HSA account is portable. Even if you switch to a different type of health plan or change employers, the money is still yours to spend on health care.

Is a high-deductible health plan right for you?

Triplett says many types of consumers can benefit from high-deductible health plans.

“I think they’re a no-brainer for the young and healthy, but I think they’re well-suited for all demographics,” he says.

Remember, though, that not all high-deductible plans are HSA-qualified. In addition, HDHPs vary in what they cover and how they’re priced.

Consider the following, Laden says:

How much can you afford to pay for health insurance?
What coverage do you need?
What does the plan cover, and what does the plan not cover?
How much is the deductible, and how much, if any, would you pay in coinsurance up to the out-of-pocket maximum?
How will you save for the HSA? Plans underwritten by Golden Rule Insurance, for example, require members to contribute at least $25 a month to the HSA.
Does the plan offer a strong network of providers, and is the network national?
If you sift through health insurance quotesand consider a “catastrophic health insurance plan,” make sure you understand how the plan works, what it covers and how much you might end up paying out of pocket.

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health insurance

What is the difference between HMO health insurance and PPO insurance?

2012/04/11 – pm 1:46

Choosing the right health insurance plan can be confusing. When open enrollment rolls around at your office, you can easily get lost in alphabet soup of acronyms and a dizzying array of coverage options.

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Fortunately, most options can be boiled down to three basic types of managed health care plans – health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service (POS) plans.

What is PPO insurance? What is the difference between PPO and HMO? It’s important to learn all about health insurance options so you’ll know which one is right for you.

Health maintenance organization (HMO) plans

A health maintenance organization (HMO) contracts with health care professionals and facilities to create a “provider network.” If you choose HMO insurance, you’ll typically pay just a small co-payment if you visit a physician or hospital within the plan network. HMO insurance often features lower premiums and co-pays than other plans.

However, HMO insurance is also among the least flexible types of health insurance plans. When you sign up for one of these plans, you must choose a primary care provider (PCP). If your current physician is not in the plan, you will have to find another doctor, or pay to see your current physician.

Typically, HMOs will not pay for non-emergency care if it’s performed by an out-of-network physician or facility. You’ll also need a referral from your PCP to see a specialist.

In general, HMOs offer you the lowest out-of-pocket costs for your care. The tradeoff is that your access to care outside the network is extremely limited.

Preferred provider organization (PPO) plans

A preferred provider organization (PPO) also enters into contractual agreements with health care providers and creates a “provider network.” But unlike HMOs, PPO health insurance will cover some – but not all – of the cost of care administered by out-of-network providers.

If you select a PPO, you will have low co-payments as long as you see in-network physicians. Another advantage of PPO insurance is that unlike an HMO, you do not need a primary care physician’s permission to see a specialist (as long as the specialist is in network).

However, PPOs also have a few disadvantages. Going out of network for your medical care is likely to cost you – either you’ll have to pay a deductible or the difference between what the out-of-network physician and an in-network physician charges. However, unlike many HMO plans, a PPO health insurance plan generally will pick up at least some of the cost of out-of-network care.

In addition, you may have to pay higher co-payments if your doctor charges more than is “reasonable and customary” (according to the insurer) for a service.

In summary, PPO health insurance offers a wider range of access than HMO insurance, but your out-of-pocket costs tend to be higher.

Point-of-service (POS) plans

A third type of health plan — known as a point-of-service (POS) plan – offers a combination of PPO health insurance and HMO insurance services. In fact, the “point of service” in the name reflects the fact that you make your choice of whether to use HMO or PPO services each time you see a provider.

Generally, a POS has rules similar to HMO insurance, but a POS will allow you to see an out-of-network physician for a higher fee. Some HMOs actually include a POS plan so you can see out-of-network physicians.

Understanding the differences among HMO, PPO and POS plans can help you make the right health insurance plan choice during your next health insurance open enrollment period.

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health insurance

The basics of short-term health insurance

2012/04/10 – pm 1:02

Designed for healthy individuals and families, short-term policies can provide an affordable safety net for those who are transitioning from one life event to another without a basic health plan. Depending on the short-term plan, benefits can be wide-ranging, with some policies providing up to $5 million in individual coverage.
Just as the name implies, these health insurance policies are a temporary solution to a short-term insurance gap.
Most plans last one to six months and can be renewed for a total of 36 months. The application process is simple and policies can be issued the next day. Most insurers take credit card payments.
The most important thing to remember is that a short-term plan is not designed to cover pre-existing conditions. These are typically defined as any condition you had during the 36-month period prior to the start of coverage. The “look-back” period for these conditions can vary by state. The insurance department in your state can tell you what laws apply.
It’s important to answer the health questions on the application honestly. Otherwise, you could wind up with a denial of any treatment related to your pre-existing condition.
All short-term policies have very specific limitations and exclusions, so read the policy carefully before you buy.
Who needs short-term health insurance?
Individuals who are temporarily out of work:
Folks who are between jobs make up a large market for short-term health insurance.
Employees who are newly hired:
If you have just started a new job, you may be waiting to become eligible for your company’s group health plan. This can take one to six months after your start date. In order to avoid a lapse in coverage, short-term health insurance can fill the gap.
Recent college graduates:
Many grads look for jobs offering health insurance benefits, but until they land full-time jobs, short-term insurance can fill the gap.
People waiting to qualify for a standard health insurance policy:
People applying for private-market individual health policies may not want to go without coverage while they wait for their applications to be approved. Having a short-term health insurance plan in place while you wait provides a seamless transition, and if you are denied for your standard policy, you still have basic health coverage through your short-term plan.
Those losing dependent status:
If you reach the cut-off age of your parents’ health insurance plan and are not enrolled as a full-time student, you will be dropped. In this case, you may be eligible for COBRA, but premiums can be very high. A short-term policy can keep you insured at lower premiums until you find a job that offers health insurance, or you enroll in an individual health plan.
People on strike, military discharge and early retirees:
You might consider a short-term plan if you are temporarily without insurance for some other reason. If you have retired early, you may need coverage until you qualify for Medicare. See other health insurance options for early retirees.
A short-term health insurance policy works like an “indemnity” plan, giving you the freedom to go to any doctor or specialist you like. However, most plans require that you obtain pre-certification from your insurer before you are hospitalized (except for emergency treatment). Without pre-certification, the plan may not reimburse you for hospital bills.
Surgery, hospital care, emergency services, diagnostic tests, prescription drugs, follow-up office visits and even limited mental health care could be included under a short-term health policy.
While many short-term policies are usually renewable for a total of 36 months, keep in mind that if you file a claim under your short-term policy your insurer will likely not renew the policy again. They might offer you another policy, but they will treat any injuries or illnesses that occurred during your previous short-term policy as a pre-existing condition.
Most reputable insurers offer a 30-day guarantee of satisfaction and will refund 100 percent of your premium within this time should you decide you don’t want the policy after all. In order to get your money back, you can’t have made claims under the policy.
Low premiums are an important perk to a short-term health insurance policy.
Short-term health insurers have established pools of healthy people and families, each of whom will need coverage only for a short period. Given the low-risk characteristics of this group, the cost of insurance remains low for everybody because insurers expect few claims.
For example, a healthy, single male nonsmoker under the age of 30 could pay about $150 a month. A healthy, single female nonsmoker can likely find a policy for $140 a month. For those over age 30, premiums are slightly higher.
With some short-term policies, you pay a deductible on a per-injury or per-illness basis. After you’ve met your deductible, most insurers will pay some portion, typically 50 to 80 percent of the next $5,000 of expenses, and then 100 percent coverage kicks in, up to the plan maximum.
Many short-term plans will allow you to pay your premiums up-front (often with a discount for doing so) or on a monthly basis. Major companies offering short-term health insurance include Aetna, Blue Cross Blue Shield, CIGNA and United Heathcare’s Golden Rule.
Advantages of short-term health insurance plans:
Short-term medical coverage is less expensive than traditional medical coverage. If you’re in an accident, have an injury or have to be hospitalized due to pneumonia or other illness, this policy would cover you for treatment. Without a short-term health insurance policy, your out-of-pocket expenses for a visit to the hospital could deal a severe financial blow.
Plans can be used with any doctor or hospital in the U.S., and there is no physician network in which you must stay.
Some insurers provide a “Certificate of Creditable Coverage” to be used with your next employer’s health insurance policy. This guarantees that your new group coverage cannot exclude your pre-existing medical conditions. For more on this, read about the HIPAA law.
It will cover you the day after you postmark the application.
Some plans cover preventive care such as mammograms and PAP smears. These things will be listed on your policy.
Plans cover certain transplants.
All eligible dependents such as your spouse and children can be covered.
Some plans cover home health care such as a health aide or services from a registered nurse.

Disadvantages
While short-term plans can prevent you from having a coverage gap and losing your HIPAA rights, short-term plans themselves are exempt from HIPAA. That means pre-existing conditions are not covered.
Policies cannot be renewed beyond a certain point. Although you can reapply, there is no guarantee that you will qualify for another short-term policy.
There is no dental or vision coverage.
Plans don’t cover pregnancy and childbirth.
If you develop a serious condition after your coverage goes into effect, you may not qualify for another plan after your policy period expires.
Who is ineligible?
Most insurers sell short-term health policies only to people under age 65. And if you have ever been denied health insurance, you may not qualify for short-term insurance.
You shouldn’t buy short-term health insurance if you are already covered by another policy. Each short-term health plan application asks a number of questions about other available coverage to determine which plan will pay first. Carrying double coverage may not be a value for your money.
You must meet acceptance guidelines, usually including acceptable height and weight.
Your state’s insurance department can provide a list of companies offering temporary or short-term health insurance policies.

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health insurance

Watch your mail for a possible health insurance rebate

2012/04/10 – pm 12:59

If your health insurance company spends too much money on costs like executive salaries and marketing, it may wind up paying you.
Under a provision in the Patient Protection and Affordable Care Act that kicked in last year, your insurer needs to spend at least 80 percent of its total premium dollars on medical care and quality improvement. If it didn’t hit this mark in 2011, you could be receiving a rebate.
The move should “eliminate a lot of the administrative costs consumers pay for,” says Carla Saporta, health policy director at the Greenlining Institute, a multiethnic public policy and advocacy organization.
Medical loss ratios
Starting this year, your insurance company needs to tell you how your money was spent. They must report their medical loss ratio.
If you belong to a small group plan or have individual insurance, at least 80 percent of your premium should go to medical care and quality improvement. If you belong to a large group plan, it should be at least 85 percent. If not, you should see a rebate.
“Some of these insurance companies have already changed their behavior by lowering premiums or spending more on medical care and quality improvement, while the remainder will need to refund this money to their customers this year,” U.S. Department of Health and Human Services Secretary Kathleen Sebelius said in a news release. The total rebates to either consumers or their employers could reach $323 million.
The refunds could come in the form of payments or premium credits to either the individual or the employer, and must be made by Aug. 1 of each year.
Saporta says she thinks insurance companies will try hard to meet the standard because they “don’t want to look bad in the eye of consumers,” and appear to be squandering their cash.
A first step
The change “helps consumers better plan for the actual costs” of care, says Saporta, who says the move is a good first step in helping to control insurance costs, and ultimately leading to more affordable health insurance.
Phil Lebherz, who founded the U.S. Uninsured Help Line, is concerned about the changes that might occur on the part of health insurance companies as they meet medical loss ratio requirements.
Consumers may receive rebates for the next year or two, but after that, Lebherz says rebates are likely to disappear as insurance companies that now spend more than 15 percent or 20 percent of health insurance premiums on nonmedical-related costs rebalance their books. The Patient Protection and Affordable Care Act doesn’t include an oversight agency to “take apart every part of a company.”
Lebherz anticipates there will be fewer health insurance brokers because they won’t receive “enough off commissions to make a viable business,” forcing some agents to shut their doors.
The result will be “consolidation of the places you can go to buy health insurance,” resulting in less choice for consumers, he predicts.
While consolidation won’t have an impact on those who prefer to purchase their health insurance online, it will affect those who prefer to purchase through an independent agent in order to get personal attention and advice.
Meeting government standards
A Government Accountability Office (GAO) report from October found that nearly two-thirds of health insurance companies already would have met the new standards had they been in place in 2010. The report found 77 percent of insurers serving the large group market would have met the standards in 2010, while 70 percent of those serving the small group market would have done so. Combined, those two groups of insurers covered 85 percent of insured Americans.
Among individual health plans, only 43 percent of insurers in 2010 would have met the standard because of the higher costs of brokers’ commissions and fees. Only 15 percent of Americans got their insurance through the individual market in 2010.
A number of states have requested waivers for the medical loss ratio requirement from the Department of Health and Human Services.

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health insurance

Health insurers need ways to stop paying for painkiller abuse

2012/04/10 – pm 12:58

The contents of the nation’s medicine cabinets are likely impacting the cost of your medical insurance.
Back in 2007, the Coalition Against Insurance Fraud (CAIF), an alliance of consumer groups, insurance companies and government agencies, reported that misuse of prescription painkillers was costing health insurers more than $72.5 billion a year.
That figure likely has become much higher, since the number of people abusing opoids — drugs intended to alleviate pain — has been steadily rising. The most commonly abused opioids are oxycodone, marketed under the brand name OxyContin, and hydrocodone, marketed as Vicodin.
Indeed, last year the Centers for Disease Control and Prevention (CDC) issued a report in which it said the abuse of prescription painkillers had grown to “epidemic” proportions.
Here’s a chart on commonly abused prescription drugs from the National Institute on Drug Abuse.
Statistics are alarming
“According to the CDC report, more people now die from misuse of prescription painkillers than from cocaine and heroin combined,” says James Quiggle, spokesperson for CAIF.
The problem affects people of all ages and from all economic groups, Quiggle says.
Some people who become addicted to painkillers “doctor shop”: They visit different doctors to get multiple prescriptions for the same drug. The average doctor shopper can cost insurance companies $10,000 to $15,000 a year, Quiggle says.
“When someone becomes drug-dependent, his insurance company is not only paying for his drugs, but also possibly for his rehabilitation and medical treatment, which adds to the health care costs that everyone helps pay,” Quiggle says. Insurance companies must pass along the costs of the drugs and treatment to other customers as “part of their normal cost of doing business.”
And those numbers don’t include the cost of lost workplace productivity or the costs to the criminal justice system, Quiggle notes.
Burdening the health insurance system
Health insurance companies are aware of the problem and its staggering cost to all consumers, says Susan Pisano, spokesperson for America’s Health Insurance Plans. “We strongly agree that prescription drug abuse is a concern, not only in terms of the extra burden on health care but most importantly in terms of patient safety,” she says.
Still, painkiller abuse poses a dilemma for health insurance companies. Insurers aren’t able to refuse to pay for valid prescriptions that are covered under a policy.
Mary Ann Schultz, spokesperson for Blue Cross and Blue Shield of Illinois, says that if a patient has a prescription from his or her doctor and has drug or pharmacy benefits, the prescription has to be processed. “All medical decisions remain between the physician and patient,” she says.
However, Pisano and Quiggle say there are steps that health insurers can take to monitor abuse and help curb it.
They include:
Educating providers. “Some make provider education, in terms of the appropriate use of painkillers and those drugs that are more likely to be addicting, a priority,” Pisano says. Doctors are encouraged to only prescribe painkillers when they’re certain they are necessary.
Requiring step therapy. Nicole Evans, spokesperson for the California Association of Health Plans, says many health plans require doctors to start patients on the lowest level of the painkiller that is least likely to be addictive and “to move the patients up only when necessary.”
Limiting the duration of a prescription. Some prescriptions are not considered valid after six months and can’t be renewed without a doctor’s re-evaluation.
Monitoring usage. Some insurance claims departments and pharmacy benefit managers have data-mining programs to alert them when patients are filling a large number of prescriptions for painkillers or appear to be doctor shopping. “They need to identify patterns of potential abuse, so they can be caught as early as possible,” Quiggle says.
More needs to be done
Quiggle says there needs to be more information sharing among insurance companies. Fraud and abuse can be the result of auto insurance, health insurance and worker’s compensation insurance all paying for the same painkillers, he explains.
“If insurance companies would systematically share data, they could uncover far more patterns and cases of drug abuse than they are now and they might also discover large rings that are operating that they don’t currently see,” Quiggle says.
Law and drug enforcement agencies also are addressing the issue, Quiggle says. As of last year, almost every state had adopted or authorized prescription drug monitoring programs that track the distribution of prescription drugs and alert law enforcement officials to potential abuse.

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health insurance

How to choose an individual health insurance plan

2012/04/10 – pm 12:56

When shopping for an individual health insurance policy, it pays to do your homework. According to Cheryl Leamon, spokesperson for Blue Cross Blue Shield Anthem, ask yourself these key questions:
Do I want to keep my doctor?If you have a particular physician you like, that might dictate whether an HMO or a PPO is right for you. In an HMO, you must use the plan’s network of doctors in order to receive coverage. A PPO plan will let you visit any doctor.
What is my household’s current and anticipated health care need?Consider the services you and your family will need on a regular basis. If your child has asthma, will he have to see an asthma specialist routinely to keep it under control?
What will my out-of-pocket expenses and monthly premiums cost? Does it make sense for me to pay a higher premium for lower out-of-pocket costs? If you want a comprehensive health plan — and don’t want many of out-of-pocket expenses — an HMO provides a very cost-effective plan. But if you’re in your 20s or 30s, have no children and some extra savings, you can possibly save money by buying a policy that covers only catastrophic illnesses. Remember, though, you’ll have to pay out of your own pocket for routine doctor visits and laboratory tests.
To estimate health plan costs, try this health care insurance cost calculator from Money-Zine.com.
Does the plan cover prescriptions and X-rays?Prescriptions are one of the most used benefits of health plans. Review the coverage of any health plan to determine if your current prescriptions are covered and at what level. X-rays are a routine part of some treatments, so it’s wise to make sure X-rays are covered in each plan you consider.
Do I prefer certain specialists?Some plans limit not only your visits but also who you can see. If you want to see an acupuncturist or chiropractor, be sure to ask your insurance agent about coverage for these services. Psychotherapy and other mental health services will likely have specific limitations as well.
What do I look for if I can’t afford a policy that covers routine care? Look for comprehensive plans with higher deductibles rather than cutting back on coverage. A basic hospital/surgical plan might cost less, but if you end up in the hospital, the last thing you need to add to your list of worries is how you’re going to pay for follow-up care once you’re released.
What will it cost me for emergency care?Look at what costs, including co-pays or co-insurance, or services such as hospital and surgery care, apply towards the deductible. Leamon advises looking at what defines “emergency care” in your policy.
“Some policies may pay for a broken leg or an injury due to an accident, but won’t cover an illness you were treated for in the emergency room. And still other more affordable plans will cover a visit to the emergency room, but not an extended stay in the hospital. Since emergency care can be the most costly in any health plan, it is best to read the fine print,” she says.

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Life Insurance

How Much Is Enough in Insuring a Life?

2012/04/09 – pm 1:26

If you died today, would your family be destitute in a few years, comfortable, or toasting your good planning as they vacationed on the Riviera?
It largely depends, of course, on your investments and how much life insurance you’ve bought.

Figuring out how much life insurance you need can be difficult, and the appropriate amount varies by situation: marital status, number of dependents, earning potential of each spouse and whether both work. Many financial advisers, nonetheless, maintain that correct coverage is crucial to a successful financial plan.

Overinsure, and good money is wasted on the unlikely event of a premature death. Underinsure, and a family may have to lower its lifestyle at an already traumatic time, a newly single stay-at-home parent might have to return to work, a house might have to be sold in a bad market or children attending college might have to drop out.

Gina Belsanti Cleary, 35, started thinking hard about the subject in 2004, when her second child was born and she was starting a residential mortgage company in LaGrange, Ill. Because she is the family’s primary earner, she took out $900,000 in life insurance on herself and $600,000 on her husband, Matthew, 44, a construction worker.

“I thought, What would happen if I died today?’’ Mrs. Cleary said. “I took myself out of the picture, and what I saw was not very good. I saw my family suffering emotionally and financially. If I can prevent the financial part, hopefully the emotional part won’t be so heavy.”

She said she wanted enough coverage so her husband could stay home with their two children until they were in school, pay off the mortgage, clear debts, invest money for college and finance the daughter’s wedding. She said their $1.5 million term insurance policies cost about $100 a month.

“This is one trip to Walgreen’s and one dinner out to eat for the four of us,” she said.

The life insurance industry’s rule of thumb is 10 times annual salary for an individual. But consultants and various online life insurance calculators try to provide more specific estimates. The Life and Health Insurance Foundation for Education, a nonprofit group financed by the insurance industry, has a calculator at www.life-line.org.

Insurance aggregators, like insweb.com and insure.com, offer calculators to figure life insurance needs as do insurance companies, banks and investment companies.

The goal is for people to withdraw less annually than their investment portfolio returns. This allows for inflation if the money is to support them for long periods. Many advisers recommend an annual withdrawal of 5 percent or less, which would be $50,000 in annual taxable income on $1 million.

“And 5 percent may even be on the high side if you have to pay someone to manage your finances,” said David Barkhausen, a fee-only life insurance consultant in Lake Bluff, Ill., and president of Life Insurance Advisors Inc.

Robert Hunter, director of insurance for the Consumer Federation of America, said 10-times-earnings is a good rule of thumb.

“You want to make sure a child is protected,” he said. “That’s a considerable amount of money when you consider education, food, housing, vacations. The nice part of it is that once your child begins to grow up and graduates from college, you can buy less life insurance.”

There are two basic varieties of life insurance. Term insurance, which covers a set period of time, is cheaper. Permanent insurance, which includes whole life and universal life, does not expire and is often used by wealthier individuals to pay estate taxes.

Young people in excellent health should not automatically buy extra life insurance through their employers, specialists say, because it can be more expensive than what they could obtain on their own unless they get it at a group discount rate. Conversely, older people, those in poor health or those looking for a convenient way to buy life insurance could benefit from employer plans, they say.

Dr. Alexander Sudarshan, an eye surgeon from Los Fresnos, Tex., has $4.8 million in life insurance — $1.6 million in whole life and the rest in term. The idea is that his wife and three adolescent sons would live off the interest were he to die unexpectedly. To calculate his needs, he hired Peter Katt, a national fee-only life insurance consultant from Mattawan, Wis., who charges $325 an hour.

“There is no room for error,” said Dr. Sudarshan, 47. “Life insurance calculators are sufficiently complicated. I was a math major at Yale. They are complicated enough that you really need somebody who really understands.”

Many advisers recommend term insurance over permanent. Term insurance costs a fraction of permanent insurance like whole life (with a locked-in premium) or universal life (where the premium may vary based on projected interest rates). Term rates tend to be constant for the life of the policy — 5 to 30 years — but coverage is like a lease: it expires when the policy does. When their term insurance expires, people who are in ill health or are otherwise considered a bad risk may finds themselves uninsurable or facing prohibitively higher premiums.

One compromise is converting term insurance to a permanent policy at preset points, allowing coverage to continue but at higher rates. Permanent insurance should not expire and it sometimes is used as a savings tool because it accumulates cash value. If policies are surrendered within a short period of time, however, policyholders may receive little of their investment.

Harold Evensky, an independent financial planner with Evensky & Katz in Coral Gables, Fla., does not sell insurance but views it as a risk management tool. He said correct insurance coverage was one of the most important aspects of financial planning.

“Once you have the right coverage, then you can talk about investing somewhere else,” he said.

The American Council of Life Insurers, a trade group, said 35 percent of households had no life insurance. One was the Diss family of Tampa.

Laura Diss was attending Florida State University when her father, Mark Diss, died of an aneurysm last year. A freelance writer, 52, he was paying for his daughter’s education but had no insurance. When he died, Ms. Diss had to drop out of college and get a job. Now 20 and a junior at Wellesley College, she receives financial aid and scholarships, works about 20 hours a week and has summer jobs.

“His philosophy tended to be that if he could spend the money on doing something with us right now, he’d rather do that than something long term,” she said. “Insurance is something that you don’t ever want to have to use, but it’s really not about you. It’s for those people who are going to be there if something happens to you.”

Kirsten Izatt, an estate planner in Wheaton, Ill., says women are more motivated than their husbands to do estate planning because they better understand day-to-day costs that would become their responsibility if their husbands died. Men, she said, often believe they could support their families without a wife.

Neal Rhoney, an Atlanta-based financial adviser with Ameriprise Financial Services, said many clients presumed a surviving stay-at-home parent would work if the breadwinner were to die.

“It’s like ‘Oh, you’re a single parent, and now you’re going back to work full time?’ You have to pay someone to care for your kids,” he said. He recommends that stay-at-home parents have 30 percent to 50 percent of the insurance carried by the working parent. “If the working parent is not able to focus on their income and instead they have to constantly take time off to chauffeur kids around, there is a big drain on that parent’s ability to earn an income.”

When Jennifer and Stephen Goldstein first heard estimates that they needed life insurance worth 8 to 10 times annual salary, they thought it was excessive. She works in Pfizer’s licensing and development department. He is a business development and marketing executive.

But after running the numbers, and having their first child in May, the Manhattan couple realized the estimate was on target.

“When you factor in everything — like you might send your kid to a $14,000 private school and a $25,000 nanny and the mortgage and what you’ll pay for college — we did end up back with that,” Mrs. Goldstein said.

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Life Insurance

Longevity Insurance: Buying Down the Risks of Living Too Long

2012/04/09 – pm 1:25

Most people buy life insurance to protect against the risks of dying too soon. Now, there are new products offering the same protection if you live too long.

It’s known as longevity insurance, and there’s clearly a huge market for it: Life expectancies are on the rise, cushy pensions are on the decline, and most people don’t have enough savings to carry them through two decades or more of retirement. This is not lost on insurance companies, which would like you to think about the product as a pension of sorts — albeit one that you have to buy with your own money.

I wrote about the pros and cons of longevity insurance — which, at its core, is really just an annuity — at the end of last year. But now, New York Life will roll out its own version, which it’s calling a “guaranteed future income annuity,” on July 11.

So how exactly does it work? With basic immediate annuities, also known as income annuities, you give a pile of money to an insurance company in exchange for a lifetime stream of income that generally starts right away.

What’s different about New York Life’s product is that the stream of income is deferred — you pay the premium, but agree to receive the income stream at some point in the future. But there are two distinct ways to use the product.

With the first way, you might think about it as a way to prepay for an annuity (or a pension) well before you plan to use it. That makes it cheaper than an immediate annuity, because, well, there’s a chance you’ll die before you begin to collect. In addition, the insurance company has the advantage of investing your money over a longer period of time. You might buy the annuity at age 55, but decide to begin collecting it at age 67, for instance.

But it can also be used as a pure insurance policy — hence the name, longevity insurance. You can agree to begin collecting the insurance at a much later date in the future, like your 85th birthday. So if you live past your life expectancy, you’re covered. And since most people don’t know when they’re going to die, this allows you to spend down your retirement savings more liberally because you know your payments will kick in later. The big risk, of course, is that you won’t see a dime because you die before you can collect.

“Mathematically, it makes a lot of sense,” said Christopher Blunt, an executive vice president at New York Life, referring to the lower costs of using the annuity purely as an insurance policy. “It’s probably the most efficient and effective way of taking that pure risk off the table.”

So let’s take a closer look at some of the numbers. It would cost a 55-year-old man $100,000 to buy $1,000 a month in guaranteed lifetime income that begins at age 65, compared to $103,500 for a woman. (It’s more expensive for women because their life expectancy is generally longer.)

It would cost $122,000 to cover both partners’ lives, which is much lower than the $203,000 it would cost to buy an immediate annuity (at age 65).

But if a man decides to make those payments over ten years, investing $10,000 a year, his income stream might be slightly less, perhaps closer to $880 a month. That’s because the insurance company is investing your money for a shorter period of time (and there’s a higher likelihood you’ll collect the income stream with each passing year). Also remember that your payments will be influenced by the interest rate environment: if rates rise, you’ll lock in a higher payout rate, and vice versa.

If you want to use the annuity purely as an insurance policy, it’s much cheaper. It would cost a 55-year-old man $12,100 to buy $1,000 in guaranteed monthly income that starts at age 85, compared to $13,750 for a woman. It would cost a 65-year-old man $17,740, whereas it would cost a woman $21,600. To cover them both, it would cost $20,340 if they’re both 55, and $31,240 if they’re both 65.

That seems like a decent deal, until you remember that little bug called inflation – your dollars are likely to be worth a lot less that far into the future. One option is to figure out how much you’ll need in inflation-adjusted dollars and buy that amount.

Now, for some of the rules of the game: The initial premium payment must be at least $10,000, but subsequent payments can be as little as $100. You can make payments at any time up to 2 years before you start collecting payments.

You also have the ability to change your start date. So if you were to retire early, you could start collecting earlier, though your payments would be less. You’re also given one shot at deferring your start date, though you can’t defer the start of your payments for more than 40 years from your initial payment.

As for costs, a one-time commission of as much as 5 percent of the premium amount is extracted from the amount you’re ultimately paid.

There are obviously risks associated with any annuity. The most obvious is that you’re giving up control of a big pile of money, and you may not live long enough to collect. You have the ability to buy survivor benefits, but that will lower your monthly payments. For instance, you can arrange for a beneficiary to receive the money back if you haven’t begun receiving payments, or to continue to receive the payments for a certain period of time.

And then there’s the issue of inflation. You can also buy an option that will allow your payments to rise a certain percentage each year, but again, it will cost you. (There is also a feature that says if rates rise more than two percentage points within five years of buying the contract, the company will reset your contract at the higher prevailing rate).

And then there’s always the question of the financial stability of the insurance company many years into the future. Mr. Blunt pointed to New York Life’s triple-A ratings from each of the big rating agencies and said the company had $30 billion in life insurance reserves on people over the age of 65, and $5 billion in reserves on individual annuities. And since the company is a mutual (as opposed to a publicly-traded company), he said it could stockpile as much capital as it needed since it was not beholden to Wall Street and shareholders.

But what happens if Merck invents the magic pill and we all live until 105? “Continued improvements in medicine that allow people to live longer could create losses on our individual annuity business,” he said, “but these would be more than offset by higher gains on the life insurance.” Still, he added, if something like that were to happen, “at some point, capacity might be limited.”

What’s the biggest reason you would or would not buy this guaranteed future income annuity?

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Life Insurance

In a Volatile Market, Some Turn to Insurance Instead of Bonds

2012/04/09 – pm 1:21

LIFE insurance, it’s fair to say, is a subject that provokes strong opinions. People who like insurance see it as a way to leave money to heirs tax-free or to make sure there is money for a rainy day. Those who don’t like it see a product that generates huge fees for the seller and a diminishing benefit for buyers who probably don’t understand it.
But given the low interest rates on government bonds, some financial advisers have begun encouraging clients to buy permanent life insurance — permanent because it does not lapse, like term insurance, after a set time — as a substitute for bonds in their portfolio.

Their argument is threefold: the rate of return on permanent life insurance is 3 to 5 percent, the money in a policy ultimately passes to beneficiaries free of income tax, and owners can borrow against the policy without incurring any taxes. If they do not repay the loan, it will simply be deducted from the death benefit.

But there are plenty of advisers who point to the layers of fees in any insurance policy — for the management of the underlying investments, for expenses and for the cost of covering the risk of people dying without making all their premium payments. The advisers also say that insurance policies limit the gains that someone gets on the money invested and that the gains go down the longer you live.

But given the continued volatility in the stock market and low yields on United States Treasury bonds for the foreseeable future, there has been an increase in interest in insurance policies for their steady, if low, returns.

Is this a good thing? It depends whom you ask. “As far as saying your bonds aren’t performing well right now, let’s put them all in the insurance policy, I don’t agree with that,” said Larry Rosenthal, president of Financial Planning Services, a wealth management firm in McLean, Va. “But I understand it from the perspective of accumulation, death benefits and tax deferrals.”

Bob Plybon, chief executive of Plybon & Associates, an insurance agency and wealth adviser in Greensboro, N.C., took the other side. “I think where we are from an economic standpoint it makes tremendous sense to look at it as an asset class,” he said. “Right now, you have the ability to generate yields that are competitive with other investments.”

Surprisingly, some people in the insurance industry are cautious about treating life insurance as an asset class. “I believe insurance should be used as insurance,” said Ron Herrmann, senior vice president of sales and distribution at the Hartford. “Taking money out of the life insurance has ramifications to the life insurance itself.”

So what do you need consider if your adviser suggests you think about putting money into a permanent life insurance as an investment?

WHEN IT WORKS People who want to use permanent life insurance policies to build wealth do so by paying more than the premium, a practice known as overfunding. This can mean anything from increasing annual payments to making a lump sum payment.

“Overfunding could be a good use because it enables you to get a longer-term return,” Mr. Herrmann said. “If someone was doing this to take money out in one year, it’s probably not a good thing. If you’re looking 15 to 20 years down the road, it works better.”

For people with substantial wealth, above $5 million, the advantage is predictable growth on a part of their portfolio that they hope not to need.

“Over a 20-year holding period, most permanent life insurance policies have an internal rate of return of 3 to 5 percent depending on the company,” said Adam Sherman, chief executive of Firstrust Financial Resources, a wealth manager and insurance broker in Philadelphia. “Given how the world looks, is it bad to have a 5 percent tool in your investment box? It’s not going to hurt you.”

Or put another way, life insurance gives you guaranteed growth: the death benefit will be worth more than what you put in. Critics would argue that you could earn more money investing that money outside an insurance policy, but even some very wealthy people do not want to take the risk.

Mr. Plybon said he worked with a couple in their 70s who wanted to buy a large insurance policy after watching their net worth drop to $20 million from $30 million in 2008. While they clearly did not need money to live on, they wanted to find a way to get it back, since they had earmarked it for their family foundation. For a premium of about $1 million, he sold them a policy that would pay out $10 million after both spouses died.
Why not just invest that money in other, faster-growing assets? “They didn’t want to take a chance,” Mr. Plybon said. “They wanted to get less aggressive, not more aggressive.”
The other main advantage of insurance as an asset class is its preferential tax treatment. It is well known that the death benefit passes to heirs free of income tax. But policy holders can also borrow up to the amount they put into the policy tax-free and after that take out a loan against the policy, which can be repaid or deducted from the death benefit.

WHEN IT DOESN’T Treating an insurance policy as an asset class can be a bad idea if you expect the policy to be more than it is.

“Just like any other asset someone would invest in, you have to pay attention to it,” said Glen Coral, director of advanced planning at CBIZ, a consulting firm. “You have to make sure the reason you purchased it in the first place still makes sense, and you have to make sure it’s performing as you anticipated it might when you first purchased it.”

Borrowing against the policy, for example, means you have to pay interest, and as the interest compounds over the years, it could greatly reduce the value of the policy.

Permanent life insurance is also loaded with fees up front, so anyone who wants to cash in a policy before 10 or 15 years is going to lose money. So those frustrated by the current low yields in the bond market need to weigh whether their frustration will last a decade.

They also have to decide whether the security of insurance is worth what they will lose in returns. Mr. Coral estimated that over 25 years a low-cost bond portfolio would have returns 1 to 1.5 percent higher than a permanent life insurance policy.

Most policies sold today are some variation on universal life, where the cash value of the policy grows as the underlying investments grow. So there is the chance for higher returns. But there is also a chance for far lower returns. Many policies guarantee at least a 3 percent return, but others, like variable universal life that allow for greater appreciation, may not.

“Insurance companies want you to think of it as an investment vehicle, but it’s a protection vehicle,” said Robert D. Russell, president of Russell & Company, a retirement adviser in Dayton, Ohio. “Fifteen years at 5 to 6 percent? Show me that in writing.”

Of course, at some point someone will get a return on the money you put in, whether it is 3 percent or 15 percent. “Mortality is recession-proof,” Mr. Sherman said. “When we go, it’s not going to be because the Dow was up or down.”

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Life Insurance

Insurers See an Opening in Commercial Mortgages

2012/04/09 – pm 1:20

Over the past several months, the commercial mortgage market has been volatile, plagued by weak investor appetite, wary lenders and warnings by ratings agencies of increasing risk. But one bright spot is emerging, as life insurance companies have taken advantage of the lull to become major lenders.

In the second quarter of this year, the life insurance industry underwrote $15.7 billion in new commercial mortgages — the largest volume on record since the American Council of Life Insurers began tracking the number in 1965. This represents a doubling of the volume of mortgages underwritten in the first quarter and a nearly 26 percent increase over the second-highest number on record, $12.5 billion, reached in the fourth quarter of 2005.

A lack of activity from investment banks has opened the door for life insurers. Pummeled by a weak economy, many Wall Street banks, traditionally the largest commercial mortgage lenders, have gone quiet, leaving little competition for life insurers.

“It is as if these guys died and went to heaven,” said Lawrence J. Longua, a clinical associate professor at the Schack Institute of Real Estate at New York University. “Life insurance companies are pretty much the only game in town.”

Life insurers are typically conservative, favoring high-quality borrowers and trophy properties, and keeping the bulk of their loans on their balance sheets. Investment banks, on the other hand, pool most of their mortgages and issue bonds against these loans. This allows the banks to transfer the risk off their balance sheets, enabling them to underwrite more, and riskier, loans.

Investment banks typically dwarf life insurance companies. Banks and savings institutions, for example, held 33.4 percent of the $2.4 trillion of total outstanding commercial real estate debt as of the second quarter, compared with the 12.8 percent held by life insurance companies, according to the Mortgage Bankers Association. But while the total amount of commercial mortgages increased 0.1 percent in the second quarter over the previous quarter, the amount held by life insurers increased 1.5 percent.

“Now is a good time to be a first-mortgage lender,” said Robert R. Merck, a senior managing director and the head of real estate investments for Metropolitan Life.

MetLife originated $8 billion in real estate loans last year and has already lent that amount in the first three quarters of this year. The company recently financed two loans to a joint venture that includes General Growth Properties, the mall company.

“There is less competition,” Mr. Merck said, “which has allowed lenders like ourselves to put a lot of very good loans on the books for properties that meet our guidelines.”

There are several reasons that banks have been driven to the sidelines, including a difficult economic environment and the sovereign debt crisis in Europe. The market for bonds backed by mortgages has also been weak, and this summer it hit a speed bump when Standard & Poor’s refused to issue a rating on a commercial mortgage bond offering, spooking the investment community. As a result, experts now estimate that what had been expected to be a $50 billion market this year will instead amount to less than $35 billion.

“It was a very optimistic winter and spring, then we turned 180 degrees and it has been nothing but negative,” said Manus Clancy, a managing director at Trepp, a commercial mortgage information provider. “We have seen a vastly different mentality than what we saw in late May.”

Many insurers have responded by increasing their 2011 mortgage allocations. “In 2007 through 2009, these companies sold off a lot of their mortgages,” said Richard D. Jones, a co-chairman of the finance and real estate practice groups at the law firm Dechert, “so now they are trying to rebalance their portfolios.”

For borrowers, life insurance companies can offer a price advantage over investment banks, experts said. Because banks pool their loans into bonds, they have to satisfy skittish bond buyers by offering them higher rates. The banks then pass on these higher rates to the borrower. But because most life insurers do not pool their loans into bonds, they can offer lower rates.

“It is a temporary consequence of a very fractured market,” Mr. Jones said. “Right now, the insurance companies are eating Wall Street’s lunch. If a life company wants to get a deal done, there is nothing anyone can do to compete with them.”

Also, life insurers’ mortgages are performing comparatively well. Some 99.6 percent of mortgages held by life insurance companies were in good standing as of the end of last year, according to Fitch Ratings. This is in large part because of their conservative lending approach and their “active management” of mortgage portfolios, Fitch said in a recent report.

Coming off such a strong performance, some life insurers are now exploring entering the mortgage bond market, an arena traditionally dominated by investment banks. Some insurers are becoming partners with banks to offer mortgage bond products. Under the agreements, the life insurers find the borrowers and originate the loans, and the banks pool those loans into bonds to sell. In this way, the life insurers earn fees for sourcing and originating the loans and the investment banks profit from selling mortgage bonds.

Life insurers want to team up with banks rather than go it alone because it allows them to be involved in more real estate lending without exceeding their asset guidelines. Typically, life insurers allocate less than 15 percent of their total assets to real estate, but because these loans are not on their balance sheets, they can be involved without bumping against these levels.

“Life insurance companies have risk management limits, but their relationships and their origination capabilities often exceed these limits, so this strategy of partnering with Wall Street makes sense,” said Tad Philipp, the director of commercial real estate research at Moody’s Investors Service. Offering mortgage bonds “also helps broaden the suite of loans they can offer borrowers,” he said.

Wall Street banks also do not want to allocate the resources to originate loans. “It is expensive to originate and service a loan, but we already have a team of 45 who this is all they do,” said Christine Hurtsellers, the chief investment officer for fixed income and proprietary investments at ING Investment Management, which is in talks to create a partnership with a bank.

This summer, the Prudential Mortgage Capital Company, a unit of Prudential Financial, announced it would join with Perella Weinberg Partners to create such a venture.

“There is only so much balance sheet capacity for the life insurance companies,” said David Twardock, the president of Prudential Mortgage Capital, “and there needs to be other loan products in the market that provide long-term fixed-rate financing.”

If the life insurance teams work with banks, that could help broaden the commercial mortgage market, Ms. Hurtsellers said. ING estimates that in the next year and a half, about $60 billion in commercial mortgage bonds are maturing, “so given that wave, these partnerships can help refinance the loans, extend them and just help generally solve the problem.”

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