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Friday April 18th 2014

Archives

February 2010 California Broker

Table of Contents

Annuities
Helping Consumers Understand the Value of Fixed Income Annuities

by Holt McGee • By using the pension comparisons to help consumers view annuities as a familiar vehicle, advisors have an opportunity to rebut many common consumer objections and help bring clarity to a valuable, but often misunderstood product.

HSAs
HSA Survey Part II: Constricting Healthcare Costs with HSAs
Find out which HSAs work best for your clients with our Annual survey

Dental
The Benefits of an Effective Dental Disease Management Program

by Dr. David Guarrera • A dental disease management program can help influence employees’ oral health and control healthcare costs by driving healthier behavior.

America’s Healthcare Trends in 2010:
Good Medicine or Bitter Pill?

California’s Changing Healthcare Market: New Products, New Strategies
by Leila Morris • Carriers are offering products that offer more employee cost sharing while searching for ways to keep HMOs available to employer groups.

Staying on Top of Your Game: The Increasing Value of
Continuing Education in a Complex and Competitive Market

by Jennifer Walsh and Thad Roake • The business world is changing quickly across many industries and the health insurance industry is no exception. It can be difficult for even the most seasoned industry experts to keep up in this environment. But there are ways for brokers to stay current and demonstrate their value to clients.

Selling Self-Funding Plans What Makes You Different?
by Stacy Morris, CEDS • By using the HRA/MERP solution, you will show your clients how to put in place a high deductible health plan and partially self-fund benefits accordingly.

Confused by Mini-Med and Fixed Indemnity Plans?
Here’s a Primer For Brokers And Clients

by Tim Adkisson • More businesses will be exploring alternatives to traditional major medical insurance as healthcare costs continue to rise and companies feel increased pressure to cut expenses. For many employers, the alternatives will include limited medical benefit, such as fixed indemnity group products.

Healthcare Reform–Why Push So Hard Now?
by Neil Crosby • Unless Congress is willing to make substantial changes to the bills working their way through the system, this reform effort is not going to accomplish that which was promised. It is up to all of us to talk about the way reform should happen.

Disability
How To Complete A Non-Can Disability Application So
You Can Avoid or Minimize A Lawsuit – Part I

by Art Fries • When the process server issues you the summons, your heart beats faster and you know it’s time to contact your E&O liability insurance company.

Know The Policy Provisions About Offsets To Ensure Your Client’s Disability Plans Pays You What It Should
by Glenn Kantor and Peter Sessions • If your client is entitled to disability benefits through an employer-provided or private plan, you may be surprised to find that their plan has provisions that allow the insurer to deduct, from their benefits, other types of income they receive or are eligible for their disability.

Life Settlements
Sometimes It Is Alright To Settle

by R. Wesley Sierk, III • For the right situation, a life settlement has a significant advantage over traditional alternatives and should be considered. To understand what a life settlement is, you must understand what it is not and how the transaction has evolved.

Fixed Annuities
Helping Consumers Understand the
Value of Fixed Income Annuities

by Holt McGee

Traditionally, consumers have shied away from annuities in favor of alternative investment vehicles or products they are more familiar with, such as mutual funds and certificates-of-deposit. Just over a year ago, these popular investments were performing well and account balances looked good on paper. Since then, the financial markets have suffered some trauma and many people have -noticed significant drops in their retirement portfolios, forcing them to make decisions about their retirement investing approach.

Financial professionals have also been slow to warm to annuities; they are finding that their clients need to protect at least a portion of their retirement savings with guarantees that only an insurance product can provide. Guarantees are particularly important during market downturns and such guarantees cannot be found in today’s traditional investment vehicles.

In a recent MetLife poll, consumers responded overwhelmingly that they are interested in products that provide protections against market risk. There are deep fissures in the retirement landscape due to the recession and losses in defined contribution plans, such as 401(k) plans, and in other savings and investment vehicles; not to mention the fact that the number of working people covered by traditional defined benefit pension plans has shrunk to approximately 31% compared to 57% 20 years ago, according to a recent study by the Employee Benefit Research Institute. Today, Americans typically have no guaranteed source of retirement income, aside from their future Social Security benefits, meaning that the financial burden is on the client to generate enough income to last throughout retirement.

Unfortunately, many discover, too late, that their bag of cash is not big enough to cover needs and wants throughout retirement. This is especially true after the recent market meltdown. However, there are ways for financial professionals to help consumers create their own version of a -personal pension plan with income annuities.

A Flock to Guarantees

Today’s economic turmoil has shined a spotlight on the need to create a guaranteed steady stream of income in retirement. Annuities are beginning to gain some popularity among consumers and formerly skeptical financial professionals.

Total fixed annuity sales have increased significantly; sales grew to $28.6 billion, which is an 11% increase from the second quarter of 2008. Year-to-date, sales totaled $64.2 billion, which is a 39% increase year-to-date, according to LIMRA. Additionally, 70% of retirees describe themselves as fiscally conservative in 2009 compared to 53% in 2008.

Like traditional defined benefit pension plans, fixed income annuities are designed to provide guaranteed consistent payments that won’t change, even during market fluctuations. A primary goal of any solid retirement plan is to be able to pay for fixed monthly expenses with the most efficient, reliable income.

Consumers must look at their annual fixed costs, such as food, housing, medical and insurance expenses, and assess how much money they may need. Then, they’ll need to take into account any regular income, such as Social Security. Any gap, which would have been filled by a defined benefit pension plan, can now be filled by an income annuity, so the consumer can take comfort knowing that their monthly expenses are covered. But consumers should consider keeping some of their savings liquid for emergencies and they may also want to keep other assets invested for growth to combat inflation.

Income Now or Later

Most people can’t sustain a comfortable living in retirement with only one or two investments in traditional product classes, such as mutual funds and money market accounts. The longevity risk of depleting investments without lifetime guarantees is too high.

It is generally understood that annuities can provide guaranteed income for the rest of a person’s life. That’s a critical component to any retirement plan since all retirees face a longevity risk. (Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.)

A financial professional may recommend a fixed income annuity to a client who needs income now. It could provide higher payouts than what the client would have been able to generate with traditional withdrawal strategies, thereby allowing them to stretch their money as far as possible.
For example, a 65-year-old man with $500,000 in savings and investments would get $20,000 annually before taxes, using what many experts believe to be a safe withdrawal rate of 4%. Suppose he allocates a portion to an income annuity ($165,000 or one-third in this example). Using current tables and assumptions, the annuity would produce guaranteed income of $11,900.

If the remaining (two-thirds) $335,000 assets, which had been left in savings and investments, were withdrawn at the 4% rate, they would provide an initial annual income of $13,400. The client would have a total income of around $25,000 ($11,900 + $13,400) annually before taxes, which is 25% more.

(Income annuity payment rates in this example assume the Annuity 2000 Mortality table and a 4% interest rate and are not guaranteed. Actual income payments are based on an insurance company’s annuity purchase rates in effect when a purchase payment is received. Ordinary income taxes apply to income payments.)

By dedicating a portion of savings to a fixed income annuity, the retiree can benefit from a three integral facets of immediate annuities and gain a LEG up, so to speak:
• Leverage (higher income-to-asset ratio derived from mortality pooling).
• Efficiency (relatively high level of income generated from an accumulated investment).
• Guaranteed income for life.

Think Product Allocation

In addition to income annuities, other retirement income vehicles should always be considered. A personalized combination of three different income solutions could be considered to maximize the sustainability of income in retirement:
1) Systematic withdraws from traditional investments.
2) Variable annuities with guaranteed living benefits.
3) Fixed income annuities.
This combination can result in a higher level of retirement income than just relying on a traditional withdrawal approach. It also benefits from a higher level of guarantees. In essence it becomes a repair strategy for depleted portfolios, and therein increases the retiree’s peace of mind.

Building a Personal Safety Net

Advisors can overcome many of the barriers to selling annuities by following the do-it-yourself personal pension approach. Consumers have shied away from annuities in favor of alternative investment vehicles or products they are more familiar with, such as mutual funds and CDs. But now is the time to take advantage of a growing need for protection and guarantees for retirement investment vehicles.
By using the pension comparisons to help consumers view annuities as a familiar vehicle, advisors have an opportunity to rebut many common consumer objections and help bring clarity to a valuable but often misunderstood product. Most importantly, advisors can help consumers create invaluable guaranteed lifetime income in retirement at higher sustainable levels, salvaging the retirement dreams of many Americans.

Holt McGee is national sales director, Annuities, for MetLife.
———

HSA Survey Part II
Constricting Healthcre Costs with HSAs
Find Out Which HSAs Will Work Best For You
With Our Annual Survey

16. What service guarantees do you offer?

Aetna: We do not offer HSA service guarantees.
Anthem Blue Cross: We do not offer performance guarantees in the Small Group market or Individual market.
Blue Shield of California: Our relationship with Wells Fargo provides for a number of service level agreements. One example of a typical service guarantee would be telephone average speed of response.
CIGNA: The standard performance guarantees apply.
First Horizon Msaver: Service-level guarantees vary based on the scope of the relationship with the customer, but generally include commitments around the delivery of debit cards and Welcome Kits as well as Customer Call Center metrics.
HSA California: HSA California guarantees outstanding service. Our customer service team has expert knowledge of the insurance industry and is available between 8:00 a.m. and 5:00 p.m. Monday-Friday for personal assistance.
Kaiser Permanente: We do not offer service guarantees to the Individual, Family or Small group markets.
Sterling HSA: Sterling HSA offers a full money back guarantee for up to 12 months of paid monthly maintenance fees if our accountholders are unhappy with our service for any reason. Sterling was the first HSA administrator to offer such a guarantee and made this commitment when the company was founded in 2004.
UnitedHealth Group: Service guarantees will vary based on the scope of the relationship with the customer, but are typically available with respect to administrative service delivered under the plan.

17. What kinds of depositories are desired?

Aetna: Not applicable.
Anthem Blue Cross: There is no minimum balance requirement.
Blue Shield of California: Guidelines will vary by financial institution.
Our relationship with Wells Fargo provides for the following:
• For IFP members, the minimum HSA deposit is $100
• For employer groups, there is no minimum deposit
• Any deposits after the initial $100 may be directed into investment accounts dictated by the member.
CIGNA: There are no minimum deposit or balance requirements. Contributions to the HSA can be funded through employer facilitated pre-tax payroll contributions (EFT/ACH transactions) or through unscheduled deposits in which participants arrange from an EFT from their personal bank account or send a check and deposit slip to a lockbox for contribution to their HSA.
First Horizon Msaver: No minimum balance requirement and no minimum initial deposit requirement for employer groups.
HSA California provides the following: No minimum balance requirement to open an HSA and no minimum deposit requirement for employer groups
Kaiser Permanente: Our preferred financial administrator for HSAs, Wells Fargo, does not require minimum deposits for employer groups with payroll deduction. The minimum deposit of $100 is required for individual and family plan members not enrolling through an employer group.
Sterling HSA: Sterling accepts cash checks, and electronic fund trans-
fers through www.sterlinghsa.com in a secure, password protected environment. We recommend an initial deposit of $100 and require a minimum balance of $20.

18. Where is your company headquartered?

Aetna: Hartford, Conn.
Anthem Blue Cross: The headquarters building for Anthem Blue
Cross is located at 21555 Oxnard Street, Woodland Hills, CA.
Blue Shield of California: Blue Shield is headquartered in San Francisco, Calif. CIGNA: CIGNA HealthCare is headquartered in Bloomfield, Conn. and CIGNA Corp., the parent company, is headquartered in Philadelphia, Penn.
First Horizon Msaver: Overland Park, KS, with an office in Fresno, CA.
HSA California HSA California is based in Orange, Calif., and does business throughout the state.
Kaiser Permanente: Oakland, California.
Sterling HSA: We are a locally owned company and are headquartered in Oakland, Calif.
UnitedHealth Group: Minnetonka, Minn.

19. Please provide the phone number and e-mail that brokers can use to find out more about your plan.

Aetna: 877-249-2472, prompt 6
Anthem Blue Cross: Please reference our online resources or contact their regional sales manager for individual and small group assistance. Large Group representatives should likewise call their group sales manager at the company.
CIGNA: Please contact your local CIGNA HealthCare sales representative at 888-802-4462.
Blue Shield of California: Brokers can call their Blue Shield sales representative or call Blue Shield Producer Services at (800) 559-5905 or visit Producer Connection at www.blueshieldca.com.
First Horizon Msaver: 1-866-889-8583, Option 3
msaverbroker@firsthorizon.com
HSA California: Brokers can call us at 866.251.4625 between 8 a.m. and 5 p.m. Monday-Friday, or e-mail us anytime at sales@hsacalifornia.com. Brokers can also visit us online at www.hsacalifornia.com, where they will find free sales training and collateral materials, and brochures and forms they can print and share with clients.
Kaiser Permanente: For questions or information about Kaiser Permanente: BrokerNet Website Address: brokernet.kp.org
Individual and Family Broker Sales: 1-800-789-4661, option 6 or 1-800-207-5084 (8:30 a.m. to 5 p.m. PST)
Small Business Broker Sales: 1-800-789-4661
(8:30 a.m. to 5 p.m.PST)
Client Services Unit: 866-752-4737 (8 a.m. to 5 p.m. PST)
For questions about Wells Fargo: 1-866-890-8309 (5 a.m. to 6 p.m.PST)
Wells Fargo Broker Support Line: 866-449-9929
(6:30 a.m. to 4 p.m.PST)
Sterling HSA: Our customer service and broker service number is 800-617-4729 or customer.service@sterlinghsa.com and broker.support@SterlingHSA.com. We have account executives and managers who support our broker and consultant channel as well. Their individual names and contact information is available at www.sterlinghsa.com.
UnitedHealth Group: For more information, please visit www.unitedhealthcare.com.

20. Which market segment (small/mid/large) do you anticipate these plans will best accommodate?

Aetna: All segments.
Anthem Blue Cross: We are seeing interest and adoption in all market segments.
Blue Shield of California: HSA-eligible plans are generating interest from all market segments, including individual and group markets. To date, Blue Shield’s membership in HSA-eligible plans encompasses all lines of business, from the individual group market to large, major employers.
CIGNA: We believe that HSAs and consumer directed health plans would be appropriate for all markets.
First Horizon Msaver: We successfully service individuals to groups of thousands of employees. Our Implementation and Account Management teams can develop enrollment, funding, and communication programs to fit any size group.
HSA California: We believe HSAs are appealing to all market segments; however, HSA California is designed for employers with 2-50 employees.
Kaiser Permanente: Our HSA-Qualified deductible HMO, PPO and EPO plans appeal to all market segments, including Individual and Family, Small, Mid and Large.
Sterling HSA: HDHP/HSAs accommodate all market segments.
UnitedHealth Group: All segments.

21. What channels have been most effective in selling HSAs?

Aetna: Brokers and general agents, consultants, Aetna sales force.
Anthem Blue Cross: Agents and brokers remain our most effective channel for HSA marketing and sales.
Blue Shield of California: Blue Shield is a broker-driven organization. Our HSA-eligible high-deductible health plans are sold via the broker channel. To assist brokers in selling our HSA-eligible plans, we’ve provided them with educational and marketing collateral to help them sell HSAs during the plan purchase.
CIGNA: We have found that the broker/consultant channel has been the most effective.
First Horizon Msaver: We believe that the most effective channel for selling HSAs is through an informed and empowered broker network.
HSA California: All HSA California sales are through licensed independent insurance brokers and authorized general agencies. To make sure brokers understand the unique selling opportunity behind HSA California – that we’re the only small group, fully integrated HSA program with multiple carriers in California – we produce timely communications and brochures that walk them through the program.
Kaiser Permanente: All channels have been successful in selling HSA programs.
Sterling HSA: We are committed to the broker, agent and consultant channel.
UnitedHealth Group: UnitedHealthcare’s HSA-qualified plans are sold primarily through brokers and consultants, or directly to individuals purchasing insurance policies on their own.

22. Which customer segments have been most receptive to HSAs?

Aetna: All customer segments.
Anthem Blue Cross: All customer segments continue to express interest in and adoption of HSAs.
Blue Shield of California: HSA-eligible plans appeal to all customer segments, from the individual market to small, midsize, and large groups.
CIGNA: Brokers have been very supportive of these plans.
First Horizon Msaver: All segments.
Kaiser Permanente: We have seen strong growth in all customer segments including the Individual and Family, Small, Mid and Large Group segments.
Sterling HSA: Customers who want to contain their healthcare costs and reduce increases are rapidly moving to the HSA market. Areas with high PPO penetration move quickly as well.
UnitedHealth Group: All segments have been receptive to the HSA product.

23. How prone are brokers to support this with reduced commissions on the high deductible health plan side of the equation?

Aetna: We have seen widespread broker support of HSA plans as a viable option for their clients.
Anthem Blue Cross: There is high interest in supporting this product from brokers to date. We continue to believe brokers will promote the appropriate health plans based on their client’s needs, regardless of commission rate.
Blue Shield of California: Blue Shield has been selling high-deductible health plans for many years even prior to the passage of the Medicare legislation that enabled HSAs. High-deductible plans have been an important option for brokers in providing their IFP and group clients plan benefit designs at more affordable price points. HSA-eligible high-deductible health plans are even more attractive because of the possible tax and personal saving advantages. We have received positive broker feedback on our HSA-eligible high-deductible health plans.
CIGNA: Brokers have been very supportive of these plans.
First Horizon Msaver: Brokers most prone to support high-deductible health plans are those who have received education, support, and the tools that allow them to recommend these plans with confidence.
HSA California: In today’s economy, the owners of small businesses are looking to reduce premiums yet still provide quality benefits to employees. HSA California takes HDHPs and HSAs to a new level by not only offering affordable benefits, but packaging three top California health plans in one program – each employee can choose a different health plan – a choice no other program in the state offers. As the market continues to change, we believe brokers will continue to adopt HSAs as an applicable solution for many clients.
Kaiser Permanente: Brokers are very supportive of these programs when they meet their customers’ business needs.
Sterling HSA: Brokers who think this is the right thing to do for their clients place them in an HDHP/HSA. Many brokers use the HSA concept as a marketing advantage to grow business in their book.
UnitedHealth Group: Brokers realize that the CDH plans are experiencing rapid adoption and they are doing their best to offer their customers the product that is right for them.

24. Will high-deductible health plans actually reduce utilization?

Aetna: We see continued positive signs of cost control and consumer engagement in Aetna’s studies of HRA and HSA results.
UnitedHealth Group: A series of studies from UnitedHealthcare in 2006 and 2007 create a solid body of evidence illustrating that CDH plans are delivering positive changes in health care behaviors and costs for both employers and consumers:
• A December 2007 study found that CDH plans constrain costs and utilization over time;
• A September 2008 study found that Health Savings Accounts encourage saving among all consumer segments, including low-income populations as well as white-collar professionals;
• An April 2007 study of preventive and chronic-care services confirms that the above gains do not come at the expense of vulnerable populations or discourage individuals from seeking needed care.
Anthem Blue Cross: When members engage in healthy choices and become active in their medical decisions, utilization is affected.
Blue Shield of California: It is to be determined if HSA-eligible high-deductible health plans reduce utilization. Satisfaction is increased when HSA-eligible plans are offered in tandem with wellness programs and an emphasis on preventive care.
CIGNA: During the past four years, CIGNA has compiled empirical data on literally millions of individuals enrolled in our CDHP, HMO and PPO plans based on claims experience that demonstrates that our consumerism products (HRA and HSA) offered as part of a comprehensive package of communication, member education and access to reliable and actionable information will substantially reduce the overall employer medical trend. Moreover, CIGNA’s multi-year experience studies of CDHP plans provide evidence demonstrate that our consumer-driven health plans both improve costs and health care quality.
First Horizon Msaver: High deductible health plans are designed to engage plan members in health care decisions by making the true cost of health care more transparent. First Horizon Msaver assists in this process by providing its HSA account holders with an online prescription drug cost comparison tool, a free consumer guide to help them determine fair prices for health care services in their area, and a medical bill evaluation and negotiation service.
HSA California: The goal of an HDHP is to allow employees and their families to control what they spend on healthcare. It’s still too early to tell whether utilization will actually be reduced by offering plans with higher deductibles.
Kaiser Permanente: We are evaluating the impact on utilization. Based on some small samples assessed, we have seen a drop in utilization with our members in HSA-qualified health plans. The lower risk factor behind this population segment may be a contributing factor. Additionally, there are also some small studies that indicate a change in behavior from these members as they become more financially engaged and responsible for their health expense. Preliminary information shows that some members have pursued alternative options – e.g., emailing their physician.
Sterling HSA: Our experience suggests that our clients are carefully
evaluating cost/treatment alternatives, thereby reducing unnecessary medical utilization.

25. How can vendors make HSAs more effective and attractive for brokers?

Aetna: Make the sales process as simple as possible and give brokers tools that allow them to present these options to employers and employees effectively.
Anthem Blue Cross: Vendors can make HSAs more effective by streamlining and simplifying the enrollment and communication processes.
Blue Shield of California: From a broker perspective, they would like higher referral fees from the HSA administrator and ease of enrolling their client into an HSA.
CIGNA: Provide information to help brokers understand the consumer advantages of the HSA product, provide products and processes that are easily understood by employers and support the member education at enrollment on an ongoing basis.
First Horizon Msaver: We make HSAs more effective and convenient for brokers by providing education and training as well as local and telephonic broker/employer support to simplify the enrollment and funding processes.
HSA California: Education is the key. It’s important that brokers are comfortable explaining the concept of an HSA and how it can work to completely satisfy the needs of clients, employees and families. HSA California and The Bancorp Bank provide a number of educational resources for brokers to help them better explain HSAs to clients. For more information on these materials, brokers can call us anytime at 866.251.4625.
Kaiser Permanente: Vendors can make HSAs more effective and attractive by keeping the sales process simple, supporting good communications, supporting installations and bringing effective online tools to the employer and members.
Sterling HSA: We support the broker channel with sales directors and account managers who handle their needs personally. We also offer HSA training and education. We have online toolkits for brokers and consultants who have registered with Sterling. These include spreadsheets, PowerPoint presentations, and other sales material. In addition, we support the broker’s employer clients in a similar fashion. This helps our broker partners better satisfy their client’s needs.
UnitedHealth Group: Make quoting, set up, and enrollment as simple as possible for the broker. Provide as much broker training as possible. Provide simple communication materials for HR staff and the enrollees. Leverage the experience and materials of your health plan partner, who can offer communications materials and other tools to provide assistance.

26. Will consumers purchase plans for their traditional health plan features and view the HSA account as a perk to cover short-term medical expenses or will the primary purchase decision focus more on long-term financial planning to cover immediate and long term medical expenses and to reduce tax liability?

Aetna: We see both with the latter being more common.
Anthem Blue Cross: The HSA plans offer choices for all members. The member can choose to save the tax-deferred monies or choose to spend the monies to cover their individual or family medical and pharmacy claims.
Blue Shield of California: Statistics are showing that consumers are using their HSAs for both purposes, though the investment dollars in HSA accounts are growing at a rapid pace
First Horizon Msaver: We recognize that the HSA appeals to both segments and we have designed our HSA offering to benefit both “spenders” and “savers.” For example, our low monthly administration fee and no transaction fees approach appeals to “spenders,” whereas our tiered interest rates and trio of investment options address the needs of those planning for the longer term.
HSA California: It depends on the individual consumer. Having funds available in an HSA for short-term medical expenses is a great feature. However, the long-term advantages are equally important. The ability to save HSA funds and earn interest tax-free year-after-year, provides the unique value inherent in HSAs. An HSA is a perfect savings vehicle to add to a long-term savings portfolio next to a 401(k), IRA or any retirement medium.
Kaiser Permanente: Consumers purchase our HSA-qualified deductible HMO plans and open HSAs to cover both immediate and long-term medical expenses, as well as to reduce tax liability.
Sterling HSA: The latter appears to be the case. This is truly a new way to finance the costs related to healthcare. In today’s economic climate, the HSA is a great way to budget for medical, dental and vision expenses as well.
UnitedHealth Group: Based on research from OptumHealthBank released in April 2007, HSA accountholders typically can be categorized into one of three basic patterns of account usage: Spenders, savers and investors. Roughly half of OptumHealthBank 400,000 accountholders are spenders and most of the remaining are Savers. While less than 5 percent of today’s HSA population are Investors, this may someday be the largest group based on early, accelerating balance trajectories. OptumHealthBank Spenders carry balances that hover between $400 and $600, spend 80 percent of contributions on current medical expenses and contribute an average of $133 per month. OptumHealthBank Savers hold a balance of nearly $1,500 on average and spend less than 10 percent of contributions to their account. OptumHealthBank Investors are the most active contributors with the highest total balances and highest expected tax savings, holding over $2,000 in bank balances and, on average, investing another $3,000 in any combination of OptumHealthBank eight highly regarded non-proprietary mutual funds.

27. Do you envision interest in an HSA eligible HMO (low-cost) plan?

Aetna: Yes, since January 2006, Aetna has offered an HMO HSA in some markets.
Anthem Blue Cross: Anthem is reviewing market interest and feasibility of offering an HSA HMO.
Blue Shield of California: Statistics are showing that consumers are using their HSAs for both purposes, though the investment dollars in HSA accounts are growing at a rapid pace
CIGNA: We have not seen significant interest at this time.
First Horizon Msaver: Yes, and since our HSA may be paired with any carrier’s eligible plan, the HSA becomes portable making it easy for a member to move between eligible plans without disrupting the saving portion of the program.
HSA California: Yes, we envision interest in an HSA-eligible HMO plan.
Kaiser Permanente: Absolutely. Since 2005, our HSA-Qualified Deductible HMO plans have appealed to all market segments, including Individual and Family, Small, Mid and Large Groups.
Sterling HSA: There has been widespread interest in HMO plans that are HSA compatible. Both Kaiser and Western Health Advantage provide these products.
UnitedHealth Group: Yes.

28. Which geographic areas and consumer demographics are brokers seeing a demand for competitive individual and family plan HSAs?

Aetna: We are not in that market segment, so we cannot respond.
Anthem Blue Cross: Being our HSA plans are consumer centric and come with strong preventive benefits, we are seeing strong demand across all territories and demographics.
Blue Shield of California: Blue Shield experience indicates that the broker interest in IFP HSAs is statewide.
CIGNA: At this time, we do not offer an individual/family plan in California so we do not have information on this market.
First Horizon Msaver: We have seen growing interest throughout the state.
HSA California: We’re seeing growing interest throughout the state.
Kaiser Permanente: We are seeing demand across all geographic areas and demographics.
Sterling HSA: We know that the early baby boomer is very interested in choosing a HDHP/HSA product. Areas with high PPO concentration and lower pricing are high sales areas. The individual market has been a PPO market for some time and was the first to migrate to the HSA. Some individuals already have a HDHP and now have a tax-advantaged way to pay for medical expenses or save for retirement
UnitedHealth Group: All.

29. What problems, if any, have you encountered with HSA eligible plans?

Aetna: None
Anthem Blue Cross: Many health plans in the California market have had challenges pricing the 100% HSA plans. Anthem made pricing adjustment in 2008 and a pharmacy benefit adjustment in 2009 to reflect the actual utilization we were seeing in these 100% plans. Anthem small group also introduced new 80% plans in 2009 and the market continues to show an interest in HSA plans in all market sizes
Blue Shield of California: We have not encountered any specific issues relative to HSA-eligible plans.
CIGNA: We have not encountered problems with the administration of the HSA eligible plans. One of the challenges of introducing these plans is to educate the member on the value of the plan and the tools to become actively engaged in the management and maintenance of their own health care.
First Horizon Msaver: A common problem is the insufficient orientation of employees as to how both parts of the program (HDHP and HSA) work together. To help brokers and employers with this education process, First Horizon Msaver has added to fristhorizonmsaver.com a number of short video clips of real people telling of their first hand experiences with the program. We have also added an interactive HSA tutorial that provides a self-guided tour of HSA basics. These new features compliment existing HSA education located at firsthorizonmsaver.com.
HSA California: We haven’t encountered any problems with our benefit plan designs.
Kaiser Permanente: When there is excellent communication to the employer and employees we do not encounter problems. It is important to provide education on how the deductible plans and the HSA work together. Kaiser Permanente and our preferred financial administrator for HSAs, Wells Fargo, have developed extensive training materials and marketing collateral for brokers, employers, employees and individuals.
Sterling HSA: Some of the carriers have not priced them competitively enough and the prices were dramatically increased in 2009. Employers want to see enough of a differential in cost and deductible limits. Carriers that have priced the products most competitively are finding the greatest opportunity to sell. The carriers that get creative on the first dollar coverage will also be very attractive to people.
UnitedHealth Group: The main challenge with the HSA product is educating the consumer to take financial responsibility when receiving health services. Most consumers are used to dealing with a health insurance company or their bank. The HSA product is more than the sum of its parts; it involves educating the members and encouraging them to ask financial questions when seeking and receiving health services.

30. How has your plan changed from last year?

Anthem Blue Cross: We have enhanced our online support of resources with our banking partners BNY/Mellon (ACS/Mellon), added Rx Copay vs. Coinsurance and a variety of enhanced deductibles for our HSAs.
CIGNA: We have added enhanced decision support tools including the Health Risk Assessment CIGNA HealthCare has entered into a long-term agreement with the University of Michigan providing access to the use of analytics that help consumers and CIGNA identify and address health risks and help employers develop worksite health and wellness programs. New online coaching capability invites immediate, active participation in online behavior change modules, pushing targeted follow-up based on HRA responses.
First Horizon Msaver: Our program has
changed over the last year with the addition of:
• Broker/Employer Support Team
• Healthy Lifestyles Portal: Prescription drug discounts, prescription drug cost comparison tool, a free consumer guide to help them determine fair prices for health care services in their area, and a medical bill evaluation and negotiation service.
• Video Vault
• Interactive HSA education
• Online calculators
HSA California: There have been no changes to our plan this year. Our health plan portfolio still includes Health Net, Kaiser Permanente and Western Health Advantage,
Kaiser Permanente: We have no significant changes planned for 2010, but we are always exploring ways to make improvements to meet our customers’ needs. We have expanded member support activities including proactive outreach activities to assist with employee understanding of these programs.
Sterling HSA: Sterling HSA has seen steady growth despite the economic environment. We anticipate healthcare reform legislation may modify HSAs to some degree, but expect industry growth to continue in 2010 and beyond. Brokers have become much more knowledgeable about HSAs and are presenting it across the board to their clients. We have also seen many clients move from a multiple option program to a total replacement of their program either initially or at renewal.

Dental
The Benefits of an Effective Dental
Disease Management Program
How Dental Disease Management Can Help Drive Healthier Behavior

by David Guarrera

A dental disease management program can help influence employees’ oral health and control healthcare costs by driving healthier behavior. Wellness and disease management programs provide a logical, timely alternative to reducing benefits and shifting benefit costs to employees. Costly conditions, like coronary heart disease, have well-established disease management programs. But few, if any, disease management programs focus solely on the cost of dental services.

What’s more, a growing body of research indicates a strong potential link between oral health and overall health and that improving dental health may contribute to better outcomes for certain medical conditions. Almost one-third of people with diabetes have severe periodontal disease, according to the Centers for Disease Control and Prevention.

Adopting dental disease management programs may help employers get more value from the dental benefits they already provide. But since dental disease management is still a relatively new concept, confusion abounds about what constitutes an effective, comprehensive dental disease management program.

An Effective Dental Disease Management Program

An effective program starts with an appropriate plan design and should be flexible enough to perform as a stand-alone solution or coordinate with an employer’s current medical disease management or other wellness programs. It takes a robust education platform, and systems to measure and monitor the health of an employee population and the utilization of benefits over time to help influence the oral health – and potentially the healthcare costs – of a population.

To deliver value to both employers and employees, it is essential for a dental disease management programs to have six components that work together: education, employee engagement, disease risk and severity scoring, participant tracking, relevant education, and reporting.

The Importance of Education

Education should be the foundation of a dental disease management program. An educational program should be robust enough to stand on its own for employees who want to learn about oral health by themselves and should provide relevant education based on their oral health and risk for dental disease.

The educational component should contain reliable and timely information and address the association between oral health and overall health. For example, employees should be able to learn how some medications can affect their oral health and about the relationship between periodontal disease and diabetes. The educational component should be easy-to-navigate and contain interactive tools like risk assessments.

Driving Participation

The initial communication is the first step to employee engagement. There should be a strong invitation to participate along with support material, such as onsite posters, newsletter articles, and online presentations with audio for the launch of the program.

Next, employees should get reminders including messages to those who did not respond to the first invitation. Ongoing communications need to target employees who participate in the program. These communications should be delivered at least once a year and when employees level of risk or disease may have changed. This can be tracked by analyzing dental claim utilization, data reported by a medical wellness vendor, or it can be self reported by employees.

Measuring Risk & Severity of Disease

Scoring helps employees measure, understand, and track their risk and the severity of disease. This enables them to see changes over time and how their actions or lack of action affects their scores.
With scoring, data is the key. In fact, the more data points that are used, the higher the confidence level should be. Dental disease management programs can use the following:

• Self-reported health data, such as tobacco use, bleeding gums, medication (prescribed and over-the-counter), diet, and family history of conditions, such as diabetes and heart disease.

• Claims utilization data, such as the absence of benefits paid in the previous 12 or 24 months, the indication of only having received emergency dental services or extractions in the past 12 or 24 months, and employees with a history of periodontal services who did not complete the definitive treatment regime and/or the follow-up therapy.

• If available, data from medical disease management vendors identifying employees with conditions, such as diabetes, heart disease, hypertension and obesity.

Delivering Information When It Has the Most Impact

After giving employees their scores for risk and severity of disease, the program should provide information that employees can act on. For example, diabetics should get information about the link between diabetes and periodontal disease and tips to manage their oral health. Participants should get this information promptly, such as when they get their risk and severity scores, which is when it may have more impact. The program should provide the following information:

• Links to articles and resources that are relevant to their specific oral health needs.

• A summary of health concerns they should take note of.

• A recommended action plan that includes a list of suggestions employees can follow to help improve their oral health.

Uncovering How Benefit Plans Are Functioning

Aggregate-level reporting gives employers valuable insights into how benefit plans and disease management programs are working as well as the health of their participating employee population. For example, a dental disease management program can report on the following:

• Participation: The percentage of employees participating in the dental disease management program in a given period, which employees are participating, and risks for demographics, such as gender and age groupings.

• Risks: The number of participants with high and low risks and the health conditions most frequently associated with those risks according to various demographics.

• Health Conditions: The percentage of participants who self-reported medical and oral health conditions including hereditary factors by condition type.

• Change in health risk: Grouped according to participant demographics.

• Claim Costs: Average costs per claim and average costs per procedure for participants with high and low risk scores.

• Utilization: Analysis of claim data identifies patterns of care, disease, and outcomes such as the types of dental services rendered including follow-up care, using all employees (i.e., disease management participants and non-participants).

Insights for Dental Benefit Decisions

Lastly, a dental disease management program should help keep employees engaged and measure employees’ dental health and dental utilization over time. Employees can see how their risk for dental disease and their level of dental disease changes over time and how their actions, or lack of action, affect their scores. Employers can see how employees are using their dental benefits and changes in the dental health of the participating population.

Medical disease management vendors can be provided with historical employee-specific information, such as comparisons of individual risk and disease scores over time and histories of dental treatment. This data can be incorporated into the medical disease management programs for systemic conditions.

While it is important to start with an appropriate dental plan design, employers can make additional changes after they have a better understanding of the health of their employee population and how existing benefits are being used.

If you want to help clients control their costs while enhancing the value of their dental benefits, you should discuss dental disease management programs. Since dental disease management is a relatively new concept, you have an opportunity to present a fresh perspective and a new dialogue on increasing the value of a dental benefits program for employers and their workforce.

Dr. David Guarrera, DDS, is vice president of MetLife’s Dental Product Management. He is responsible for the oversight of sales training and market positioning. He is also responsible for setting clinical policies in relation to the practice of dentistry as it relates to MetLife’s dental products, the oversight of MetLife’s professional claim review process as well as disease management and wellness initiatives. Dr. Guarrera can be contacted at dguarrera@metlife.com.
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Fixed Annuities
Helping Consumers Understand the
Value of Fixed Income Annuities

by Holt McGee

Traditionally, consumers have shied away from annuities in favor of alternative investment vehicles or products they are more familiar with, such as mutual funds and certificates-of-deposit. Just over a year ago, these popular investments were performing well and account balances looked good on paper. Since then, the financial markets have suffered some trauma and many people have -noticed significant drops in their retirement portfolios, forcing them to make decisions about their retirement investing approach.

Financial professionals have also been slow to warm to annuities; they are finding that their clients need to protect at least a portion of their retirement savings with guarantees that only an insurance product can provide. Guarantees are particularly important during market downturns and such guarantees cannot be found in today’s traditional investment vehicles.

In a recent MetLife poll, consumers responded overwhelmingly that they are interested in products that provide protections against market risk. There are deep fissures in the retirement landscape due to the recession and losses in defined contribution plans, such as 401(k) plans, and in other savings and investment vehicles; not to mention the fact that the number of working people covered by traditional defined benefit pension plans has shrunk to approximately 31% compared to 57% 20 years ago, according to a recent study by the Employee Benefit Research Institute. Today, Americans typically have no guaranteed source of retirement income, aside from their future Social Security benefits, meaning that the financial burden is on the client to generate enough income to last throughout retirement.

Unfortunately, many discover, too late, that their bag of cash is not big enough to cover needs and wants throughout retirement. This is especially true after the recent market meltdown. However, there are ways for financial professionals to help consumers create their own version of a -personal pension plan with income annuities.

A Flock to Guarantees

Today’s economic turmoil has shined a spotlight on the need to create a guaranteed steady stream of income in retirement. Annuities are beginning to gain some popularity among consumers and formerly skeptical financial professionals.

Total fixed annuity sales have increased significantly; sales grew to $28.6 billion, which is an 11% increase from the second quarter of 2008. Year-to-date, sales totaled $64.2 billion, which is a 39% increase year-to-date, according to LIMRA. Additionally, 70% of retirees describe themselves as fiscally conservative in 2009 compared to 53% in 2008.

Like traditional defined benefit pension plans, fixed income annuities are designed to provide guaranteed consistent payments that won’t change, even during market fluctuations. A primary goal of any solid retirement plan is to be able to pay for fixed monthly expenses with the most efficient, reliable income.

Consumers must look at their annual fixed costs, such as food, housing, medical and insurance expenses, and assess how much money they may need. Then, they’ll need to take into account any regular income, such as Social Security. Any gap, which would have been filled by a defined benefit pension plan, can now be filled by an income annuity, so the consumer can take comfort knowing that their monthly expenses are covered. But consumers should consider keeping some of their savings liquid for emergencies and they may also want to keep other assets invested for growth to combat inflation.

Income Now or Later

Most people can’t sustain a comfortable living in retirement with only one or two investments in traditional product classes, such as mutual funds and money market accounts. The longevity risk of depleting investments without lifetime guarantees is too high.

It is generally understood that annuities can provide guaranteed income for the rest of a person’s life. That’s a critical component to any retirement plan since all retirees face a longevity risk. (Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.)

A financial professional may recommend a fixed income annuity to a client who needs income now. It could provide higher payouts than what the client would have been able to generate with traditional withdrawal strategies, thereby allowing them to stretch their money as far as possible.
For example, a 65-year-old man with $500,000 in savings and investments would get $20,000 annually before taxes, using what many experts believe to be a safe withdrawal rate of 4%. Suppose he allocates a portion to an income annuity ($165,000 or one-third in this example). Using current tables and assumptions, the annuity would produce guaranteed income of $11,900.

If the remaining (two-thirds) $335,000 assets, which had been left in savings and investments, were withdrawn at the 4% rate, they would provide an initial annual income of $13,400. The client would have a total income of around $25,000 ($11,900 + $13,400) annually before taxes, which is 25% more.

(Income annuity payment rates in this example assume the Annuity 2000 Mortality table and a 4% interest rate and are not guaranteed. Actual income payments are based on an insurance company’s annuity purchase rates in effect when a purchase payment is received. Ordinary income taxes apply to income payments.)

By dedicating a portion of savings to a fixed income annuity, the retiree can benefit from a three integral facets of immediate annuities and gain a LEG up, so to speak:
• Leverage (higher income-to-asset ratio derived from mortality pooling).
• Efficiency (relatively high level of income generated from an accumulated investment).
• Guaranteed income for life.

Think Product Allocation

In addition to income annuities, other retirement income vehicles should always be considered. A personalized combination of three different income solutions could be considered to maximize the sustainability of income in retirement:
1) Systematic withdraws from traditional investments.
2) Variable annuities with guaranteed living benefits.
3) Fixed income annuities.
This combination can result in a higher level of retirement income than just relying on a traditional withdrawal approach. It also benefits from a higher level of guarantees. In essence it becomes a repair strategy for depleted portfolios, and therein increases the retiree’s peace of mind.

Building a Personal Safety Net

Advisors can overcome many of the barriers to selling annuities by following the do-it-yourself personal pension approach. Consumers have shied away from annuities in favor of alternative investment vehicles or products they are more familiar with, such as mutual funds and CDs. But now is the time to take advantage of a growing need for protection and guarantees for retirement investment vehicles.
By using the pension comparisons to help consumers view annuities as a familiar vehicle, advisors have an opportunity to rebut many common consumer objections and help bring clarity to a valuable but often misunderstood product. Most importantly, advisors can help consumers create invaluable guaranteed lifetime income in retirement at higher sustainable levels, salvaging the retirement dreams of many Americans.

Holt McGee is national sales director, Annuities, for MetLife.

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America’s Health Trends
The Increasing Value of Continuing
Education in a Complex and Competitive Market
Staying on Top of Your Game

by Jennifer Walsh and Thad Roake

The business world is changing quickly across many industries and the health insurance industry is no exception. New rules and regulations are introduced almost weekly; new products and services appear and disappear in the blink of an eye; and customer needs can shift suddenly. It can be difficult for even the most seasoned industry experts to keep up in this environment. But there are ways for brokers to stay current and demonstrate their value to clients.

Staying on top of your game requires a focused and constant effort to educate and re-educate yourself about the latest insurance trends, the newest products and services, the economy and its impact on your clients, and the many moving parts of the complex transactions you facilitate. So what’s the best way for agents and brokers to stay on top of the knowledge game in our ever-evolving industry? Here are a few tips that may help.

Have a Focused Education Plan

While it can be tough to find the time, the most successful health insurance agents and brokers have an established, on-going and focused educational plan that targets a few key areas that are the most vital to their particular businesses. Just as a brain surgeon doesn’t spend time focused on heart, liver, and lung diseases, a broker selling primarily small group plans shouldn’t spend a great deal of time trying to keep up with the nuances of the large group marketplace. A targeted education plan will help brokers avoid becoming overwhelmed with new products, regulations, and information. Smart brokers implement education plans that complement the areas that will be most beneficial to their businesses.

Take Advantage of Insurance Carrier Educational Offerings

Some carriers hold free learning seminars around the state or country to help educate brokers on industry issues, emerging products, legislative updates and other important topics, such as health plan operations, network management, customer service, and underwriting. These behind-the-scenes seminars can be extremely helpful to brokers who are new to the field or to those who haven’t brushed up on the back-end operations of the health insurance industry. These workshops often provide continuing education credits that count towards regular CE requirements.

Utilize Technology

Today’s brokers can stay updated and educated using a wide range of exciting new technologies. Industry organizations, carriers, and educational vendors offer classes and programs through webinars, interactive videos, and educational micro-sites to complement more traditional educational meetings. Brokers can also sign up for RSS feeds, podcasts, and free Google news alerts about any topic or company they want. The software does the work and allows brokers to receive real-time updates about the issues that matter the most to their success. Learning about critical information, as it happens, can give one broker a powerful competitive edge over another.

Learn From Your Peers

Peers are a rich source of wisdom, creativity, and information and they can help brokers solve problems in new ways that they may not have considered. Brokers should take advantage of their peers’ experience and their proximity by forming their own network of peers who can meet regularly to discuss real world issues and solutions, lessons learned from the trenches, or ideas to bounce off each other. There is no substitute for the kind of education obtained through a close networking bond.

Make the Most of National and State Organization Resources

Brokers have some outstanding educational resources through national and state organizations, such as the National Association of Health Underwriters (NAHU) and America’s Health Insurance Plans (AHIP). These organizations not only offer a range of CE courses, but they also provide regular educational updates on some of the most significant areas of change, such as regulatory issues and healthcare reform. NAHU and AHIP are great resources for keeping agents and brokers abreast of these regulatory changes. NAHU offers a state-by-state legislative tracking database that shows a breakdown of changing regulations around the country, while AHIP offers state and federal updates. State departments of insurance, such as The California Department of Insurance, also offer state-specific regulatory updates.

Education is the Key to a Winning Strategy

Even the savviest brokers admit that it’s tough to keep up with the insurance market these days. But the moment you let your guard down and stop striving to stay ahead, someone else will reach out to your clients with just the right new solution. Don’t let your competitors outsmart you. Develop a focused education plan; know your customers and their special needs; rely on trusted partners and peers who can help you in those areas where you are not an expert; and take advantage of technology to enhance your education. By applying all of these principles, you can stay on top of the knowledge game and be prepared to provide your customers with the most relevant new strategies today and tomorrow.

Jennifer Walsh is a partner & senior vice president, Employee Benefits Practice Leader in the San Francisco office of Woodruff-Sawyer, one of the largest independent insurance brokerage firms in the nation. For over 90 years, Woodruff-Sawyer has been partnering with clients to implement and manage cost-effective and innovative insurance, employee benefits and risk management solutions, both nationally and abroad.

Thad Roake is Vice President of Mid/Large Sector, Northern California, Large Group Business Unit at Blue Shield of California, a not-for-profit health plan dedicated to providing Californians with access to high quality care at a reasonable price. Blue Shield of California is one of the largest provider networks in the state.
They offer a five-day course that examines key health insurance topics and gives brokers insight into the business of healthcare. For more information, visit www.blueshieldca.com.

America’s Health Trends
Selling Self-Funding Plans
What Makes You Different?

by Stacy Morris

“Let your current broker show you everything else in the market, I just want to show you one thing.”How would you like to walk into a prospective client’s office and make that statement? It speaks confidence and builds instant credibility that you are a person who knows something the current broker may not know. It will get your foot in the door.
Ask yourself a couple of questions:

• What type of salesperson am I — an order taker or consultant?
• Would I stand out in a room full of my competitors?

You need something to set you apart from your competition. A portfolio full of yesterday’s solutions won’t cut it when you are working with small employers that are facing today’s realities. Allow me to ask this another way: Are you in business to do exactly what your clients want and nothing more or will you be the person who helps your client figure out what’s in the client’s best interest and make it happen?

Small employers have faced more than 10 years of double-digit rate increases. Each year, employers have to make the decision to lower the benefits, pass the extra cost on to the employees, or eliminate the health plan altogether. Employers need you now, more than ever, to be an expert and lead them in the direction that will provide relief

Step one is to break down the situation. In any size group, 50% to 70% of the members do not use the health plan in any given year or they use it so little that it doesn’t make sense to pay high premiums for co-pay or traditional plans. You can show the employer how to take advantage of that fact.

The next step is to address the benefits. If the employer strips out benefits, it hurts the 4% to 7% of the members who have a chronic illness and use the plan regularly. Once you show the employer how to lower the premium as I mentioned above, you can address how to improve the benefits.

What’s the solution? Health reimbursement arrangements (HRA) and medical expense reimbursement plans (MERP) can be packaged in different ways to fit your client’s needs. When you become familiar with the mechanics of a HRA/MERP plan, it will be an easy concept for you to deliver. As a consultant, you will show the employer a new way to take on some of the risk and responsibility of providing benefits. The end result will give your client a group health plan that saves the employer 30% to 50%, gives the employees benefits they have grown accustomed to, makes you an expert in your industry, and sets you apart from your competition.

How does it work?

By using the HRA/MERP solution, you will show your clients how to put in place a high deductible health plan and partially self-fund benefits accordingly. Typically, the self-funded benefits are customized to mirror what the client already has in place. With your guidance and the right administrator, the client can create its health plan in any way it desires

By moving the small employer client to the high deductible health plan, you cut the health plan premium by as much as 60%. It is from the premium savings that an employer is able to pay for any claims that may be incurred by an employee. The employer can rest easy knowing that its maximum liability is capped by the high deductible health plan and it will not self-fund any more than the deductible minus the employee benefits for any one risk unit. Take a client who selects a $2,000 high deductible health plan. The client then wants the employees to have a $250 deductible and the client will self-fund 80% of the remaining $1,750. This leaves the client with a meager $1,400 in liability. If one of the employees ended up in the emergency room with a severe medical problem, the client would not pay more than $1,400. The insurance carrier would then cover all charges incurred for the remainder of the calendar year.

The Research Continues

All of this can be administered using a TPA that specializes in HRA and MERP plans. When qualifying a TPA for your clients, there are things you should look for and questions you should ask.

How long Has the TPA been in Business?

There are many obstacles to overcome in order to provide a properly administered plan. A good TPA has met those obstacles

Does the TPA Offer Options Or Is it Just a Simple Reimbursement Plan?

The easiest path for a TPA is to offer reimbursement plans. When a member goes to the doctor or pharmacist, the member pays the provider in full for the services then waits for a check to come back from the administrator for reimbursement. This would be a good option if the members could afford to pay 100% of the cost up front. But how many members could afford that? Assuming the member could not afford to pay in full each and every time they visit a doctor or pharmacist, a co-pay option is typically preferred.

How Are Claims Paid?

It takes a seasoned TPA to work this method out so that it is seamless for the client. Some reimbursement TPAs will process the claim and send the reimbursement to the member as I stated above. This method could work out fine if the member paid in full. But how likely is a member, who still owes for services, to use the reimbursement to pay the provider? In many instances the provider ends up sending the member to collections for lack of payment. Other TPAs may process the claim and send payment to the employer, which works, but the employer then needs to forward that check to the member or the provider. Some TPAs will offer to process the claim and send payment to the provider. An experienced full-service TPA will have the capability to offer all of the methods shown.

How Are Fees for Administration Determined?

The saying, “You get what you pay for” is true in most scenarios. Some TPAs will offer to administer the plan for $5 less than the guy next door. You may find that a TPA advertises the lowest administration fee only to find out it applies to every member and dependent. If you really dig in, you will discover that the advertised fee is lower because the TPA’s services or capabilities are less and the claims cost to the employer is higher than it would be with a full-service administrator.
These are a few key points to consider when doing your research. The small employer client depends on you to know the answers in order to guide them in a direction that will keep them in business and allow the client to offer a competitive benefits package.

The Result

It takes years of persistence and continuous effort to become known as a consultant or resource, but it will be clear to everyone, once you have reached that point, including your competition. Small employers will begin to approach you and ask for your help with their benefits — not the other way around. Remember, it’s not just about being different; it’s about being different in ways that provide greater value to your client. Offering these plans will give you the confidence to walk into your prospect’s office and say, “Let your current broker show you everything else in the market, I just want to show you one thing.”

Stacy Morris, CEDS, is the Director of Marketing for BEN-E-LECT. Under Stacy’s direction, BEN-E-LECT created the concept of Employer Driven Benefit Plans TM, implementing strategies which put small employers in control of their group health plans, lowering cost without reducing benefits.

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America’s Health Trends
A Mini-Med Primer for
Brokers and Clients
Straightening Out the Confusion Over
Mini-Meds and Fixed Indemnity Plans

by Tim Adkisson

More businesses will be exploring alternatives to traditional major medical insurance as healthcare costs continue to rise and companies feel increased pressure to cut expenses. For many employers, the alternatives will include limited medical benefit, such as fixed indemnity group products.

These products offer a less expensive option than more comprehensive coverage. They provide medical benefits on a more limited scale for employees. However, a limited medical benefit is not a one-size-fits-all solution. There are two primary types of limited benefit plans that provide medical benefits — mini-med plans and fixed indemnity or payment plans. While each plan type has its place in serving the needs of employees, it is important to understand the key differences and why one may be more appropriate in certain circumstances.

What is a Limited Benefit Plan?

Limited benefit medical insurance policies generally provide benefits for routine services and preventive care — things like doctor visits, prescriptions, and emergency room visits. They are often suitable when major medical plans are impractical or financially out-of-reach for the employer and when uninsured workers can’t afford more comprehensive coverage.
It’s important for brokers, employers, and plan participants to view these plans though a different lens than with major medical. The benefits are not as extensive. While the amount of coverage is limited under these plans, they do offer some level of benefits to help employees gain access to the doctor.

Mini-Med Policies

Mini-med plans are expense-based benefits that often share the look and feel of major medical plans. In some cases, they may provide richer benefits than do fixed indemnity plans. Like major medical, they focus on in-network care; they include co-pays and deductibles; and they may include clauses for preexisting conditions. However, unlike major medical, they lack catastrophic coverage and have annual caps on in-patient and out-patient benefits.

The similarities to major medical plans can make mini-meds easier to understand for groups that are losing a comprehensive plan. But it can also lead to confusion when employees reach their coverage limits. Typically, there is an annual coverage limit as well as coverage limits for each benefit component. The policy’s annual level maximum may actually be lower than the sum of the individual components. So a plan participant may use up the annual maximum unexpectedly while coverage still exists under the coverage limit for an individual component.

With mini-meds, separate deductibles may apply to each of the plan’s benefit categories (for example, outpatient, inpatient, accident). Some policies have a prescription deductible that is separate from the out-patient deductible. Before the accident benefit it paid, some policies may require the out-patient deductible, the in-patient deductible, or both to be met. This creates a tangled web of competing deductibles, which can lead to confusion and higher out-of-pocket costs than originally assumed. Also, because they are expense-based, these mini-med rates are more susceptible to inflation. The presence of co-pays and deductibles may also be financially difficult for certain employees.

Fixed Indemnity Policies

Fixed indemnity policies are not expense based. They pay a fixed benefit regardless of the actual cost of service. While they may offer fewer overall benefit amounts than mini-med plans, their lower cost and design flexibility make them appealing to those who did not have insurance coverage in the past, want to reduce their overall medical costs, or want to supplement a major-medical plans to reduce the effect of high deductibles for their employees.

Fixed indemnity plans can be easier for newly insured employees to understand. For example, an employee who goes to the doctor will receive a fixed, known benefit, regardless of the actual expense. And because benefits are fixed, rates remain stable and are less affected by inflation. Also, there are no pre-existing condition clauses, no out-of-network penalties, and generally no co-pays or deductibles.

However, fixed indemnity plans are fundamentally different than traditional major medical plans. So they can be hard to understand for new clients or employees who have had major medical and are used to co-pays and deductibles. The benefits may appear too limited. They can also be confusing because the dollar amount is per-event, not an overall limit. The patient may not know how much doctor’s office visit costs until after they get treated.

A key value to fixed indemnity plans is design flexibility. Plans can be tailored easily to group demographics. For example, let’s look at a ski resort that wants to cover seasonal lift operators. Rather than loading up on preventative options, the resort may look at hospitalization, accident, and surgery benefits, which may be their most common claims experience. When choosing a fixed indemnity plan, it’s important to look at who the people are in the group, what they are most likely to use, and where they would find value.

So Which Plan is Right?

It depends on the client, of course. Mini-med plans more closely resemble comprehensive medical plans and may offer more benefits at higher premium levels. They are especially attractive to employees who recently lost access to a comprehensive major medical plan. But it is important for employees to understand the caps and limitations that lie under the surface of mini-med plans.
Fixed indemnity plans may be a better option for clients seeking lower premiums. These plans help clients get the most benefit for their dollar since the plans can be customized to fit the client’s needs. Fixed indemnity plans can also be available on an hourly platform, which may be particularly beneficial for employers that have hourly, part-time or seasonal workers.
Mini-Med Features

• Reimbursement-based benefits.
• Co-pays and deductibles.
• In and out-of-network co-insurance.
• Preexisting exclusions.
• Coordination of benefits.
• Annual cap on inpatient and outpatient benefits.
• Deductibles may apply to each coverage.
• Contract level annual cap on benefits.
• May have indemnity aspects.

Mini-Med Pros and Cons
• Often easier to understand for groups losing major medical given similar characteristics.
• Emphasis on in-network care.
• Can provide richer benefits.
• Co-pays and deductibles may be barrier to utilization.
• Internal limits and caps may be reached quickly.
• Rate is more susceptible to inflation.

Fixed Indemnity Features
• First dollar/pre-determined fixed payment benefits,
regardless of the expense.
• No co-pays or deductibles.
• No required networks.
• No preexisting condition exclusions.
• Coordination of benefits not required.
• Guarantee Issue.
• Paid per visit with calendar year maximums.

Fixed Indemnity Pros and Cons
• Easier for the uninsured to understand.
• Plan design can be tailored to group demographics.
• Rate is less likely to be affected by inflation.
• No out of network penalty in the plan design.
• May be harder for decision makers to understand because they’re used to co-pays and deductibles.
• May be harder for employees losing major medical to understand the difference.
• Benefits may appear too limited.
• Claims submission may be manual.
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Tim Adkisson is national sales VP for Select Benefits Distribution, Group Division at Symetra Life Insurance Company. Symetra sells employee benefits, annuities and life insurance through a national network of benefits consultants, financial institutions and independent agents and advisors. For more information, visit www.symetra.com or email grplif@symetra.com.

America’s Health Trends
Healthcare Reform
Why Push So Hard Now?
Unless Congress is willing to make substantial changes…this reform effort is not going to accomplish that which was promised.

by Neil Crosby

We have all witnessed a tremendous push for healthcare reform, unlike we have seen before. But with all of the challenges that have faced the House and Senate in trying to package up a successful bill, why has it been pushed so hard to get it done now? Considering that healthcare reform became President Obama’s major domestic campaign promise, it is no wonder that there has been such a focused determination to keep that campaign promise. When the effort was beginning to stall during early summer, President Obama revived the effort by changing just one word; he changed the goal of healthcare reform to health insurance reform, and began to paint insurers as greedy to build momentum for reform. It always helps to build momentum for a cause if there is an enemy involved.
So what can be done to counter the political process of this reform effort? It seems fairly obvious that the majority in Congress, as well as some members of the minority want to see some reform to the healthcare system. We do need some changes to reform some major provisions of our current marketplace. But the bills that have recently been moved forward are not going to accomplish the goals that the administration wanted to achieve originally, which were:

• Contain healthcare costs
• Provide Quality healthcare
• Provide Affordable healthcare for every Individual and Family
• Provide Guaranteed Access to healthcare

If the proposed bills were to successfully address these goals we might be able to support this effort, at least in part. But with the bills as written, they do not address the goal of containing the steady rise of healthcare costs. And why do they keep rising? Because healthcare costs keep rising, simple as that. The bills also will not attain the goal of providing more quality healthcare, nor really bend the curve of how providers are reimbursed. The true shame of these bills is they will not accomplish one of the largest goals of providing affordable healthcare for Americans as promised. Unless these bills are changed drastically, the effect of these bills will be to cause health insurance rates to soar, the opposite result of the desired goal. The final goal of providing guaranteed access to those seeking to purchase health insurance coverage regardless of pre-existing health conditions is a lofty goal and frankly long overdue. When we have Americans who apply for coverage, attach a check, and are willing to be responsible enough to buy coverage they need to be able to access coverage.
So what needs to be done now? Unless these reform bills are changed to comply with the goals they were supposed to accomplish they should be opposed. The public has grown more and more uneasy about what this reform effort may cause, and rightly so. The public wants to know what this means to them, what it is going to cost them as an employer or as an individual American.

To accomplish real healthcare reform, what needs to happen is:
• National Tort Reform
• Electronic Health Records
• Providers paid for Quality care
• Transparency of Healthcare Costs

National Tort reform is needed, not so much to trim malpractice awards, but to try to slow all of the defensive medicine that is practiced everyday by providers throughout America. Electronic health records, over time, could reduce duplicate medicine that is a huge cost driver in the system. There is discussion of changing the way that providers are paid for patient care, as long as it is effective and is also fair to providers this would also bend the cost curve. And imagine if healthcare transparency would allow us to shop for our healthcare procedures just like we do for so many products and services.

The public would be aware of how much healthcare really costs if you were able to attain true transparency in healthcare costs and couple that with recent trends in the market, at least in California, where consumers are buying more consumer directed health plans.
As you are aware, most of the public has no idea of the actual cost of healthcare procedures, let alone the actual cost of the premium being paid when they receive their coverage through their employer. They are shocked when they see what their coverage will cost through COBRA. Even the media doesn’t understand it, they report how much more COBRA coverage is versus what they believe the cost was under the employer plan. These realities are changing the buying trends in California and America already, and will continue to do so, at least into the near future.
Unless Congress is willing to make substantial changes to the bills working their way through the system, this reform effort is not going to accomplish that which was promised. Will they stop here, clean the slate and start over? Not likely. Therefore it is up to all of us to talk about the way reform should happen. Talk to your friends, family, neighbors and community groups. Let’s try to make a difference.

Neil Crosby is director of Sales at Warner Pacific Insurance Services and Vice President of Public Affairs for the California Association of Health Underwriters For more information, e-mail NeilC@WarnerPacific.com or call 800-801-2300 x 408.

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Disability
How to Complete a Non-Can
Disability Application to Avoid or
Minimize a Potential Lawsuit
Don’t Let A Client’s Benefits Expire at 65

by Art Fries

Most of you dread the day you might receive a summons & complaint from a process server. When the process server gives you the summons, your heart starts to beat faster and you know it’s time to contact your E&O liability insurance company — that is if you’re smart enough to have E&O coverage.

I’ve worked as disability claim consultant almost 15 years and served many more years as an expert witness related to disability claims. I have seen many errors made by those who have sold disability insurance. I have done thousands of audits on individual disability policies. They all included an application that asked many questions including those related to medical history. Sometimes, the claimant doesn’t collect on a disability policy because of a fraud clause included in the contract. The two-year incontestability clause becomes meaningless even if the contract has been in force for 10, 15, or 25 years or more. And when the policy does not provide coverage, the claimant looks for anyone else who might provide deep enough pockets to provide money in lieu of the intended disability contract. That deep pocket could be you. Suppose you have an agency relationship (rather than that of a broker). The insurance company could be a further, deeper pocket if you placed the policy with the same insurance company for which you had the agency relationship.
In their article, I will be discussing the proper way to complete a non-can individual disability application to present your prospect in the best possible light to the home office underwriter. Before I get into the overall process involved relating to the important areas of a disability application, I want to bring to your attention some of the problem areas that cause agents and brokers to be sued. Here are some examples:

• The agent never explained how much personal disability insurance the claimant was eligible for and how it relates to the applicant’s income.
• The agent never asked the applicant if they were a corporation, never asked if they were putting any money into a profit sharing plan, pension-type plan, or SEP IRA and never discussed overhead disability when the exposure was clearly there.
• The agent recommended a five-year payout or benefit period without showing the premium for a longer benefit (age 65).
• The agent put down no unearned income on the application for an applicant earning $200,000 per year after overhead. Could your applicant have even a tiny savings account? Wouldn’t you question your applicant further?
• The agent doesn’t keep a copy of the proposal related to the application submitted and doesn’t keep notes related to the case.
• The agent tells the applicant they will get a refund if they cancel an existing disability policy when the insurance company does not provide a refund, which is the case with most insurance companies.
• The agent doesn’t tell the insured how to cancel a disability policy properly with over-insurance being the result.
• In a deposition, the agent tells the opposing attorney that they don’t remember why the insured received a rating or modification in coverage. Since the agent doesn’t keep notes in the client file, the agent has nothing to refresh their memory.
• The agent never made it clear to the applicant what binding meant.
• The agent doesn’t know if the insurance company they submitted the application to goes age last birthday or age closest birthday.
• The agent leaves the “Net Worth” question blank.
• In a deposition, the opposing attorney asks the agent what income was needed to quote the cost of the disability insurance and why the agent recommended the amount that was issued. The agent responded, “That’s what the client wanted.”
• The agent never dates any letters to the client nor does the agent even reference the subject matter.
• After reviewing the application, the applicant tells the agent that not all the questions have been completed and the agent responds, “If the insurance company needs any further information, they will request it and any blanks not filled in I’ll take care of.”
• On Part II, all the medical questions completed by the paramedical service are answered “No.” I suggest you make note of the fact that a Part II is included in the actual insurance policy when issued. The agent did complete medical information when the agent completed their part of the application. Some of the medical questions were answered “yes” and that also becomes part of the actual policy. You should review the photocopy of the application and Part II included in the policy to make sure there was consistency in the medical information you completed and that of the paramedic who performed the exam.
• The agent doesn’t ask how much disability insurance is in force and thus doesn’t show all the policies on the application. In turn, the agent applies for more insurance than the applicant is eligible for.
• In a deposition, the attorney on the other side asks the agent if a large amount of unearned income would make the applicant ineligible for a disability policy. The agent responds, “I can’t answer that it would be based upon the underwriting at the insurance company. They would make that determination not me.”
• In a deposition the agent states, “To get a proposal we don’t need a lot.” Well, I guess if you’re an order taker you don’t need a lot, but if your letterhead says you handle insurance for professionals or a financial planner, you would want to ask a lot more questions to make sure your applicant was provided a complete proposal with the appropriate alternatives.
• The application is submitted for a monthly benefit that’s different from the proposal or has lesser benefits than what’s shown in the proposal. If there is a difference, make sure you indicate, on your copy of the proposal and the applicants copy, the change in monthly benefit or the benefit that is not included. Initial it accordingly.

There are dual or more occupations. Your applicant may say they are a surgeon and you assume that’s the occupation. I have seen where the applicant had two or more occupations. In one such case, the claimant was a pulmonary surgeon as well as medical director at a local hospital and he ran a sleep apnea clinic. He had a large in office practice in addition to his usual surgery duties and emergency visits to the hospital. Suppose you said the following to the client without asking the proper questions, “Doctor, if you can’t perform surgery. Since you have the ‘your occupation’ definition in your policy, you will be considered totally disabled.” You better pray you have enough E&O liability insurance. In that particular claim, the doctor was eligible for residual (partial) disability as a result of reducing their hours and eliminating some duties, but was not eligible for total disability. Many older policies have been issued with a lifetime benefit. Almost all companies provide a residual (partial) benefit only to age 65. It is not a happy time when a policyholder claimant expects to get paid for life, but finds out they will only be paid to age 65.

Art Fries is a disability consultant with over 40 years of experience. For further information, go to www.afries.com.

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Disability
Know Policy Provisions About Offsets To Ensure Your Client’s Disability Plans
Pays You What It Should There Are Rules That Govern
How Insurers May Govern Offsets

by Glenn Kantor and Peter Sessions

If your client is entitled to disability benefits through an employer-provided or private plan, you may be surprised to find that their plan has provisions that allow the insurer to deduct, from their benefits, other types of income they receive or are eligible for their disability. These deductions are called “offsets,” and are permissible under state and federal law. Common offsets include Social Security disability benefits, workers’ compensation benefits, and benefits from state disability programs like those in California, New York, New Jersey, Rhode Island, and Hawaii. Insurers can also deduct any amounts from their benefit that your client receives from working part-time (usually called “partial disability” or “residual disability” benefits), as well as retirement or pension benefits (including disability pension benefits).

The rationale behind offsets is this: If your client were allowed to keep the full amount of all of the various disability benefits to which they might be entitled, it would be possible for them to earn more money on disability than they would by working. Disability benefit programs, both public and private, are designed to avoid that result.

When people are receiving benefits from enough different sources so that their disability income exceeds the benefit amount in their policy, most policies have a minimum monthly benefit that is payable regardless of the total offset amount. Each policy calculates this benefit differently. Some policies have a set amount, such as $100; some set the amount as a percentage of their regular benefit; and some have a combination of the two. However, some policies do not have a minimum monthly benefit at all; insurers are not required to include one in their policies.

You can determine whether their plan contains offsets by looking at the part of the plan that explains how their benefit amount is calculated. Most plans have language indicating that the insurer is allowed to deduct “other benefits” or “other income benefits.” The policy will then have a separate section shortly thereafter explaining what types of benefits constitute “other benefits,” and how the insurer can offset them from their regular benefit. This language can vary significantly from policy to policy, so it is always extremely important to read and understand their policy to make sure that your client’s insurer is applying the offset provisions accurately.

You may wonder what kinds of offsets are allowed under the law and if there are any restrictions on how insurers can apply them. For the most part, offset provisions are not heavily regulated. For example, the Employment Retirement Income Security Act (ERISA) governs employee benefits, including disability benefits. However, ERISA is primarily concerned with explaining what employers and insurance companies must do if they offer benefits to employees. It does not tell employers and insurers what kinds of benefits they have to offer or how those benefits should be calculated.
You may also wonder if there is anything you can do to change the offset provisions that are in your client’s policy. Unfortunately, if your client is receiving a disability benefit through their employer, the terms of their disability benefit plan have already been negotiated between their employer and the insurance company and they can do nothing to change those terms. If your client is receiving benefits through a private policy of insurance, they can try to negotiate with their insurer to remove offset provisions, but they are unlikely to be receptive to their requests.

There are, however, some rules that govern how insurers may apply policy offsets. Here are some examples:

Workers’ Compensation

Workers’ compensation benefits are designed to compensate injured workers for replacement of wages, loss of use, and medical treatment, among other things. If your client gets workers’ compensation benefits, the insurer may attempt to offset all of their workers’ compensation benefits, even if they are not attributed specifically to lost wages. There is a strong argument that insurance companies should not be allowed to do this. Under this argument, it would be permissible for an insurer to offset their “temporary total disability” benefits, because these benefits are typically based on their prior salary. After they have become “permanent and stationary,” the insurer would not be allowed to offset the full amount of their “permanent total disability” benefits, because these benefits include compensation for multiple injuries, not just their lost wages.
California recently enacted an insurance regulation that supports this argument. It allows group disability insurers to offset temporary total disability benefits, but prohibits them from offsetting permanent total disability benefits. (California Code of Regulations Section 2232.45.4)
As always, read the policy carefully because it may contain language that limits the insurer from offsetting your client’s entire workers’ compensation benefit. For example, some policies only allow offsets for benefits based on “loss of time,” while others are more broadly worded. This can be a confusing issue, so your client should consult with their workers’ compensation attorney to ensure that their benefits are properly attributed to avoid being offset.

Subrogation

An insurer can also offset your client’s benefit by money they receive in a lawsuit against a party who caused their disability. The legal term for this situation is called “subrogation,” and involves the legal rule called the “make whole” doctrine. Suppose your client is entitled to benefits from different sources for their injury (for example, from both the person who caused their injury and the insurer). The insurer can only collect its offset, (enforce its subrogation rights) if your client has been fully compensated for their injury — in other words, they have been “made whole” for their injury.
If their claim is governed by ERISA, conflicting legal decisions govern whether the make whole doctrine applies to their claim. In some states, such as California, the courts will apply the doctrine, but in others, they will not. If your client is in this situation, they should consult with an attorney who specializes in ERISA law to determine whether the make whole doctrine applies to their claim so they can determine if the insurer has the right to offset their benefits, and if so, by how much.

Social Security

Social Security disability benefits typically increase over time to compensate for the effect of inflation on fixed incomes. This increase is called a cost-of-living adjustment (COLA). Some states, such as California, have laws that prevent insurance companies from reducing their benefit if their Social Security disability benefit goes up. (California Insurance Code Section 10127.1) Even if no law prohibits an insurer from reducing their benefit, insurance policies often contain a provision stating that the insurer will not do so.

If your client is receiving family Social Security benefits, or “dependent benefits,” in addition to their individual Social Security benefit, be aware that these benefits may also be offset. Most policies limit offsets to benefits your client is entitled to receive personally for their disability, but there is no law prohibiting insurers from offsetting dependent Social Security benefits as well. Again, every policy is different, so read the policy to see whether their insurer has the right to apply this kind of offset.
Regardless of what offsets might apply in you client’s case, you may be surprised to learn that their policy probably gives their insurer the right to estimate those offsets before they even begin to receive them. Insurers assume that if your client is eligible for benefits from them, they are probably eligible for benefits from other sources, such as Social Security, as well. The insurer will estimate and apply an offset for those benefits as soon as possible. Sometimes, the insurer will give your client a choice. An insurer might ask if they want to estimate the other benefits and apply the offset now or whether they want to wait until they receive the other benefits and then pay the insurer back.
Some states, however, prohibit certain kinds of estimates. For example, in California, group disability insurers are not allowed to estimate retirement benefits (California Code of Regulations Section 2232.45.2) or workers’ compensation temporary total disability benefits (California Code of Regulations Section 2232.45.3), and therefore may not offset those kinds of benefits until they actually receive them.

In sum, offsets are an important part of a disability benefit plan since they directly affect, and often substantially reduce, their benefit amount. However, they can also be very confusing. If your client is concerned that their benefit has been miscalculated because their insurer has not applied the policy’s offset provisions correctly, they should request a detailed calculation in writing from their insurer. If their benefits are governed by ERISA, as most disability benefits are, they have the right to appeal the insurer’s calculation. If that appeal is denied, they have the right to bring a lawsuit in federal court. To maximize their chances of succeeding, they should contact an attorney who specializes in ERISA law before going through the ERISA appeal process. ERISA imposes strict evidentiary limits, so if they do not present their best evidence and arguments during the appeals process, they may be prevented from doing so later when they get to court. As a result, it is important to get legal advice as early in the process as possible.

Glenn Kantor is a founding partner of, and Peter Sessions is an associate with, Kantor & Kantor, LLP in Northridge, California. The firm represents policyholders in insurance disputes regarding denial of ERISA and other health-related benefits. They can be contacted at (818) 886-2525, or by e-mail at gkantor@kantorlaw.net. For more information, log on to www.kantorlaw.net.

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Life Settlements
Sometimes It’s Alright To Settle
There’s a Viable Secondary Market for Life

Our clients often ask us to explore various estate- and business-planning options. One unique option for seniors is the sale of their of their life insurance policy, a life settlement. For the right situation, a life settlement has a significant advantage over traditional alternatives and should be considered. To understand what a life settlement is, you must understand what it is not and how the transaction has evolved.

In 1911, the Supreme Court decided that life insurance policies are freely assignable for value. The court found that a life insurance policy is a form of property and that policy owners are free to sell and transfer ownership to other parties.

The court stated the following in the case of Grigsby vs. Russell (1911): “Life insurance has become, in our days, one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. This is recognized by the bankruptcy law (70,1), which provides that, unless the cash-surrender value of a policy (like the one before us) is secured to the trustee within 30 days after it has been stated, the policy shall pass to the trustee as assets. Of course, the trustee may have no interest in the bankrupt’s life. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner’s hands.”

Since then, there has been a dramatic increase in the value and volume of the life settlement industry. The market for life insurance has helped consumers manage their life insurance assets more effectively, providing an alternative to lapse or surrender. In 2004 alone, life settlements provided seniors with $1 billion in purchasing power — $660 million in excess of cash surrender value, according to the Life Insurance Settlement Association (LISA).

There is now a mature and viable secondary market for life insurance policies. As the market matured, recognized financial leaders began providing significant capital funding. Warren Buffet said, in his February 25th letter to shareholders, “Berkshire purchases life insurance policies from individuals and corporations who would otherwise surrender them for cash. As the new holder of the policies, we pay any premiums that become due and, when the original holder dies, collect the face value of the policies. The original policyholder is usually in good health when we purchase the policy. Still, the price we pay for it is always well above its cash-surrender value (CSV). Sometimes, the original policyholder has borrowed against the CSV to make premium payments. In that case, the remaining CSV will be tiny and our purchase price will be a large multiple of what the original policyholder would have received, had he cashed out by surrendering it.”

What A Life Settlement Is Not

It is important to understand the fundamental difference among the life settlement business, investor owned life insurance (IOLI), stranger owned life insurance (STOLI) and other similar structures. Industry associations, such as the American Council of Life Insurers (ACLI), the Association for Advanced Life Underwriters (AALU), and others have done a great job at confusing the differences. Settlements are legal, ethical, honest, and good for the industry while the others are not.
Investor-owned life insurance and the many other varieties involve a third-party investor approaching a senior about purchasing premium-financed life insurance (lender paid premium). This often involves the investor advancing money to the insured as an enticement to purchase a policy.

What a Life Settlement Is

Life settlements offer consumers an alternative to lapsing or surrendering policies. Policyholders have a choice that will help them realize full market value if they decide to abandon their policies.
A life settlement is an option for seniors (typically age 70 or older) who want to maximize the disposition of unwanted life insurance policies. The life settlement transaction involves selling a life insurance policy to an institutional investor in exchange for a lump sum payment. The payment is larger than the cash-surrender value, but smaller than the death benefit. The institutional buyer becomes the new owner of the policy, paying premiums, going forward, and collecting the death benefit upon the insured’s death.

Sometimes, an insurance policy is no longer needed to meet its original purpose of protecting a breadwinner’s stream of income, compensating for the loss of a business’ key employee, or funding a buy/sell agreement. The most popular policies that are settled are low cash value universal life policies. Our clients are often surprised that their term insurance policies have value as well, allowing them to recover a portion of all of the premiums they have funded throughout the years. There is also a market for joint survivorship and group policies (if convertible and portable).

Approximately $15 billion worth of life insurance policies were sold on the secondary market in 2006. Partly fueling the growth is a more knowledgeable marketplace and a maturation of the industry. This emerging industry is becoming a mainstream option for seniors and their advisors due to increased regulatory oversight and the infusion of institutional capital from investment banks, such as Credit Suisse, Goldman Sachs and Deutsche Bank as well as foreign and domestic hedge funds.
Furthermore, the recent volatility and underperformance of the stock and bond markets has shaken investors to the core. Global investors have lost confidence. They are looking for alternatives that can provide safe, secure, predictable rates of return. These institutional investments should provide long-term, consistent cash flow and positive returns. We are seeing a surge in these investments outside the traditional investment channels and a backlash against traditional investment vehicles. However, this industry is not insulated from the credit and capital markets. As the availability of money has contracted, so has the number of available policy buyers. This has created an excess supply of policies and we’ve seen a reduction in value of offers to our clients as of late. As the credit and capital markets recover, we fully expect the same in the life settlement marketplace.

Case Studies

An estate attorney introduced us to an 81-year man who had a $1.25 million life insurance policy that he acquired almost 20 years ago to pay estate taxes. Initially, he was diligent about funding the policy, but decided to stop paying premiums over the past decade. We discovered that the policy was projected to lapse over the next 12 months without new premium payments under the insurance company’s guaranteed interest rates. Although the client valued the insurance, he didn’t want to continue funding premiums. If the policy lapsed, there would be no cash-surrender value and he would get nothing.

We explored the secondary market with a myriad of institutional investors. The client accepted the best offer of $257,000. Along with our work in finding the best value for the policy, we had underwritten the client with a stable of reputable life insurance carriers. The client was in good health and was very active. We were able to secure a very good offer from a carrier and recommended that the client and his advisor acquire the new insurance using some of the proceeds from the sale of their existing policy. The new policy was funded with a single premium payment. The $1.5 million policy significantly extended the coverage period for the client and his family. This strategy resulted in the continuity of additional life insurance protection, which was the family’s goal, without any out-of-pocket expense from the client.

Another client asked us to double the coverage on a 65-year old key executive employee of his business. There was term insurance in the amount of $5 million. Term insurance rates have been decreasing steadily due to the improvement in general mortality trends. So, one good option is to replace the existing coverage with a $10 million policy. A few years ago, we would simply lapse the policy after the new one was in force. We suggested that we explore the settlement of the convertible term policy instead of simply surrendering the policy. The client received over $150,000 from the settlement of the term policy instead of giving it up for nothing.

Generally speaking, if the life settlement proceeds do not exceed cost basis or the premiums paid for the policy, the payment will not be subject to income tax. You must consult with your tax advisor regarding the tax treatment.

These are very specific circumstances and we explored many other options. However, it is evident that the emergence of the life settlement industry provides a viable option that was not previously available. Make no mistake; this is a sophisticated financial transaction that has pitfalls. It requires the coordinated due diligence of knowledgeable advisors. Nevertheless, monetizing an asset normally seen as having little or no current worth, allows the client can leverage it into significant value.

R. Wesley Sierk, III is the president and lead strategist for Risk Management Advisors, Inc. He’s an expert on the insurance marketplace, asset protection, executive compensation, corporate benefit planning, alternative risk transfer and captive insurance formation. He is a frequent speaker to industry and trade associations, and business organizations. He’s a member of the American Society of Pension Professional & Actuaries, Associations for Advanced Life Underwriters, the Wealth Counsel, and the International Forum He’s the author of “Taken Captive: The Secret to Capturing Your Piece of America’s Multi-Billion Dollar Insurance Industry.” He is also the author of You Can Make It, But Can You Keep It?”