Judge Heard What Healh Care Law Did Not Say

It’s ironic that the ultimate fate of the nearly 3,000 page Patient Protection and Affordable Act (PPACA) may hinge on what was not included in the legislation.

Today’s ruling by a federal appellate court judge in Florida that the law’s individual mandate provision is unconstitutional is certainly important, but even more significant is that the judge also ruled that entire law must be struck down on the basis on non-severability. In other words, if a single provision does not pass constitutional muster, then it all gets thrown out.

This is particularly interesting because shortly after the passage of PPACA, it came to light that the law did not include a severability provision, which is a pretty standard clause for most comprehensive legislation. To this day no one really knows for sure the reason for this important omission, although the most likely theory is that it was drafting error made in the rush to pass the legislation.

Then-Speaker Nancy Pelosi famously said that we needed to pass the bill to know what’s in it. Apparently we also needed to pass the bill to know what was not in it.

I have written and commented about this small but important legislative detail frequently over the past year. On more than one occasion someone has challenged me that it is not realistic to think that the entre law could be thrown out even if specific provision were voided by the courts. Conventional wisdom misses the mark once again.

So it’s off to the Supreme Court we go and we’ll see if at least five justices hear what the health care law did not say.

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Life Insurance: The Basics

by Richard F. O’Boyle, Jr., LUTCF, MBA

Life insurance policies are contracts between individuals and insurance companies to pay a set dollar amount on the death of the individual covered by the policy. Most people first buy life insurance when they start a family and take on a large expense such as a mortgage since they don’t want to leave their spouse and kids with a stack of bills and only one income. Individuals in later life see the value of life insurance as part of their retirement and estate planning.

Obviously, life insurance proceeds can be used to pay for final expenses such as probate taxes and funeral costs. But life insurance can also provide retirees with additional options. For example, the cash values in permanent life insurance plans can be used to supplement retirement income on a tax-favored basis. A life insurance plan may allow a retiree to elect a more generous pension option, knowing that the life insurance will pay out to their surviving spouse. Finally, having a life insurance plan late in life gives the retiree the comfort in knowing that she can spend down her assets and savings and her children and grandchildren will have a financial legacy.

Types of Life Insurance

Term Life Insurance will pay your beneficiaries a set amount as long as the policy remains in effect, which is generally 5, 10, or 20 years. If you choose a longer term, the premium will be higher, all other things being equal. The rate will increase at these time increments, and ultimately become unaffordable or simple terminate.

Many term plans offer the option of converting to a permanent plan at a future date with no evidence of insurability, that is, no new medical exam. You get to keep the same rating or classification, even if your health has deteriorated, and the length of coverage can be extended.

Permanent Life Insurance, such as Whole Life or Universal Life, has a higher premium, but some money is set aside in a conservatively invested account for the medium- or long-term. The premium on the permanent plan does not increase over time. There are other variants of permanent insurance such as Variable Life (where the money is invested in stock-type accounts) or Return of Premium plans which act a lot like Universal Life plans.

Keep in mind, that once you get life insurance, the rate will increase only by the specified amount (if a term plan) or not at all (if a permanent plan). These rates are locked in even if your health deteriorates over time.

Whole Life Insurance is permanent life insurance designed to last through your life expectancy. The premium remains fixed and level as long as you own the policy. The policy’s cash value grows at a guaranteed rate and may also accumulate dividends.

Universal Life Insurance is permanent life insurance with a flexible premium and a cash value that grows based on current market interest rates. The policy owner may choose to pay higher or lower premiums depending on his own income cycles.

Term Life Insurance is temporary coverage designed to last for a specified time frame – usually five, ten or twenty years. Premiums will increase on a set schedule after the initial term expires. No cash value accumulates, although many plans offer a conversion rider that allows the owner to convert the plan into a permanent policy.

Customizing Your Policy with Life Insurance Riders

Disability Waiver of Premium: If you are unable to work due to illness or injury for six months or more, the insurance company will pay your life insurance premiums. Whole Life plans will continue to accrue all scheduled cash values and dividends; Universal Life plans will generally not accumulate additional cash values, but will remain in force during the period of disability.

Conversion: You can convert your term policy “without evidence of insurability,” e.g., without a medical exam, into one of the permanent plans offered by your insurer. The insured must pay the new premium based on their age at the time of conversion.

Accelerated Death Benefit: You may take up to 80% or 90% of the death benefit while still alive if diagnosed with a terminal illness.

Family and Child Insurance: The spouse and/or dependent children of the primary insured may be covered at a percentage of your death benefit.

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Book Review: "The Big Short: Inside the Doomsday Machine"

by Richard F. O’Boyle, Jr., LUTCF, MBA

In Michael Lewis’ expose of the origins of the 2008-2009 credit meltdown, “The Big Short: Inside the Doomsday Machine,” we see how greed and ignorance created the perfect storm that brought on the worst financial crisis since the Great Depression. As a financial professional who helps families and businesses plan for their retirements, I help implement insurance and planning strategies. When we put in place these plans we are often relying on third party ratings of insurance companies and products to give us the confidence that the plans can be fulfilled.

If anything, the experience of the last three years must give us pause when taking for granted the ratings of companies such as Moody’s and Standard and Poor’s. I’m not saying that we should jettison these ratings altogether – instead we should consider them carefully as a piece of the overall picture of financial strength. These agencies went wrong when they got involved in rating very complex derivative products while relying almost entirely on the data supplied by the companies that created those same products.

Lewis’ account of the development mortgage bonds and the evolution of derivative financial products such as credit default swaps is a readable insider’s view of Wall Street’s money machine. Things went awry when rating agencies gave their stamp of approval on these products for sophisticated investors such as hedge funds and institutions. Shockingly, the creators of these products – Citigroup, Goldman Sachs, Merrill Lynch and other banks – often weren’t so sure of the value of the home loans that were the foundation of the underlying bonds.

The basic problems were that the mortgages that formed the foundation of the bonds after 2005 were increasingly low-quality subprime loans and the rating models of the agencies did not take into account that property values might decline. Furthermore, the banks creating the products tailored their submissions to the agencies so that the credit risks of the underlying bonds were not truly diversified and thus riskier than they appeared. In effect, very risky bonds were given super-safe AAA ratings.

Here’s how the products were constructed and what went wrong:
1. Individual mortgages are lumped together into mortgage bonds. Investors in these asset-backed bonds get paid off as the individual mortgages are paid off.
2. Mortgage bonds are rated for financial stability by rating agencies based on their assumptions about default rates by individual mortgagees. The underlying home values and FICO scores are two key measures that they look at.
3. Investors in the bonds buy insurance called “credit default swaps” against the risk that these mortgage bonds will not pay off as expected (that they will default). The price of this insurance is based on the rating that the mortgage bonds received.
4. Big banks package thousands of these bonds and savvy investors trade in the swaps. Some banks generated so many of the bonds that they couldn’t sell them all right away so they held onto them in their own accounts.
5. When adjustable rate mortgages began to reset in 2007 and 2008, the new higher rates forced many individual mortgagees to default. The cascade effect of high defaults and sinking home values triggered the credit default swap insurance plans.
6. Banks were forced to pay out on the insurance and devalue the bonds held on their own books. Ultimately, the banks were forced to come up with more cash to shore up their finances or go bankrupt.

While I walked away after reading this book with a clearer understanding of how Wall Street works, I’m not sure that this knowledge makes me any more confident with the abilities of the various players. Lesson learned: be careful of the herd mentality in all forms of investing. Even the most sophisticated investors can get into trouble when they get greedy and rely too heavily on someone else to do their own homework.

“The Big Short: Inside the Doomsday Machine” is available from Amazon.com

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The Life Insurance Medical Exam

by Richard F. O’Boyle, MBA, LUTCF

When applying for life insurance, the company bases it’s underwriting decision on a slew of data, including a past medical treatments, personal history, financial profile, motor vehicle record and current medical examination. If you are applying for over $1,000,000 of coverage or if you are over age 60, the medical requirements will be a bit more thorough.

The medical exam usually consists of a series of medical questions, blood pressure and pulse readings, and blood and urine samples. The insurance company will have a nurse collect copies of your medical records from your doctors. Additional tests may be requested, most often an EKG if you have a history of serious heart disease.

Read the complete article...

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Self-Insurance Faces a Triple Regulatory Threat

SIIA has reported recently on a series of the meetings with DOL and HHS officials to discuss PPACA-mandated studies on self-insurance. Our assumption is that at a minimum there is ignorance among regulators, but more likely a negative bias pervades.

We are working to head off a DOL report that concludes smaller employers should not self-insure due to solvency concerns and a separate HHS report suggesting that self-insured health plans will negatively impact health insurance exchanges due to adverse selection concerns.

While the policy battle rages on these two fronts, self-insurance is now being targeted by a third team of regulators. The Treasury Department has recently developed a keen interest in stop-loss insurance of all things.

The hook for the IRS folks is that the new health care law limits the tax deduction companies that sell fully-insured health insurance products may take for the compensation they pay to their employees. In other words, if a company sells “health insurance,” the company is subject to this tax deduction limitation. And guess what, it looks like the IRS and Treasury officials are confusing stop-loss insurance with health insurance.

Consider the following excerpt from an IRS publication regarding this tax deduction limitation, requesting comments from the public on:

"the application of the deduction limitation for services performed for insurers who are captive or who provide reinsurance or stop loss insurance, and specifically with respect to stop loss insurance arrangements that effectively constitute a direct health insurance arrangement because the attachment point is so low." (See IRS Notice 2011-2).

So, not only are the Treasury officials asking insurance practitioners how they should treat, for example, stop-loss policies, Treasury is explicitly asking for comments on how they should treat these policies, especially policies with a low attachment point.

Interestingly, this was reported to be a hot subject of discussion at an American Bar Association meeting for tax practitioners last week in Florida. Can you picture a bunch of tax lawyers with no background in self-insurance trying to figure out stop-loss insurance? Yep, that’s a scary thought.

But back to the IRS. Should it conclude that stop-loss insurance can be defined as health insurance for even its limited tax treatment purposes, a troublesome precedent will be established. For more than two decades, SIIA has been largely successful in pushing back on state efforts to regulate stop-loss insurance like health insurance.

A contrary interpretation by the feds will likely embolden those who seek to impose new regulations on self-insured plans via their stop-loss insurers. That’s the last thing the industry needs.

So, with stop-loss insurance under a Treasury Department microscope, self-insurance now faces a true regulatory triple threat. Watch for additional updates on this important developing story.

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