OHS 208 Lecture Notes - Lecture 5: Canada Pension Plan, Ouster Clause

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1 Feb 2018

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Workers who have a loss of earnings as a result of an injury which is covered by the insurance plan are entitled to several kinds of insurance payments. These include: wage replacement (either total or supplemental, non economic loss (nel, health care, return to work, and/or labour market re entry plan (lmrp) Where a worker is killed on the job, the survivors are entitled to: wage replacement, lump sum death benefit (non economic loss, funeral expenses. All of these entitlements are covered in sections 43 to 48 in the wsia. Where the worker returns to the preinjury job, the two amounts would be the same. When the worker cannot return to the pre injury job, the after injury earnings may be different, and the board will determine the earnings that the worker is able to earn from the employment that is suitable and available.

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Long term disability (LTD) insurance policies cover workers who become disabled and can no longer perform their job functions. Workers who think they qualify as disabled can submit a claim to their employer for LTD payments to replace their lost wages.

Below is an excerpt of the abstract of a recent NBER working paper entitled a Moral Hazard and Claims Deterrence in Private Disability Insurance by David Autor, Mark Duggan, and Jonathan Gruber:

We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer.. . . we find that a higher [wage] replacement rate and a shorter waiting time to benefits receipt . . . significantly increase the likelihood that workers claim LTD.

(a) Higher disability claim rates when LTD benefits are more favourable may be an instance of moral hazard. Any instance of moral hazard involves a price distortion, a behaviour response, and an information asymmetry. What is the price distortion in this example?

(b) What is the purported behaviour response?

(c) What is the nature of the information asymmetry? Explain what would happen if this information asymmetry did not exist.

(d) If the higher wage replacement rate and shorter waiting time policies had been applied randomly to different workers in this sample, then the finding would be convincing evidence of moral hazard. Explain how the same result could have been found even if there was no moral hazard (that is, no behaviour response to the price distortion)?

rosebat70

Joe and Lisa White are a married couple. Joe is 63 and Lisa is 61. Joe is thinking about retiring in a few years, and the Whites have come to you for an insurance evaluation. Lisa plans to continue working even after Joe retires. The following provides a summary of the Whitesâ insurance planning situation.

Life Insurance

Joe owns a $500,000 universal life insurance policy. Joe is the insured and their son David, age 37, is the beneficiary. The policy has a cash value of $50,000 and a living benefits provision; all account earnings are used to offset premium expenses. Lisa owns a 20 year $350,000 level term life policy that she purchased five years ago. She pays approximately $1,000 per year in premium costs. Lisa is the insured and Joe is the beneficiary.

Property and casualty insurance

Joe and Lisa own a home as JTWROS. The home has a market and replacement value of $675,000. The house is insured with the standard HO-3 policy for $550,000. The policy requires that the Whites pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage on detached structures

Coverage up to $250 for cash

Coverage up to $1,500 for collectibles, artwork, and similar assets

Personal property contents coverage equal to 20% of the insured dwelling

Living expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Whitesâ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

Health insurance

The Whites are covered under Lisaâs group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.

Using this information, please answer the following questions.

3. If Joe were to die today, how would the universal life insurance policy benefits be distributed? Would there by any taxes involved: income tax, estate tax, gift tax? Explain your response completely.

4. What will be the tax consequences if Lisa decides to cancel her term life insurance policy? Justify your answer.

Life Insurance

Property and casualty insurance

10% coverage on detached structures

Coverage up to $250 for cash

Coverage up to $1,500 for collectibles, artwork, and similar assets

Personal property contents coverage equal to 20% of the insured dwelling

Living expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Whitesâ two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

Health insurance

Using this information, please answer the following questions.

9. The Whites are curious about the alternatives available when planning for possible nursing home care costs in the future. They have discussed Medicare, Medicaid, and using their savings. What would you recommend for the Whites and why?

10. Currently neither Joe nor Lisa has disability insurance coverage. Joe and Lisa would like more information from you about disability insurance. What recommendations would you make to them? Include a discussion of the elimination period, taxation of benefits, own-occupation vs any-occupation, and guaranteed renewable options.

OHS 208 Lecture Notes - Lecture 5: Canada Pension Plan, Ouster Clause

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