FINA 260 Lecture Notes - Lecture 9: Polskie Radio Program Iii, Co-Insurance, Managed Care

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29 Sep 2016

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Determine your life insurance needs and design a life insurance program. Describe the major types of coverage available & the typical provisions that are. Design a health-care insurance program & understand what provisions are important to. Describe disability insurance and the choices available to you. Explain the purpose of long-term care insurance and the provisions that might be. Health insurance is an issue none of us can afford to dismiss. Most of us avoid thinking about and planning for our deaths - most of us do not seek out a life insurance policy. When you consider your need for insurance, need to keep in mind its purpose. An insurance policy spells out what losses are covered, what the policy costs, and who receives payment. Health insurance provides protection against devastating medical bills. Life insurance protects your family if you die. High costs mean limited insurance coverage, limited health benefits, and higher out-of-pocket payments for medical bills.

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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.

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.

Please show work for both problems and I will give a thumbs up!

5. You are considering the purchase of a quadruplex apartment building. Effective gross income during the first year of operations is expected to be $33,600 ($700 per month per unit). First-year operating expenses are expected to be $13,440 (at 40 percent of EGI). Ignore capital expenditures. The purchase price of the quadruplex is $200,000. The acquisition will be financed with $60,000 in equity and a $140,000 standard fixed-rate mortgage. The interest rate on the debt financing is 8 percent and the loan term is 30 years. Assume, for simplicity, that payments will be made annually and that there are no up-front financing costs.

a. What is the overall capitalization rate?

b. What is the effective gross income multiplier?

c. What is the equity dividend rate (the before-tax return on equity)?

d. What is the debt coverage ratio?

e. Assume the lender requires a minimum debt coverage ratio of 1.2. What is the largest loan that you could obtain if you decide that you want to borrow more than $140,000?

12. An office building is purchased with the following projected cash flows:

â¢ NOI is expected to be $130,000 in year 1 with 5 percent annual increases.

â¢ The purchase price of the property is $720,000.

â¢ 100 percent equity financing is used to purchase the property.

â¢ The property is sold at the end of year 4 for $860,000 with selling costs of 4 percent.

â¢ The required unlevered rate of return is 14 percent.

a. Calculate the unlevered internal rate of return (IRR).

b. Calculate the unlevered net present value (NPV).

2. Health Care Event Protection. Christina Haley of San Marcos, Texas, age 57, recently suffered a stroke. She was in intensive care for 3 days and was hospitalized for 10 more days. Her total bill for this care was $125,500. After being discharged from the hospital, she spent 25 days in a nursing home at a cost of $170 per day. Christina, who earns $4,500 per month, missed two months of work. Christina had a health insurance plan through her employer. The policy had a $1000 deductible and an 80/20 coinsurance clause with a $2000 coinsurance cap. She had also accumulated 21 sick days (equivalent to one month) at work. Otherwise she had no long-term care or disability income insurance.

(a) How much of Christina's direct medical expenses was paid by her insurance policy?

(b) What did Christina have to pay for her nursing home care?

1. Calculating Life Insurance Need. Review the material in âHow Much Life Insurance Do You Need?â on pages 351â354. Then using dollar amounts that fit your personal situation, complete Worksheet 48: Determining My Life Insurance Needs from âMy Personal Financial Planner.â If you are currently single and childless, for the purposes of this activity, assume that you are 30 years old, have two children under age 5, are married, and earn $60,000 per year and redo the estimate of need. How would having a family change your need for life insurance?

Determining My Life Insurance Needs (page 353)

NOTE: Results here may differ slightly than when using Appendix A in text due to rounding.

Factors Affecting Need

Sample Only

Insert Your Own Figures

1. Income-replacement needs*

$823,219

2. Final-expense needs

$ 12,000

3. Readjustment-period needs

$ 19,000

4. Debt-repayment needs

$ 10,000

5. College-expense needs

$ 75,000

6. Other special needs

$ -

7. Subtotal (combined effects of items 1â6)

$ 939,219

8. Government benefits**

$390,370

9. Investment Assets Available

10. Current Life Insurance In Place

$ 98,000

11. Life insurance needed

$ 450,848

*Income Replacement Needs Calculator

Current Annual Income

$56,000

Percent of Annual Income To Be Replaced

75%

Annuity Amount (% desired of annual income)

$42,000

i (assumed interest rate

3.00%

n (number of annuity payments)

PV (present value) of Income Replacement Needs

$823,219

**Present Value of Social Security Benefits Calculator

Estimated Monthly Benefit (See Appendix B in Text)

$2,725.00

Estimated Annual Benefit

$32,700

i (assumed interest rate

3.00%

n (number of annuity payments)

PV (present value) of Government Benefits

$390,370

Mary and Harry Reser, 57 and 62, are looking ahead to retirement early next year. They are thinking about heading south to a cheaper and warmer state but haven't made a firm decision. Harry is the sole breadwinner and earns $64,543, plus an additional $8,169 from investments.

The Reser's two main concerns are longevity and taxes. "We want to take income from investments with the least amount of tax liability and make the money we have accrued last as long as we do," notes Harry. He also noted a concern about taking money out of tax-deferred plans in the correct manner to avoid IRS penalties.

The Reser's can be considered "millionaires next door," with an impressive net worth of $1,065,951. They have absolutely no debt and the following assets: $32,000 in a 2% bank passbook account, $347,365 in telephone stock; $224,901 in Harry's 401(k); $31,000 in an annuity; $202,685 in mutual funds; $23,000 in whole life insurance; their $190,000 home; and $15,000 of personal property.

No information was provided as to the type of mutual funds or the 401(k)'s asset allocation (i.e., the percentage of the account in different types of assets like stocks and bonds). Harry contributes 15% of his salary to the 401(k) and appears to have been doing this for many years. Neither spouse has an individual retirement account (IRA), however.

The Resers estimate that their monthly expenses total $1,500. The are concerned about the future cost of health care and note that, in retirement, "the biggest expense not in our current budget will be medical insurance." Currently, Harry shares part of the cost of health coverage with his employer but this coverage will end after he retires. His employer also provides short-term disability coverage and matches his 401(k) contribution up to the first 8% of pay.

The Reser's car and home have $500,000 and $300,000 of liability coverage, respectively. They do not own an umbrella liability policy. The Resers are thinking of tapping their $23,000 of life insurance cash value. "We do not feel that we need life insurance any longer," says Harry, "and will most likely cash them in."

Taxes were mentioned several times as a major concern. The Reser's taxable income is $50,543. If their adjusted gross income in retirement exceeds $44,000, 85% of their Social Security benefits will be taxed. Tax on Social Security is figured on what is known as "preliminary adjusted gross income." This figure includes all earnings, pensions, dividends and interest from investments, including tax-free municipal bonds, and half of a person's Social Security benefit.

The Resers do not have wills. They have no children and it is unclear who their heirs are.

1. Discuss the strengths and weaknesses of the Rese family's financial situation.

Their strength is their net worth of $1,065,951, their job contribute 8% of their 401k, they invest for the future and they have no debt.

Their weakness is that they can be penalize by the IRS, they have no kids so thereâs no will and they have no future health insurance.

2. Comments about Reser family's cash flow.

4. Calculate the savings required to reach Reser familyâs financial goals.

5. Recommend 3 to 5 action steps to improve Rese family's financial.

6. Recommended financial products such as bank accounts, insurance policies, and mutual funds for Reseâs family.

FINA 260 Lecture Notes - Lecture 9: Polskie Radio Program Iii, Co-Insurance, Managed Care

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