Is Self-Insurance Right for Your Business?

Is Self-Insurance Right for Your Business?

Open enrollment for 2016 benefits is coming to an end, and many businesses and workers are finding themselves with higher insurance costs than ever before. Many small businesses that offer health insurance plans may think that purchasing an expensive plan from an insurance carrier is their only option. But depending on your circumstances, self-insurance could help you save a significant amount of money on your premiums.

According to Healthcare.gov, self-insurance is a “type of plan … where the employer itself collects premiums from enrollees and takes on the responsibility of paying employees’ and dependents’ medical claims.” Insurance services such as enrollment, claims processing and provider networks can be handled in-house, but are more frequently managed by a third-party administrator (TPA) or an insurance company.

With self-insurance, the employer takes on much of the risk that insurance carriers typically assume. In an article on ZaneBenefits.com, author Christina Merhar outlines the difference between fully insured and self-insured health plans:

  • Fully insured (traditional) plans involve a fixed monthly premium paid to an insurance carrier, based on the number of employees enrolled in the plan. The carrier pays for health care claims, while enrolled employees and dependents pay any deductible amounts or co-payments for those covered services.
  • Self-insured (self-funded) plans involve fixed monthly costs such as administrative fees based on plan enrollment. Health care claims are paid by the employer, and costs vary from month to month, based on the services used by enrolled employees and dependents.

Because of the increased liability associated with self-insurance, employers have a couple of options to reduce their risk and potential costs under this type of plan. You can set up a health care reimbursement plan (HRP), in which the employer reimburses employees for individual eligible health insurance premiums. You can also purchase a stop-loss insurance policy, in which an insurance carrier is responsible for “unpredictable” losses that exceed your deductible limits, according to HCC.com.

Prior to the Affordable Care Act (ACA), self-funding employee benefits was considered too risky and complex for most small businesses, Carpel said. Although the concept has been around for years, self-insurance has traditionally been an option that only larger companies (those with 1,000 employees or more) and unions took advantage of. But the ACA’s “adjusted community rating” requirement has led to higher premiums across the board for traditional insurance, and small businesses are finding that self-insurance could save them money.

“Underwriters used to look at medical data and price premiums accordingly, [based on] the actual risk profile of a particular group of employees,” said Russ Carpel, CEO of Level Funded Health, a provider of self-insurance programs. “Now it’s an adjusted community-rating risk, spread out more broadly across hundreds of businesses in a certain community, [and] carriers are not allowed to look at medical data … [beyond] age, zip code and tobacco usage. That’s why small businesses are seeing 20 to 200 percent increases in premiums.”

But because of the Employee Retirement Income Security Act (ERISA) of 1974, this rating methodology doesn’t apply if your insurance plan is self-funded. Your rates can be based on your specific group, rather than on multiple groups in your local area.

“Under ERISA, if a group is fairly healthy with no critical illnesses … you would save 10 to 40 percent just by letting underwriters get a deeper look at medical data,” Carpel told Business News Daily.

Self-insured plans are also exempt from the excise tax on health insurance premiums under the ACA.

Is self-insurance right for your business? Before you make the switch, it’s important to take the time to conduct thorough research on risk projections, potential discounts and cost comparisons.

“Before self-insuring, an employer needs a feasibility study using its claims experience and projections,” said insurance professional Michael Turpin in an interview with BenefitsPro. “An employer also needs to review provider network discounts to ascertain the subtle differences between each insurer-based network, as well as independent, third-party, administrator-based networks. Employers also need to understand the nuances of provider contracting.”

Turpin also noted that very small employers (those with fewer than 100 employees) may still be too small to accurately predict their risk. Therefore, one major unexpected claim could put a huge wrench in your budget. However, it still might be a smart, cost-cutting option if your workforce has been historically healthy.

“It’s [unfortunate] to see small businesses get penalized by the government and big business,” Carpel said. “Most companies are paying 50 percent of employees’ premiums, so [self-insurance savings] don’t just benefit the business, but also the average Joe.”

Are Voluntary Benefits Like Pet Insurance Worth It?

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NEW YORK — When some 120 million employees start filling out their open enrollment choices this fall, they will be presented with the usual health, dental and vision options. But a slew of other voluntary benefits are now popping up, ranging from critical-illness coverage to pet insurance.

Some group deals your employer will offer are true group discounts. Others merely make it easier for employees to sign up for coverage but provide no real cost savings.

Spotting the difference between a good deal and merely a convenient one requires shopping around to know the market value of the policies you are considering, according to benefit consultants.

“Some of those policies are going to be a perfect fit and valuable, and other things are not going to be useful,” says Jennifer Benz, who runs her own benefits firm based in San Francisco.

Here is what you need to know before you sign up:

Supplements Matter

For employees with a high-deductible health plan, which now accounts for about 25 percent of the workforce, a supplemental policy like critical illness insurance (for cancer and other major illnesses) can be helpful as a hedge, said Karen Frost, senior vice president of health strategies and solutions for Aon Hewitt, a benefits consultant.

“It’s a really inexpensive way to fill a gap with high-deductible plans,” said Frost, adding that supplemental premiums can run as low as $5 a month and typically don’t require medical underwriting.

Many employers who offer high-deductible plans will provide some level of critical illness coverage and also hospital indemnity policies, which cover a flat dollar fee for hospital stays that would defray a person’s out-of-pocket costs, Frost added. Then employees can pay extra for higher levels of coverage.

The same applies to personal accident insurance as well as short- and long-term disability policies.

“We recommend accident more than life insurance, especially if you don’t have a family,” said Frost.

When plans like these are bundled together during open enrollment, workers with high-deductible plans choose them much more than when they are offered other times, with enrollment jumping from around 4 percent to 15 to 20 percent, Frost said.

Brokers Needed

With supplemental life insurance, long-term care insurance or any other complicated product that is typically sold by a licensed broker, employees should definitely talk to a professional before taking the leap.

Rates can vary by company and a person’s age, but adding four times your pay to basic coverage could cost in the range of $40 a month. An individual $250,000 “term” policy for a healthy 40-year-old man could cost $36 a month, according to ValuePenguin.com.

Many employers provide individual discussions with a financial professional over the phone as part of their educational outreach. Half of workers offered supplemental insurance at work buy into it, according to LIMRA, the life insurance trade association. “Although it’s not the sit-down with a broker, they do get insights,” said Frost. For instance, a young single person will need less life, but more accident coverage.

Group life insurance rates may be competitive in the open market. Rates for specialty products like long-term care insurance may not be.

For these, what is called a “group” is sometimes just individual policies packaged together, said Jesse Slome, president of the American Association for Long-Term Care Insurance.

“If you are healthy or married, you might get a better price as an individual,” said Slome.

A typical individual long-term care policy for a 55-year-old healthy woman could be $250 a month, according to Genworth (GNW), one of the leading providers.

Club Discounts

Your workplace may also be able to help you insure your car, your house and your pet, but don’t count on getting the greatest deal. An average pet policy, for instance, averaged $36 a month in 2014, and a group employer discount typically knocked off 5 percent, said Randy Valpy, president of the North American Pet Health Insurance Association.

“The convenience of payroll deduction is where those begin and end. Potentially you’re getting a discount, but it’s not really something I’d consider a generous benefit,” said Hall Kesmodel, consultant at Sequoia, an employee benefits firm headquartered in San Mateo, California.

Why You Should Buy Longevity Insurance

Senior man using digital tablet at breakfast tableIt’s a dirty trick of modern life: escaping disease and accident to live long — only to run out of money before the end.

With the withering of old-fashioned pensions combined with longer lifetimes and baby boomers flooding into retirement, the insurance industry is churning out a raft of new, deferred-income annuity products to provide guaranteed income later in life for a big payment upfront or over time. And new government rules allow investors to buy these products with money built up in tax-favored accounts, such as IRAs and a 401(k).

DIAs seek to overcome drawbacks in “longevity insurance,” which has been around for decades without catching on.

Along with their cousins, immediate-income annuities, which start smaller payouts immediately after purchase, DIAs can provide dependable retirement income for life.

“Go back a generation or two. Did anybody not like having a pension?” says Douglas Dubitsky, vice president of retirement solutions at The Guardian Life Insurance Company of America. “We are saying, ‘Well, you can create that yourself.'”

DIAs “are a good thing,” says Anthony Webb, senior research economist at the Center for Retirement Research at Boston College. “They enable households to insure [against] the risk of living exceptionally long.”

DIA sales are up. LIMRA International, the insurance trade group, says DIA sales reached $2.7 billion in 2014, up from about $1 billion in 2012. That’s still a minuscule share of the multi-trillion-dollar financial services market, but many experts expect sales to continue growing as consumers catch on to the new offerings.

The old-fashioned longevity policy, which is still available as a plain-vanilla DIA, is simple. For example, you could spend $100,000 to buy a policy at 65, and 20 years later start receiving an income as high as $50,000 to $60,000 a year. The high payout is possible because the insurer has that 20-year “deferral period” to grow the initial $100,000 before payouts begin, and because many policyholders will die before they receive much income, if any. Once spent, the premium is gone for good.

Old-style longevity insurance never really caught on, largely because consumers didn’t like giving up that big upfront payment for an income stream they might never receive.

In the past few years, insurers have addressed these concerns by offering optional features to allow the income to start earlier — at 65 in many cases. With add-on features, the income stream, once it begins, will rise with inflation. Other features allow joint coverage for a couple, and some return the premium to survivors if the policyholder dies before payouts start, or before income received equals the initial premium. Providers say many people are purchasing DIAs in their 40s or 50s, with payouts to begin in their 60s or 70s rather than 80 or 85.

“We have a lot of clients who think of it as a health care coverage possibility” for old age, says Liz Forget, executive vice president of MetLife Retail Retirement & Wealth Solutions.

Add-ons, of course, come at a price: a smaller payout. One firm, for example, offers a 64-year-old man $55,584 a year at age 85 for a $100,000 premium. Add a feature to return the premium to heirs if the policyholder dies early, and the payout falls to $36,228.

Among the add-ons, premium return has proved the most appealing to purchasers, says Chris Blunt, president of the investments group at New York Life Insurance Co. Inflation protection, which can reduce the payout substantially, has less appeal, being adopted by only about 10 percent of policyholders.

That shows many consumers have things backward, Webb says. “Inflation protection is expensive but probably worth it. Return of premium is definitely not worth it.”

Annuities generally have fees associated with them that make them more expensive than comparable mutual funds or [exchange-traded funds], and this negates any advantage in many cases.

That’s because the whole idea is to insure against the risk of living a long time. If you die soon after buying a policy, you won’t face that risk, but live a long time and inflation can chew up the buying power of your DIA payout.

DIAs have their critics, too. DIA critics typically worry that policies are hard to understand and that not enough policyholders will live long enough to make them pay off. David Weinbaum, associate professor of finance at Syracuse University, warns of costs embedded in DIA-payout calculations.

“Annuities generally have fees associated with them that make them more expensive than comparable mutual funds or [exchange-traded funds], and this negates any advantage in many cases,” he says. “In other words, they are just too expensive for what they are, and most investors would be better served in traditional low-cost index funds. I would recommend that most people not invest in annuities at all.”

Experts who do recommend DIAs generally say a purchase shouldn’t exceed 10 to 30 percent of one’s retirement assets.

In July 2014, the U.S. Treasury department issued new rules permitting DIA purchases with IRA and 401(k) assets, in a “qualified longevity annuity contract,” or QLAC. This allows investors to tap what for many is the largest or only source of retirement funds. And the rules also allow the policyholder to wait until age 85 to begin taking required minimum distributions that IRAs and a 401(k) normally require after age 70½. The maximum QLAC purchase is $125,000, or 25 percent of IRA and 401(k) assets, whichever is smaller. (Note that if your 401(k) does not offer a DIA, you would have to first transfer the funds to a rollover IRA, which cannot be done until you have left the employer.)

These new rules are gradually being reflected in product offerings. “Advisers are very interested,” Forget says.

While a DIA can be a useful tool, experts say that these days, some potential customers are holding off in hopes that higher interest rates over the next few years will make DIA payouts more generous.

Blunt says it’s true that premium pools largely hold interest-paying securities likecorporate bonds. The more the insurer earns on the pool, the more likely the firm will offer a larger payout for a given premium. “If you had a sense that rates were going to skyrocket in the short term, then you are better off waiting,” Blunt says.

But he and other experts argue that what would be gained from a modest increase in interest rates could be more than offset by the payout cut from shortening the deferral period by waiting to buy.

“Most of the time, the people who have been waiting [to purchase a DIA] got crushed in the last six or seven years,” Blunt says. Some DIAs offer a recalculation option or dividend payment to counter the effect of rising rates. And Dubitsky suggests buyers make several DIA purchases over time to improve odds of benefiting from higher rates later.

For those who live long enough, a DIA can be a good investment, as the payout relative to the premium far exceeds what can reasonably be expected from bonds, or even stocks. It would take a double-digit investment return for a $100,000 nest egg to grow enough to spin off $50,000 a year after 20 years.

A DIA purchase should be considered carefully, as payouts and other terms can vary considerably between providers. Many major life insurers offer DIAs. Online services like WebAnnuities Insurance Agency provide quotes, and financial services firms like Vanguard and Fidelity offer plans from multiple insurers. But before buying, it may be worthwhile to talk to a trusted insurance broker who can evaluate products from a variety of providers.

Taking the Really Long View on Long-Term Care Insurance

Long-Term Care Insurance PolicyNEW YORK — As a financial planner who also sells long-term care insurance, Regi Armstrong always planned to buy a policy at some point. The only question was when.

The Florence, South Carolina, resident and his wife made the leap early, when they were still in their 40s, and today he is glad they did. Three years into paying premiums of $3,800 a year, his wife, now 49, got diagnosed with a serious auto-immune disorder that would have disqualified her.

Life is fickle. You don’t know when you are going to get sick.

“Life is fickle,” says Armstrong, who is 50. “You don’t know when you are going to get sick.”

Of the 4.8 million people who have long-term care insurance, the average age to purchase it is 57. More than 80 percent of buyers are 50 or older, according to financial services research group LIMRA.

Among the chief arguments for buying long-term care insurance early is that you could, at any time, develop an illness that would disqualify you while forcing you to incur tremendous expenses.

Care costs an average of $46,000 a year in the home and $80,000 in a nursing home, according to a survey from Genworth (GNW), one of the largest long-term care insurers.

The danger in waiting jumps by age, said Jesse Slome, president of the American Association for Long-Term Care Insurance, a trade group.

Between ages 60 and 69, 27 percent of individuals who applied were rejected for health reasons. Go up a decade, and the decline rate is 45 percent. But below 50, it is just 14 percent.

Comparing Costs

The other main concern is price. The earlier you sign up, the less you pay.

A 45-old-woman would pay on the order of $215 a month for a fairly typical policy from Genworth. A 55-year-old would pay $250.

But wait a few years and the numbers multiply. Armstrong regularly prices coverage for clients who are trying to see if they can get better deals. His rule of thumb is that if a policy is older than two years, it is hard to improve on it.

One client, who is now 66, is paying about $1,000 a year for a policy he got about 15 years ago. “He’s paying half of what I’m paying, and he’s 16 years older,” Armstrong said.

According to a study by insurance carrier John Hancock, a 50-year-old would pay 15 percent less over a lifetime of premiums than a person who started a policy at age 55, while a 40-year-old would pay 40 percent less than that 55-year-old.

Group policies can offer more savings. Most carriers have stopped offering them, although Genworth is starting to expand in that area again, said Chris Conklin, senior vice president of product development.

(The premium on my own group policy, which I bought into a few jobs ago when I was in my 30s, hasn’t yet cracked $25 a month after 10 years.)

Benefit of Planning

The argument to buy early isn’t likely to sway most people because long-term care insurance itself is pretty much a non-starter for non-planners, says Robert Applebaum, professor of Gerontology at Miami University in Oxford, Ohio.

For one thing, it is a costly monthly reminder of all the bad things that can befall you before you die — even more of a downer than thinking about life insurance.

Also, policy parameters and the companies offering them change often, so it isn’t always easy to compare deals. Some carriers are now bundling long-term care insurance features with life insurance or annuities, Applebaum said.

These are increasing in popularity, according to LIMRA, while stand-alone long-term care policies are declining.

Many people don’t like the idea of paying premiums for years and never getting the benefit, either because they won’t need it or because they won’t be able to keep up payments.

Slome’s suggestion for managing costs: Buy a policy that is expandable. Start with a limited benefit when you are young to keep premiums low, and then pay up as you age.

Rental Car Insurance From Your Credit Card

A Dollar Thrifty Car Rental center.Q. I’m going to rent a car when traveling for Thanksgiving. I understand that my credit card will provide rental car insurance. How does this coverage work? –E.S., Hanover, Pennsylvania.

A. Your own auto insurance policy most likely covers rental car damage and liability, up to the same limits as for your own vehicle, and that insurance kicks in first. But your credit card can fill in the gaps, such as the deductible. The coverage varies by card issuer and requires certain steps.

All Visa, Discover and American Express cards and some MasterCards, provide rental car coverage. To qualify, you must reserve the rental car with the same credit card you use to pay for it. You must also decline the rental company’s supplemental insurance and collision damage waiver.

The card company may limit coverage to 15 or 31 days, and it may not cover cars rented in certain countries, according to Card Hub, which provides credit card rates and other information. Most card companies don’t cover trucks, and American Express doesn’t cover some full-size SUVs, such as Chevy Suburbans and Tahoes, GMC Yukons and Ford Expeditions.

How to Get Rid of Private Mortgage Insurance

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If you want to buy a house but can’t pay 20 percent of the cost upfront, a lender will want you to have private mortgage insurance. PMI protects the lender from loss if you can’t make payments on a loan with less than a 20 percent down payment.

PMI increases a borrower’s monthly mortgage payment, which is why most borrowers don’t want to shoulder it. Short of saving up a sufficient down payment, however, there are only a few ways to avoid PMI or get rid of it.

1. Take Out a Second Mortgage

One way to avoid PMI is to take out what’s sometimes called a piggyback loan or an 80-10-10. In this scenario, you’d take out a mortgage for 80 percent of the value (so it doesn’t require PMI), make a 10 percent down payment and take out a second loan for the remaining 10 percent. You could borrow that 10 percent in the form of an installment loan or a home equity line of credit.

“It’s not always a good idea,” said Casey Fleming, a mortgage adviser for C2 Financial Corp. and the author of “The Loan Guide.”

“If you use two loans, you will avoid mortgage insurance, but you should go in with a plan to get rid of the second mortgage as soon as you can,” Fleming said. “Second mortgages are expensive.”

Whether an 80-10-10 is a smart option for you depends on a lot of factors, but it’s something to consider.

2. Have Your Lender Pay for It

Lender-paid mortgage insurance is what it sounds like: Your lender pays the insurance company instead of you. The lender will bump up your interest rate to cover the cost, so even though you’re not paying the mortgage insurance directly, you’re still paying for it by way of interest.

“The justification for doing this is [the homeowner] can deduct all of the interest, where mortgage insurance is not readily deductible,” Fleming said.

The important thing to note here is you can get rid of mortgage insurance, but you’re stuck with the interest rate for the life of the loan.

3. Ask Your Lender to Remove It

The Homeowners Protection Act requires lenders to remove PMI from a loan after the loan balance has fallen to 80 percent of the home’s original purchase price, but there’s a way to get rid of it quicker. Keep an eye on your home’s value. When your home appreciates in value, your loan balance becomes a smaller percentage of your home’s total value. Once your remaining loan balance is at or below 80 percent of your home’s current value, you can ask your lender to remove PMI.

“As soon as you believe you’ve got 20 percent equity, that’s the point at which you should think about contacting your lender,” said Joe Parsons, senior loan officer at PFS Financing in the Northern California suburb of Dublin. You will need to pay for an appraisal, and depending on the kind of appraisal your lender requires and where you live, that appraisal could cost several hundred dollars. Parsons recommended using a real estate site such as Zillow (Z) to keep track of your home’s value. That can help avoid wasting money on an appraisal when your property may not yet have appreciated enough to get rid of PMI.

Parsons said he has encountered people who have paid PMI for years longer than they needed to, so it’s important borrowers know to pay attention to property values and ask their lenders to remove mortgage insurance when the time is right.

Another thing to know: Most contracts require the borrower to pay PMI for at least two years, regardless of home value, Fleming said.

4. Refinance

Asking your lender to remove PMI isn’t always an option. For example, FHA loans require mortgage insurance for the life of the loan. In that case, the only way to get rid of it would be to refinance. You could also refinance a conventional loan with insurance to a loan without it.

“In some cases where the rates have decreased, then it can make sense to refinance, even if the rate is only dropping a quarter or half a percent,” Parsons said. The lower rate, combined with the savings of eliminating PMI, can save the borrower money. Keep in mind there are costs associated with refinancing, and you reset the clock when you take out a new loan.

Parsons and Fleming mentioned refinancing as a way to get rid of insurance only when mortgage rates have gone down.

“I wouldn’t refinance just to get rid of the [PMI],” Parsons said. “Usually there’s a cheaper way.”

Another way to avoid mortgage insurance for U.S. military veterans is to take out a VA loan, but that’s not an option for every borrower.

There are dozens of factors to consider when deciding how and when to borrow to buy a home. As you figure it out, one of your top priorities should be to buildgood credit, because it will heavily factor into your mortgage approval and pricing.