Qualified vs Non-Qualified Policies

Qualified vs Non-Qualified Policies

In the insurance world, the terms qualified and non-qualified indicate whether a specific retirement plan is qualified for advantages in tax.

An insurance policy that is often classified as qualified or non-qualified is the long term care insurance. A long term care insurance classified as qualified is taken as an itemized deduction until “certain limits”, provided that premiums and other related medical expenses that are unreimbursed are more than 7.5% of adjusted gross income.

The said “certain limits” are specified in the data from year 2002 as follows:
• $240 premiums annually for persons with ages 40 or below;
• $450 premiums annually for persons with ages 41-50;
• $900 premiums annually for persons with ages 51-60;
• $2,390 premiums annually for persons with ages 61-70;
• And $2,390 premiums annually for persons with ages 71 and above

The above amounts will increase each year based on Medical Consumer Price Index.

A policy to be considered qualified is required to comply with the federal requirements as stipulated in IRC Section 7702B(b). Long term care contracts must be curing, therapeutic, preventive, mitigating, treating, rehabilitative services, personal care and maintenance services, and necessary diagnostic. It must also be needed and requested by chronically ill persons.

The IRC in Section 7980C(c) stipulates that qualified long term care insurance plans should be handed over to the insurance policyholder within a period of 30 days as of the date of approval. It also further requires a carrier of the policy who denies a particular claim to furnish written explanation for the reasons of his denial. Moreover, he is also required to release all necessary information in line with the denial at a period of 60 days from the date of denial.

Additionally, benefit dollars that have been paid out on qualified long term care policies are considered non-taxable income subject to particular limitations.

On the other hand, plans considered to be unqualified contain unclear tax treatments. According to law, premiums paid to non-qualified long term care insurance policies cannot be deductible, and its corresponding benefits may be required to be integrated in taxable income. Experts suggest that before purchasing a non-qualified long term care insurance policy, one must first consult his tax adviser. A person who decides to purchase non-qualified insurance of this type is required to affix his signature in a statement of disclosure addressing such purchase.

Although life insurance is already considered tax-advantaged, financial plans that make use of life insurance is viewed as non-qualified. This is due to the fact that financial plans do not carry tax advantages with them.

The greatest example of this is the split-dollar arrangement, a financial plan that specifies how to pay a certain life insurance. The fact that the life insurance plan incorporates tax advantages doesn’t mean that it is also held by the split-dollar arrangement because such arrangement is non-qualified in the first place. However, non-qualified plans are able to decrease taxes to be paid. A deferred compensation plan, for example, can postpone and reduce income taxes that are due. The greatest advantage of non-qualified plans is its intrinsic characteristic of not needing to abide in various regulations by the IRS for it to retain its status.

Premium to Surplus Ratio

Premium to Surplus Ratio

In insurance, the term surplus characterizes diverse meanings. A surplus account signifies an insurance company’s assets less its liabilities. The term surplus lines, in the regular insurance market, means an insurance coverage that is unavailable from a company that is admitted in the said market. In the reinsurance market, surplus lines imply a contract between the ceding company and the reinsurer that has an agreement based on the former’s line guide, in which case the reinsured amount is expressed in number lines. The number line is the retention amount’s terms of multiples.

Example, a ceding company issues an insurance policy for $50,000 and maintains $12,500, or one-fourth of the total amount. The outstanding $37,500 is then transferred to the reinsurer company. This illustrates the three line surplus as the insurer transfers an amount line to the reinsurer three times more than how much he retains.

Insurance companies measure its financial strength by way of surplus adequacy ratio, which is computed by dividing its adjusted surplus by the adjusted liabilities.

On the other hand, an insurance premium is the term used in insurance to indicate the price of the insurance protection intended for a particular risk in a given period. Likewise, the term premium balances represents premiums in the course of collecting them, agent’s balances, and booked installments deferred and outstanding, as well as bills receivables that are obtained for plain premiums in addition to retrospective premiums accrued.

Also, premiums earned denote premium sums paid in advance. These premiums are earned in view of the principle of the passage of time without even gaining resultant claims. For instance, a five-year policy paid in advance is considered a partly earned premium on the first year it subsisted. In contrast, premiums unearned are those portions of the premium that is applicable towards the unexpired section of the period of the policy.

Moreover, net premium is the amount obtained by deducting the agent’s commission from the premium amount. It is the premium sum required to cover the losses anticipated before considering to deal with other several expenses. Net premiums earned are the modification of new premiums written with the intention of increasing or decreasing the liability of the company for premiums unearned throughout the year.

An insurance company that increases its business each year will often have earned premiums that are lesser than the premiums written. Having this higher volume, premiums are then viewed as fully paid since the creation of the said policy. This is intended for the company to establish premiums that represent the unexpired provisions of the specified policies. However, net premiums written characterize gross premiums that are written, direct, and assumed in reinsurance, minus the reinsurance ceded.

A ratio to measure the insurer’s ability to take in losses that are above the average as well as his financial power is called the premium to surplus ratio. It can be computed through dividing the net premiums written by the surplus. For instance, a business having $6 of net premiums written for each $3 surplus has a premium to surplus ratio of 2-to-1. A lower ratio depicts greater financial strength for the company. As a rule, state regulators set up less than 3-to-1 premium surplus ratio to be adhered by insurance companies.

Policyholder Surplus

Policyholder Surplus

In general, surplus refers to a number in excess of what is needed. It means the quantity that remains when the need or use of a particular supply is gratified. It may also be termed as excess. In the government, a surplus indicates a figure in public treasury funds that is larger than what is necessitated for regular government purposes at a given time. Surplus is also a term widely used in economics for various related measures. In accounting, surplus depicts a different meaning. It is the difference obtained by deducting the company’s total liabilities from the total assets; the remainder of receipts in excess of expenses; and the difference between a company’s net assets and the capital stock’s face value.

In insurance, the term surplus characterizes diverse meanings. A surplus account signifies an insurance company’s assets less its liabilities. The term surplus lines, in the regular insurance market, means an insurance coverage that is unavailable from a company that is admitted in the said market. In the reinsurance market, surplus lines imply a contract between the ceding company and the reinsurer that has an agreement based on the former’s line guide, in which case the reinsured amount is expressed in number lines. The number line is the retention amount’s terms of multiples.

Example, a ceding company issues an insurance policy for $50,000 and maintains $12,500, or one-fourth of the total amount. The outstanding $37,500 is then transferred to the reinsurer company. This illustrates the three line surplus as the insurer transfers an amount line to the reinsurer three times more than how much he retains.

Insurance companies measure its financial strength by way of surplus adequacy ratio, which is computed by dividing its adjusted surplus by adjusted liabilities. Adjusted surplus is the sum of statutory surplus, asset valuation reserves, and interest maintenance reserves. Adjusted liabilities are the difference between statutory liabilities and interest maintenance reserves less asset valuation reserves. A high ratio for surplus adequacy depicts superior financial strength used to cover benefit compensations.

Meanwhile, a policyholder’s surplus means the remainder of the assets of an insurance company after deducting all of its liabilities to be able to provide the benefits expected to policyholders. It is the insurer’s net worth as shown in its financial statements. It is considered as a financial support to protect the policyholders against unexpected predicaments. Some companies include the following accounts in its policyholder’s surplus:
• Minority interests
• Stockholder’s equity comprising of common stock, other comprehensive income, additional paid in capital (APIC), and retained earnings; in which case the equity must not include minority interests
• An equity substitute, specifically hybrid capital

To compute for policyholder surplus, the total paid in capital, paid in surplus, and contributed surplus, adding in contingency reserves accomplished voluntarily, are added. It can also be computed by subtracting total liabilities from total assets that have been admitted.

A change in policyholder surplus portrays a change in percentage of the previous year’s policyholder surplus, drawn from investment gains, operating earnings, contributed capital at net, and similar other sources.

Out-of-Pocket Limit

Out-of-Pocket Limit

When we hear of a health insurance covering 100% of all costs, we are amazed. Although it is okay to pay for higher insurance premiums, it is not genuinely sensible all the time. A person can be paying an insurance coverage with costs that outweigh the benefits accompanied in it. There are cases when you do not need all of what your expensive insurance covers. And it is unreasonable to incur costs on things you no longer want. Thus, a coverage that doesn’t pay everything but compensates only for certain significant areas may turn out to be a worthy deal.

This idea paved a way for insurance companies to impose certain limitations on its coverage.

Insurance plans that contain stricter constraints and limitations usually include those in line with Health Maintenance Organizations (HMO). This is due to the precarious tendering of care benefits this organizations offer. Generally, out-of-pocket costs are considered as the most conventional form of insurance limitations.

Out-of-Pocket costs indicate the costs that an individual has paid out of his own pocket for a certain health care, even if such person is paying an insurance premium. These may include coinsurance, annual deductibles, and copayments for the medicines and the health professional. Deductibles comprise of amounts a consumer pays ahead of the payments made by the insurance company; while coinsurance represents sums paid after the payment of deductibles. Coinsurance often appears being a percentage from the expenses covered in excess of the deductible. For instance, a 10% coinsurance signifies that a person pays 10% of all covered expenses in excess of the deductible.

When out-of-pocket costs are high, the insurance premiums paid may turn out to be of no value since it still doesn’t lessen the associated financial risks. If these are low, then such premiums are surely costly. Therefore to be superior, these out-of-pocket costs must arrive at the average level only.

Consequently, consumers should be acquainted with the out-of-pocket costs covered by an insurance policy. This may include costs for outpatient visits, drug prescriptions, hospital stays, physician’s services, and other related costs. Plans with a wide range of out-of-pocket costs are presumed to have lower premiums since its members use only a few of its services.

Health Insurance plans enclose a specified limit as to the out-of-pocket costs to be covered. This is called the insurance out-of-pocket limits. It is recognized in various names such as annual out-of-pocket maximums, and OOP maximum. This is the highest required amount to be paid by consumers as regards to their health care costs. Each time an individual reaches the plan’s out-of-pocket limit, the company will then indemnify 100% of costs regarded as necessary for a person’s health.

Out-of-pocket limits help protect a person from additional expensive costs and thus limit the risk of high health care costs. These costs must be annually contained in the Explanation of Benefits (EOB) document to be valid. However, some companies offer fake limits, which in turn compel consumers to pay more than the amount that is supposed to be covered.

Other Income/Expenses

Other Income/Expenses

In business, income refers to the money and other revenues acquired in the sale of products as well as services in the ordinary course of business operations. Plain income is referred to as gross income; if it is decreased by business expenses, costs, and write-offs associated with it, it is called net income. Example of income for a merchandising business is sales; for a dentist is dental or professional income; and for an apartment is rental income. Income is displayed in the company’s income statement, or statement of profit and loss, a business financial statement intended to be made for a particular period, say monthly or annually. Income in business indicates the presence or loss of money, the main fact that concerns managers, business investors, and the public in the course of the business’ life. An income statement is a corresponding statement that goes with the balance sheet, another financial statement showing the company’s financial position.

On the other hand, the term expense, or expenditure, denotes a company’s outflows of money and other assets while in the process of production, on top of other purposes. It is used to pay a person or company for a particular item, service, and other various costs. This is deducted from the gross income to arrive at the net income of the business. An expense occurs when an asset is utilized or a particular liability is acquired. An expense reduces the owner’s equity in relation to the so called accounting equation: Assets = Liabilities + Owner’s Equity. Rent is considered an expense of a tenant, while office supplies is expense to a business establishment. The basic needs of a person, such as food, housing, and clothing are viewed as expenses. Moreover, if something costs too much, it is called expensive; and inexpensive, if it costs a little. Like income, expense is recognized for a particular period.

Aside from income and expenses in the ordinary course of business, there are also those considered as other income and other expenses. Other income is earnings gained other than those from the ordinary operations of a business. This may comprise of gains from foreign exchange, investment interest, profit acquired from non-inventory assets sold, and rent income for business not centered in leasing operations. Likewise, other expenses cover certain costs and expenses in line with activities not included in the central operations of a company. Other expense includes postage, stipends, freight, and publication costs.

However, in insurance, income portrays all cash flow sources. It is usually stated annually in business reports.

A person who became incapable of executing certain tasks or occupational duties, either for a short while or long-standing, or for the rest of his life, may apply for disability income insurance. This policy is usually tax free and is intended to replace at least a portion of the income that could have been earned had the person not contracted disability.

The term other income/expenses in insurance stands for miscellaneous operating income sources that are in line with income for premium finance and uncollectible premium charges, as well as reinsurance business.

Net Underwriting Income

Net Underwriting Income

In business, income refers to the money and other revenues acquired in the sale of products as well as services in the ordinary course of business operations. Plain income is referred to as gross income; if it is decreased by business expenses, costs, and write-offs associated with it, it is then called net income.

Example of income for a merchandising business is sales; for a dentist is dental or professional income; and for an apartment is rental income. Income in business indicates the presence or loss of money, the main fact that concerns managers, business investors, and the public in the course of the business’ life, since a decision to support, invest, or continue in a business relies on its ability to generate higher income.

Income is displayed in the company’s income statement, or statement of profit and loss, a business financial statement intended to be made for a particular period, say monthly or annually. An income statement is a corresponding statement that goes with the balance sheet, another financial statement showing the company’s financial position.

However, in insurance, income portrays all cash flow sources. It is usually stated annually in business reports.

On the other hand, there is a practice in insurance called underwriting. It is the practice of reviewing and evaluating probable insured persons or groups to assess them of possible risks in order to arrive at the exact premium. Risks are then classified according to their extent of insurability so that correct premium rates are designated. Risks that do not qualify are therefore discarded. The person who does the underwriting is labeled as an underwriter.

The underwriting practices are contained and detailed in the underwriting guide. Other names for this is underwriting guidelines, underwriting manual, or manual of underwriting policies. This provides accurate guidance for underwriters in analyzing the different kinds of applicants.

Underwriting income is the difference between earned premiums and the expenses in settling claims such as losses and paid dividends. Simply put, it is the total income generated by an insurance company. It is viewed as the revenue from premiums on the company’s various insurance policies. To illustrate, an insurance company having $5,000,000 revenues from premiums, and the cost to settle its claims is $3,000,000, its income then is $2,000,000.

Net underwriting income is composed of loss adjustment expenses, dividends for policyholders, expenses for loss-adjustment, and earned net premiums minus losses incurred.

Expenses in underwriting that are attributable to net premiums written are called underwriting expenses incurred. These include salaries, advertising costs, and net commissions.

Additionally, underwriting expense ratio represents the portion of a business’ net premium written that move towards its underwriting expenses, including brokers’ and agents’ commissions, salaries, employee benefits, municipal and state taxes, and similar costs of operations. This ratio can be computed by means of dividing the underwriting expenses by the net premiums written. Expense ratios vary according to the line of business involved. Group health insurance often have low expense ratios, while machinery insurance have high expense ratios because of its need to hire skilled inspectors.

Net Premiums Written to Policyholder Surplus (IRIS)

Net Premiums Written to Policyholder Surplus (IRIS)

In insurance, a policyholder’s surplus is the remainder of the assets of an insurance company after deducting all of its liabilities to be able to provide the benefits expected to policyholders. It is the insurer’s net worth as shown in its financial statements. It is considered as a financial support to protect the policyholders against unexpected predicaments. Some companies include the following accounts in its policyholder’s surplus:
• Minority interests
• Stockholder’s equity comprising of common stock, other comprehensive income, additional paid in capital (APIC), and retained earnings; in which case the equity must not include minority interests
• An equity substitute, specifically hybrid capital

To compute for policyholder surplus, the total paid in capital, paid in surplus, and contributed surplus, adding in contingency reserves accomplished voluntarily, are added. It can also be computed by subtracting total liabilities from total assets that have been admitted.

A change in policyholder surplus portrays a change in percentage of the previous year’s policyholder surplus, drawn from investment gains, operating earnings, contributed capital at net, and similar other sources.

On the other hand, an insurance premium is the term used in insurance to indicate the price of the insurance protection intended for a particular risk in a given period. Likewise, the term premium balances represents premiums in the course of collecting them, agent’s balances, and booked installments deferred and outstanding, as well as bills receivables that are obtained for plain premiums in addition to retrospective premiums accrued.

Also, premiums earned denote premium sums paid in advance. These premiums are earned in view of the principle of the passage of time without even gaining resultant claims. For instance, a five-year policy paid in advance is considered a partly earned premium on the first year it subsisted. In contrast, premiums unearned are those portions of the premium that is applicable towards the unexpired section of the period of the policy.

Moreover, net premium is the amount obtained by deducting the agent’s commission from the premium amount. It is the premium sum required to cover the losses anticipated before considering to deal with other several expenses. Net premiums earned are the modification of new premiums written with the intention of increasing or decreasing the liability of the company for premiums unearned throughout the year.

An insurance company that increases its business each year will often have earned premiums that are lesser than the premiums written. Having this higher volume, premiums are then viewed as fully paid since the creation of the said policy. This is intended for the company to establish premiums that represent the unexpired provisions of the specified policies. However, net premiums written characterizes gross premiums that are written, direct, and assumed in reinsurance, minus the reinsurance ceded.

A ratio that measures the business’s net retained premiums that are written subsequent to the reinsurance ceded and assumed proportionate to its surplus is called net premiums written to policyholder surplus (IRIS). It indicates how much the company is exposed to errors in pricing in its existing book.

Loss and Loss Adjustment Expenses

Loss and Loss Adjustment Expenses

In finance, a loss refers to a negative income. It is the state that transpires when the business does not succeed in generating sufficient returns to cover all the expenses in line with its operations. Thus, costs exceed revenues resulting to a negative income.

In insurance, losses incurred, or simply pure losses, are the net losses paid at the current year along with the change of loss reserves from the previous year. Losses outstanding characterize the losses incurred but not yet paid, while losses paid represent the sums paid to claimants to settle an insurance claim.

Furthermore, in insurance, there exists the so called loss adjustment expenses. This represents expenses incurred for investigating, defending, managing, and settling of losses. This may include costs to acquire police reports and other court costs alike. This cost no longer needs to be allocated to a specific claim. However, if this is allocated, then it is called “allocated loss adjustment expenses” (ALAE). Loss adjustment expenses do not take into account unallocated loss adjustment expenses. The latter includes salaries, employee costs, office costs, and similar overhead expenses.

The account loss and loss-adjustment expenses contain the reserves in total for the losses unpaid, plus other supplemental reserves set up by the business. It embodies the total business lines as well as all its accident years. Companies having significant increases in such reserves relative to its surplus face higher risks for probable deficiencies. This is due to the reserve’s inadequacy in meeting future claim settlements. However, many companies believe that reserves for loss and loss adjustment expenses are sufficient enough to pay off ultimate costs for claims and losses until its present time.

If the multiple of the reserves for losses is higher as against surplus, a business’s solvency is likely to be more dependent on having and sustaining the adequacy for reserves. This scenario can be identified using the loss and loss-adjustment reserves to policyholder surplus ratio.

The estimation of loss and loss adjustment expenses is based on the undiscounted source, which employs statistical analyses, distinct case-based valuations, and other actuarial procedures. The adjustments for these estimates are included in the expenses that took place in the same period as it was adjusted. Additionally, claim payments for the future is projected and reported based on the business’ historical data as well as the loss data of the industry it belongs.

Nonetheless, some reserves may not coincide with the assumptions utilized in the estimation. This may be due to several uncertainties, such as changes in economic and legislation conditions, judicial decisions, patterns in claims settlement, and reporting models.

Companies may fix a specific fee for every claim for in-house litigation. Half of this fee is then allocated for the expenses at the beginning of a litigation, while the other half is for those at the close of such litigation. This fees are determined based on the estimated number of litigated claims, as well as the expected schemes at the start of the year. It also takes into account the company’s proposed budget for in-house attorneys. These amounts are required to be adjusted once in every quarter basing from the company’s actual experience.

Leverage or Capitalization

Leverage or Capitalization

In business, leverage generally refers to the extent on how companies utilize borrowed funds to generate gains or losses. Example, companies may borrow funds to make its equity in leverage; may purchase fixed assets to make its revenue in leverage; or make use of the so called derivatives to leverage. Leverage can demonstrate the extent as to which of the company’s debts or activities are funded by its creditors as against its owners. Leverage is also referred to as capitalization.

Leverage can result to higher investment returns to stockholders. However, high-leveraged companies are exposed to higher risks of losses such as bankruptcy if it is incapable of paying its liabilities regardless of its high surplus.

Financial leverage ratio, or debt/equity ratio, measures the company’s reliance on borrowed funds to finance the company’s assets. It is computed by dividing the company’s total liabilities by its total equity. A company that has a high debt/equity ratio may face problems in paying the principal amount and the interest since it is at the same time borrowing more funds.

On the other hand, insurance leverage represents the effect of the so called insurance reserves on the company’s equity returns. Insurance companies, as well as reinsurance ones, can attain advantage if settled on great leverages. Insurer companies usually have capital accounts and surplus as a small percentage of the total insurance amount it is qualified to sell. Given that the received premiums in addition to the investment income on reserves for losses are sufficient enough to gratify the company’s expenses and losses, leverage can be attained undeniably.

However, there have been a number of debates whether leverage in insurance companies is to be considered as either operating leverage or financial leverage. Operating leverage occurs when insurers use debt or other debt instruments to gain financial assets. These can take form of bonds. On the other hand, financial leverage evaluates the value of debt or other debt funding utilized by the insurer to come across with its wide-ranging capital necessities, as long as asset matching or liability matching is strong and the risk management approach used is effective. There is a huge difference as to the credit effect between operating leverage and financial leverage regarded funding.

Standard & Poor’s, a US based company on financial services, conducted a concise investigation to this matter. It established an explicit definition of related terms to expound its statement underlying the choice to view fund sources as operating leverage or financial leverage in insurance.

It defined financial leverage as the one accomplished by generating activities that could result to increase cash by way of debt or debt instrument issuance; a distinct pool of assets or simply assets and hedging instruments that has cash flows ample enough to pay the debt principal, as well as the returns; and insignificant risks associated to other assets of the paying issuer. Examples of these are lending securities, notes in medium term periods, funding agreements, and group insurance commissions (GIC). Alternatively, it gave meaning to operating leverage as a type of debt incurred while in the course of asset funding. Debts not considered to profit from being treated as operational leverage would then be regarded as financial leverage.

Investment in Affiliates

Investment in Affiliates

In insurance, the term investment in affiliates represents stocks, bonds, collateral loans, and short term or interim investments in affiliated properties as well as real estate properties held by the business.

Stocks refer to the original paid-in capital of a business either paid by stockholders or invested by the business’ founders. It functions as a form of security for the business creditors since it cannot be easily withdrawn by investors. A stock’s value and quantity may fluctuate as it is traded in the stock market. Bonds refer to debt instruments that are issued for over a year to increase capital through borrowing. Cities, states, corporations, and the government typically sell bonds to raise its current capital. Bonds are viewed as a guarantee to pay off the interest in addition to the principal on its date of maturity.

On the other hand, collateral loans are loans that are secured by a particular asset owned by a company or a person. If you are not able to pay back the loan as arranged, then you must hand over the asset; while short term or interim investments are investments held by a company for a period of less than one year. Real estate properties, alternatively, take in buildings, land improvements, and all other improvements to immovable properties.

On the other hand, investment income in insurance represents the returns obtained by insurers from respective investment portfolios. This may include dividends, interest, and capital gains on stocks realized. However, it does not contain the company’s current stock or bond values.

An affiliate is an inter-company relationship of a company owning less than the majority of the stock of another company. It is accounted for using the equity method of accounting. It can also be created when two different businesses are both subsidiaries of one larger business called the parent company. To illustrate, assume A Company owns 30% of the voting stock of B Company. Here, B Company and A Company possess the affiliate relationship, and A Company may exercise significant influence excluding control over B Company’s operations.

There is also another relationship called an associate. In accounting, it is termed as investment in associate. An associate is a business entity where the investor can exercise a significant influence over its operations. Hence, the associate here is the investee. Significant influence is the power to take part in the operating and financial policy decisions of a business. In no case shall the investor exercise control or joint control in an associate relationship.

The equity method of accounting is a way of initially recording an equity investment at cost. An adjustment is then made to reflect the share of the investor in the associate’s net assets.

On the other hand, one more type of relationship among business is the subsidiary relationship. In this type, control highly exists. A subsidiary company is the one that is being controlled by a different company. The company who controls is called the parent company. Control is of two categories, namely legal control and economic control.