A Term Life insurance policy is a basic type of life insurance that is lower in cost to a policyowner, is only in force for a specified period of time and does not accumulate cash value, nor does it provide the policyowner with any policy loan value. A term life policy’s death benefit is payable only if the insured dies during the specified period of time stated in the policy.
The ‘term’ of a policy is the number of years that the policy’s insured is covered with a specific ‘face amount,’ or amount of principal payable to the policy’s beneficiary in the event the insured dies within the policy’s term. Policy terms can range from 10 years to 30 years, or longer.
Term life coverage expires once the term has ended and can either be renewed for an additional term or be allowed to expire. Assuming death has not occurred, the policy simply ends and the insurer assumes no further responsibility to the policyowner or beneficiary. It is common for a term life policy to be renewed for additional terms, or converted to a whole life or other cash value policy.
Guaranteed vs. Non-Guaranteed Level Premiums
Term life policy premiums are based on the insured’s age, tobacco use, and health at the time of application. Once issued, a term policy’s premium rate is either guaranteed to remain constant, or ‘level’ for the entirety of the term; or the policy’s premium rate is non-guaranteed, which enables the insurer to increase the premium rate during the contract period.
A guaranteed level premium policy is most commonly purchased. This type of policy calculates the total premium payable for the term of the policy and divides payments evenly to keep the premium rate level over the policy’s term.
A non-guaranteed level premium policy might provide for a lower premium initially with the possibility of a rate increase after a set period of time within the policy’s term.
Indeterminate Level Premiums
A term life policy can also include an ‘adjustable premium’ schedule which is indeterminate at the time of policy issuance and can fluctuate over the term of the policy. The policy’s premium rate is determined by the insurer’s current mortality rates, interest earned from premium investments, and company expenses.
Policy premiums are guaranteed to never exceed a certain amount; however, if the insurer’s profits are greater than at the time of policy issuance, the ‘current’ premium will be lower than at the time of issuance. If profits are lower, the premium will be higher than at the time of issuance, but the premium will not exceed the policy’s guaranteed maximum rate.
Types of Term Life Insurance Policies
In addition to the premiums paid for a term life policy, benefits provide from the policy can also vary. The policy’s face amount can remain level, it can decrease, or it can increase over the term of the policy. In addition, term life policies can provide a policyowner with the option to renew, purchase additional coverage, or convert to a whole life policy in the future.
Level Term
A level term life policy’s face amount remains constant, or ‘level,’ for the term of the policy. The only aspect that changes, if renewed, is the increase in premium due to the increased age of the policyowner.
Decreasing Term
A decreasing term life policy’s face amount decreases over the term of the policy. For instance, a decreasing term insurance policy with a face amount of $100,000 and a 10-year term will provide the full $100,000 of coverage if the insured dies within the 1st year, $90,000 of coverage the 2nd year, and so on until the benefit amount reduces to zero at the end of the 10 years.
This type of coverage is often purchased to protect against home mortgages, student loan debt or any situation in which the need for insurance is greater at the beginning of the policy, as opposed to the end of the policy.
Increasing Term
In comparison, an increasing term life policy’s face amount increases over the term of the policy. Although this type of policy is not often sold as a stand-alone insurance product, it is typically incorporated into a whole life policy as an added rider.
Special Features of Term Life
Renewable
A renewable term life policy does not require evidence of insurability at the time of renewal; however, premium rates increase according to the age of the insured at the time of each renewal. This type of premium rate increase is often called Step-Rate Premiums.
Re-entry Option
An option that allows an individual to reapply for, or ‘reissue’ his or her term life policy every few years (usually 5 years) and receive a premium lower than their guaranteed renewal rate. However, in order to receive this lower rate, evidence of insurability must show that the policyowner is maintaining good health. If not, the policyowner will instead have to pay the guaranteed renewal rate if they want to continue their coverage.
Convertible
A term life policy can also be ‘convertible,’ meaning that a policyowner can convert his or her term policy to a whole life or other cash value policy in the future without being required to provide evidence of insurability. The ‘option to convert’ is provided to the policyowner who may or may not elect to convert to a long-term policy in the future.
When converting to a long-term plan, the policyowner can use either his or her current age, referred to as his or her ‘attained age,’ or the whole life policy can be written using the original age of the policyowner used at the beginning of the original term policy. If a policyowner’s original age is used when converting to a whole life policy, he or she will pay a lower premium based on the younger age in comparison to his or her current age; however, the insurer will require interest to be paid, as well as an additional payment amount equal to the difference in age that the insurer would normally charge for a policy written using the current age of the policyowner.
Although both methods of conversion seem to add up to the same amount for the policyowner, instead of incurring a higher premium, the policyowner is actually building up his or her cash value quicker than would occur if he or she paid a higher premium using his or her current age. Essentially, instead of paying a higher premium, the policy’s cash value increases quicker as a result of the bulk payment and increased interest.
Interim Term
A type of convertible term policy, referred to as an Interim Insuring Agreement, is commonly provided by insurers to ensure immediate temporary term life protection during the underwriting of a whole life policy. Referred to as ‘interim term’ coverage, an individual who wishes to purchase a whole life policy in the near future, or who is waiting for his or her whole life policy to be underwritten by the insurer, may be temporarily covered under a term policy which is then automatically converted to a whole life policy within a short period of time.
An interim term policy is commonly issued for a period of 1 month up to 11 months, at which time the policy automatically converts to a whole life policy. As a result of this short period of time before conversion, premiums for the whole life policy are based on the age of the policyowner when the interim policy converts to the whole life policy, not the age of the policyowner at the time the interim term began.
Return of Premium (ROP) Term Life Policy
A Return of Premium Term Life, or ROP, policy is a more expensive type of term life insurance that provides an ‘end benefit’ to the policyowner at the expiration of his or her policy’s term by returning 100% of the premiums paid into the policy when the insured survives the policy’s term.
For example, if an insured survives past a 35-year return of premium term life policy and the policyowner does not surrender it beforehand; the policyowner would receive 100% of the premiums paid into the policy upon the insured satisfying the 35-year term.
Although a return of premium provides extra incentive to purchase, deciding to purchase an ROP term life policy should be considered carefully as the extra premium costs involved might be better invested in an interest-bearing retirement account, such as an IRA.
The Employment Retirement Income Security Act (ERISA) was enacted by Congress in 1974 as a result of increased awareness towards employee benefits in the workplace and the lack of regulation over employer-sponsored welfare plans. Before ERISA, employers had little incentive for providing welfare benefits to employees, and if provided, company welfare plans were often vulnerable to funding mismanagement and abuse due to a lack of disclosure and adequate safeguards concerning their operation.
Commonly referred to as ERISA, this federal law established minimum guidelines pertaining to the administration of employer-based pension plans and employee welfare benefit plans such as life, health and disability insurance. The overall purpose of the law is to protect participating employees and their beneficiaries from unethical or unlawful practices in regards to the funding, management and distribution of employee retirement and insurance benefits.
ERISA is regulated by the Department of Labor and is administered and enforced through the department’s Employee Benefits Security Administration. ERISA regulation applies to all non-governmental, private employer-groups in the U.S. who offer employee benefit plans. Government employees as well as religious organizations are exempt from ERISA rules, as are individuals who purchase private individual retirement and insurance plans.
It is important to note that ERISA does not ‘preempt,’ or supersede state insurance laws, as the states ultimately regulate insurance; however, since employer-sponsored plans involve interstate commerce, such plans also fall under federal jurisdiction for federal taxation purposes because they substantially affect the revenues of the United States due to the preferential Federal tax treatment provided to such plans.
ERISA regulation does not pertain to the types and levels of plan benefits, nor does it mandate that groups establish pension or insurance plans; however, for those groups that do establish such plans, ERISA regulation pertains to the administration of the group’s benefit plan in how it is managed to ensure it benefits the members of the group for which it was established.
Reporting and Disclosure
ERISA mandates the reporting and disclosure of plan eligibility, benefits provided under the plan and the limitations of the plan to participating employees by the employer or other group sponsor through a Summary Plan Description (SPD), in addition to any policy summary provided by the insurer. Under ERISA, the plan sponsor must establish a written policy, whether purchased by an insurer or self-insured by the sponsor itself, the sponsor is ultimately responsible for providing such disclosures to members of the group, and is held accountable for ERISA compliance. While state laws mandate insurer disclosure, ERISA mandates employer disclosure, in addition to material provided by the insurer.
Under ERISA, the group’s sponsor has the fiduciary responsibility to act in the best interests of the plan’s participants and to ensure proper participation and vesting standards are met. It is the responsibility of the plan sponsor to ensure safeguards are in place to ensure proper collection of plan funds, as well as distribution and claims processes to avoid discrimination within the group.
Enacted by Congress as part of the Social Security Act of 1935, Social Security Disability Insurance (SSDI) is a federal program that is funded primarily through employer and employee payroll taxes, known as ‘FICA taxes,’ and provides benefits to eligible individuals in the form disability income benefits.
SSDI is available to all working Americans that pay FICA taxes who have qualified as ‘fully insured’ for benefits upon becoming totally disabled. Benefits are not provided unless an individual qualifies as both ‘fully insured’ and ‘totally disabled.’
An individual becomes fully eligible for Social Security Disability benefits based on his or her Insured Status, which is determined by how many Quarters of Coverage or Credits he or she has accumulated while being employed and taxed under FICA.
One credit can be earned for each quarter in the calendar year that an employee pays FICA payroll taxes, with a maximum annual accumulation of 4 quarters of coverage, or credits, per calendar year, beginning after an individual turns 21 years old.
Average Indexed Monthly Earnings (AIME)
Social Security benefit amounts are based on an individual’s lifetime earnings that were taxed under the FICA payroll tax using an indexed earnings average, called the Average Indexed Monthly Earnings (AIME). This average, which is computed over a 35 year period of time, reflects changes in wage levels and more accurately accounts for inflation when determining benefits. This average is used within a formula to determine the individual’s ‘primary insurance amount,’ or ‘PIA.’
Primary Insurance Amount (PIA)
The Primary Insurance Amount (PIA) is the benefit amount that an individual receives when he or she chooses to begin receiving retirement benefits at his or her normal retirement age. Based on the AIME amount, the PIA determines the correct amount of Social Security benefits for each recipient based on the amount of annual income he or she produced while in his or her working (and FICA taxed) years.
Insured Status (Currently vs. Fully)
An individual qualifies as partially insured, also referred to as Currently Insured, if he or she has accumulated at least 6 quarters of coverage within the last 13 calendar quarters. The minimum requirement for individuals under age 24 to obtain currently insured status is 6 credits in the last 3 years. Beginning at age 24, additional credits are required to obtain currently insured status based on the individual’s age at the time of disability.
An individual qualifies as Fully Insured when he or she has accumulated the required quarters of coverage based on their age.
To be fully insured, an individual needs to obtain at least one credit for each calendar year after turning age 21, and the earliest of the following:
- The year before attaining age 62,
- The year before death, or
- The year an individual becomes disabled
- The minimum number of credits needed is 6 and the maximum number needed is 40. Any year (all or part of a year) that was included in a period of disability is not included in determining the number of credits needed to be fully insured.
Unlike private disability insurance, Social Security Disability Insurance (SSDI) only provides benefits to individuals who are totally disabled, as oposed to partial or short-term disability. SSDI defines total disability as the inability to engage in any substantial gainful activity due to physical or mental disability and must last at least 12 months or end in death. Benefits are paid after a 5 month waiting period to ensure the individual is totally disabled.
In addition to being totally disabled, an individual needs to be fully insured and have earned at least 20 quarters of coverage in the last 40 calendar quarters (last 10 years) ending with the quarter in which the disability begins.
A qualified beneficiary will receive 100% of his or her PIA. In addition, his or her spouse and dependent children under 18 years of age will receive 50% of the worker’s PIA.
U.S. labor laws require all businesses to either pay for their employee’s medical care, or provide insurance to cover such costs for any work-related medical expenses that occur while working due to a work-related accident. Workers’ compensation is the type of insurance purchased by a business to cover such work-related medical expenses.
Regulated on the state level, but administered through the Department of Labor, businesses can purchase workers’ compensation insurance from a private company or it can purchase such coverage directly from the state.
Although all businesses in the U.S. are required to pay for work-related illness and injury of their employees, some states, known as ‘elective’ states allow employers and employees the decision of providing or not providing such insurance, while ‘compulsory’ states require all employers to provide workers’ compensation coverage for their employees.
Workers’ compensation provides benefits to cover both an employee’s medical expenses as well as providing a percentage of lost income while disabled. The goal of this type of insurance is to make the employee ‘whole’ again, and to enable him or her to return to work as quickly as possible.
Coverage only applies to job-related illness, injury or disability that occurs while working, but does not provide for such illness, injury or disability claims that occur outside of one’s employment. For non-work-related injury and disability coverage, it is advisable to purchase and maintain private disability insurance.
Under the Extra-Territorial Provision, an employee is covered under the workers’ compensation laws of the state in which employed, even if the employee is temporarily working in a different state.
Workers’ compensation insurance provides the following benefits:
Disability Income Benefits
Benefits that replace lost income due to an occupational injury and are paid on a weekly basis or as a lump sum (or combined). Temporary disability is usually paid weekly, while a permanent disability is generally paid as a lump-sum benefit.
Medical Expense Benefits
Benefits that fully cover any medical treatment as a result of the occupational injury.
Death Benefits for an Employee’s Survivor
Benefits paid to the surviving spouse of a deceased employee due to occupational death. Payments are based on the deceased employee’s average earnings as well as the number of surviving dependents.
Rehabilitation Benefits
As a result of the Federal Vocational Rehabilitation Act, federal aid is provided towards employee rehabilitation in every state to help the employee return to the workforce.
Due to an increased need for public assistance in America throughout the last century, Congress enacted the Social Security Act of 1935 to provide a minimum amount of financial protection for working Americans and their families upon retirement, or in the event of disability or death.
Formally titled as Old Age, Survivors and Disability Insurance (OASDI) by the Social Security Administration, Social Security is a federal program that provides monthly income for qualified retirees and their spouses, monthly survivor benefits to the spouse and family of a deceased OASDI recipient, and financial protection to OASDI recipients who become disabled.
Social Security FICA Payroll Taxation
Also enacted in the same year, Congress passed the Federal Insurance Contributions Act (FICA) and created the FICA Payroll Tax in order to fund Social Security. This Act was later amended to include funding for Medicare Part A and Medicaid. FICA taxes accumulate in a trust fund created solely to finance these federal and state programs.
FICA taxes are imposed on an employee’s wages up to a maximum annual amount, known as the Social Security Wage Base. This income limit, or ‘wage base,’ is set by the Social Security Administration and allows for taxation on all income earned up the current year’s wage base, which the administration typically increases 2-3% annually to reflect rising inflation. Income amounts exceeding this taxable ceiling are not taxed under FICA for Social Security purposes.
In regards to Medicare funding, no such income limit exists, meaning that an employee’s entire annual wages are FICA taxable for Medicare purposes. In addition, FICA taxation is strictly a payroll tax and is not required for any earning or financial gains on investment performance, such as interest earnings or dividend returns.
Currently, the FICA tax rate remains at 6.2% and is scheduled to stay the same for the upcoming few years, although historically, it can and has changed over time. An additional Medicare tax of 1.45% is added to the FICA rate for a total of 7.65% per employer and employee. Combined, Social Security collects 15.3% in FICA Payroll taxes from employers and employees annually to support and fund Social Security’s various programs.
Self-Employment Contributions Act (SE Tax Act)
In 1954, Congress also enacted the Self-Employment Contributions Act (SE Tax Act) to impose a similar payroll tax for self-employed individuals. Under the SE Tax Act, self-employed individuals are viewed as both the employer and employee, and are taxed on (6.2 + 6.2) and (1.45% + 1.45%), or a 15.3% SE tax for Social Security and Medicare funding.
The SE tax is only imposed on 92.35% of net earnings versus 100% of gross income with a 7.65% difference that is exactly half of the 15.3% imposed. Essentially, this difference in the taxable wage amount for self-employed individuals provides more equality in taxation between employed and self-employed taxpayers.
Who is Covered by Social Security
Social Security is available to all working Americans that pay FICA taxes and become eligible for OASDI benefits upon certain qualifying events such as reaching the normal retirement age, survivorship benefits for a spouse and children of a qualified deceased Social Security recipient, or for Social Security disability benefits upon becoming disabled.
An individual becomes ‘eligible’ for Social Security benefits based on his or her Insured Status, which is determined by how many Quarters of Coverage or Credits he or she has accumulated while being employed and taxed under FICA.
One credit can be earned for each quarter in the calendar year that an employee pays FICA payroll taxes, with a maximum annual accumulation of 4 quarters of coverage, or credits, per calendar year, beginning after an individual turns 21 years old.
Insured Status (Currently vs. Fully)
Currently Insured
An individual qualifies as partially insured, also referred to as Currently Insured, if he or she has accumulated at least 6 quarters of coverage within the last 13 calendar quarters. The minimum requirement for individuals under age 24 to obtain currently insured status is 6 credits in the last 3 years. Beginning at age 24, additional credits are required to obtain currently insured status based on the individual’s age at the time of disability.
Limited benefits are available if an individual is currently insured in comparison to full benefits when the individual is fully insured. If a worker is ‘currently’ insured at his or her time of death, benefits would continue to be payable to dependent children of the deceased recipient.
Fully Insured
An individual qualifies as Fully Insured when he or she has accumulated the required quarters of coverage based on their age.
To be fully insured, an individual needs to obtain at least one credit for each calendar year after turning age 21, and the earliest of the following:
The year before attaining age 62,
The year before death, or
The year an individual becomes disabled
The minimum number of credits needed is 6 and the maximum number needed is 40. Any year (all or part of a year) that was included in a period of disability is not included in determining the number of credits needed to be fully insured.
Fully and Permanently Insured
To be considered Fully and Permanently Insured requires an individual to work approximately 10 years to obtain the maximum of 40 credits.
Once an individual has earned 40 quarters of coverage, he or she is fully insured and permanently eligible for Social Security retirement benefits once he or she retires, disability benefits if he or she becomes disabled, and premium-free Medicare Part A benefits, regardless of whether or not he or she continues to work in the future.
Normal Retirement Age (NRA)
The Normal Retirement Age (NRA), also known as the Full Retirement age, is considered to be the age that an individual becomes fully eligible for Social Security benefits. An individual’s qualifying age is based on when he or she was born. The average age of current Social Security beneficiaries ranges between age 65, for individuals born before 1937, to age 67 for individuals born in 1960 and later.
Although the normal retirement age is between ages 65-67, a covered Social Security recipient can start receiving benefits as early as age 62; however, benefits are reduced by a fraction of a percent for each month before the normal retirement age of the covered individual.
Social Security pays the same amount of benefits for each recipient over his or her lifetime, whether or not the individual elect to receive early benefits, or delays benefits to a later date. Benefits are reduced for early enrollment to account for a longer benefit period; likewise, if an individual chooses to delay Social Security benefits to a point in time after his or her normal retirement age, benefits would be increased to account for a shorter benefit period.
Often abbreviated simply as the ‘Affordable Care Act (ACA),’ this federal statute is actually 2 laws, called the ‘Patient Protection Act’ and ‘Affordable Care Act.’
Enacted between 2010 through 2014, and amended by the Health Care and Education Reconciliation Act, the federal government has reformed both the private health insurance industry and government-sponsored health programs such as Medicaid and Medicare to provide U.S. citizens with more comprehensive healthcare coverage by eliminating the current exclusions of pre-existing conditions, as well as expanding the availability of Medicaid. All health plans issued after January 1, 2014 must provide coverage for pre-existing conditions, and insurers cannot deny coverage for applicants with pre-existing conditions.
As defined by healthcare.gov, under the law, a new “Patient’s Bill of Rights” gives all Americans the stability and flexibility we need to make informed choices about our health and to put consumers back in charge of their health care. [hhs.gov]
Grandfathered vs. Non-Grandfathered
Grandfathered health plans are defined as health plans that were issued prior to January 1, 2014. Although all health plans going forward are mandated under the PPACA to cover pre-existing conditions, currently in 2014, individuals may remain on pre-PPACA plans which may still exclude pre-existing conditions.
In comparison, non-grandfathered health plans are those plans that comply with the pre-existing condition inclusion legislation set forth by the PPACA. Any health plan issued after January 1, 2014 is considered to be ‘non-grandfathered.’
For purposes of the state licensing exam, if a health plan excludes pre-existing conditions, it is considered to be a ‘grandfathered’ plan. By the end of 2015, such grandfathered plans will be eliminated, or modified by insurers to include pre-existing conditions in order to be compliant with the PPACA.
State and Federal Health Exchanges
To provide a fair and affordable selection of insurance plans from which to choose, the PPACA also mandates each state to provide an insurance ‘Exchange,’ or Marketplace, in which multiple private insurance plans are offered U.S. citizens who are not currently enrolled in an individual or employer-based insurance policy, Medicare, Medicaid or other government-sponsored plan. If a state does not offer its own exchange, residents of such state must purchase insurance through the federal exchange by enrolling online through healthcare.gov.
Brief Overview of the PPACA:
Coverage
- Ends Pre-Existing Condition Exclusions for Children: Health plans can no longer limit or deny benefits to children under 19 due to a pre-existing condition
- Keeps Young Adults Covered: Children can remain on their parents policy until age 26
- Costs
- Ends Lifetime Limits on Coverage: Lifetime limits on most benefits are banned for all new health insurance plans
- Reviews Premium Increases: Insurance companies must now publicly justify any unreasonable rate hikes
- Maximizes the Use of Premium Dollars: Policy premium dollars must be spent primarily on health care – not administrative costs
Care
- Covers Preventive Care at No Extra Cost: No copayment or doctors fee for preventive care
- Protects One’s Choice of Doctors: Individuals may choose the primary care doctor they want from their plan’s network
- Removes Insurance Company Barriers to Emergency Services: Anyone can seek emergency care at a hospital outside of their health plan’s network.
PPACA Definitions and Regulations
Minors and Adult Child Coverage Extension
As of 2010, children are allowed to remain on their parents’ insurance policy until the age of 26, regardless of if they live with their parents, are financially dependent on their parents, a student, or married.
Guaranteed Issue
The PPACA mandates that all health insurers offering health insurance coverage in the individual or group market throughout the United States must accept every employer and individual that applies for such coverage; however, enrollment is restricted to ‘Open Enrollment’ or ‘Special Enrollment’ periods.
Open Enrollment Period
The annual Open Enrollment Period is the period of time during which individuals who are eligible to enroll in a Qualified Health Plan can enroll through the Healthcare Marketplace. The Open Enrollment Period starts on November 1st and continues through December 15th. Plans sold during Open Enrollment start on January 1st.
The individual market has set this timeframe every year for Open Enrollment, much like Medicare, where new and renewing members can enroll. If that window of time is missed, the individual must wait until the next Open Enrollment Period to get coverage, unless he or she experiences a qualifying life event that allows for enrollment through a Special Enrollment Period.
Special Enrollment Period Requirements
Special Enrollment Periods are times outside of the Open Enrollment Period during which individuals have a right to sign up for health coverage. In the Marketplace, an individual qualifies for a Special Enrollment Period 60 days following certain life events that involve a change in family status or loss of other health coverage. Job-based plans must provide a Special Enrollment Period of 30 days. Life events that qualify an individual for a Special Enrollment Period include:
- Getting married
- Having a baby
- Adopting a child or placing a child for adoption or foster care
- Losing other health coverage
- Moving to a new residence
- Gaining citizenship or lawful presence in the U.S.
- Leaving incarceration
Individuals already enrolled in a Marketplace plan qualify for a Special Enrollment Period if a change in income or household status occurs that affects eligibility for premium tax credits or cost-sharing reductions.
Voluntarily quitting a Marketplace plan mid-year does not qualify an individual for a Special Enrollment Period.
Members of federally recognized Indian Tribes or Alaska native shareholders can enroll in or change plans once per month any time of year (not just during Open Enrollment).
Prohibiting Discrimination Based on Health Status
A group health plan and a health insurance issuer offering group or individual health insurance coverage may not establish rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan or coverage based on any of the following health status-related factors in relation to the individual or a dependent of the individual:
- Health status
- Medical condition (including both physical and mental illnesses)
- Claims experience
- Receipt of health care
- Medical history
- Genetic information
- Evidence of insurability (including conditions arising out of acts of domestic violence)
- Disability
Guaranteed Renewability of Coverage
If a health insurance issuer offers health insurance coverage in the individual or group market, the issuer must renew or continue in force such coverage at the option of the plan sponsor or the individual, as applicable.
Shared Responsibility
The Patient Protection and Affordable Care Act will accomplish a fundamental transformation of health insurance in the United States through shared responsibility. Systemic insurance market reform will eliminate discriminatory practices such as pre-existing condition exclusions. Achieving these reforms without increasing health insurance premiums will mean that all Americans must be part of the system and must have coverage. Tax credits for individuals and families will ensure that insurance is affordable for everyone.
Employer Shared Responsibility Payment (ESRP)
The Affordable Care Act requires certain employers with at least 50 full-time employees (or equivalents) to offer health insurance coverage to its full-time employees (and their dependents) that meets certain minimum standards set by the PPACA or to make a tax payment called the ‘Employee Shared Responsibility Payment (ESRP).’
No employer with fewer than 50 full-time employees is subject to the Employer Shared Responsibility Payment in any year.
Individual Mandate for Minimum Essential Coverage
Since its enactment, the PPACA has required most individuals to attain health insurance coverage or pay an annual tax penalty. Penalties are reduced from an individual’s tax refund, if any; however, if an individual does not receive a tax refund and is not exempt from the penalty, he or she will not be subject to criminal prosecution, nor can a levy or lien be placed on the individual’s income or property. Starting in 2019, the fine for declining to purchase health insurance has been eliminated as a result of the Tax Cuts and Jobs Act; however, the individual mandate still exists as part of the PPACA.
Under the PPACA, individuals are required to maintain ‘minimum essential coverage’ for themselves and their dependents. Minimum Essential Coverage is defined as:
- Coverage under certain government-sponsored plans
- Employer-sponsored plans, with respect to any employee
- Plans in the individual market
- Grandfathered health plans
- Any other health benefits coverage, such as a state health benefits risk pool, as recognized by the HHS Secretary
- Minimum essential coverage does NOT include dental or vision correction coverage
- Advanced Premium Tax Credits (APTC)
A tax credit that can help an individual afford coverage bought through the Marketplace. Unlike tax credits claimed when filing annual taxes, these tax credits can be used right away to lower monthly premium costs. If qualified for an APTC, an individual may choose how much advance credit payments to apply to premiums each month, up to a maximum amount. APTCs may be available to most households with income not more than 400% of the federal poverty level.
If the amount of advance credit payments received for the year is less than the tax credit due at the end of the year, the difference is provided as a refundable credit when filing an annual federal income tax return. If advance payments for the year are more than the amount of tax credit due, repayment of the excess advance payments are due with when filing an annual federal income tax return.
Medical Loss Ratio (MLR)
A basic financial measurement used in the Affordable Care Act to encourage health plans to provide value to enrollees. The MLR is also referred to as the ‘80/20 Rule,’ and generally requires insurance companies to spend at least 80% of the money they take in on premiums on actual health care and quality improvement activities instead of administrative, overhead, and marketing costs.
If an insurer uses 80 cents out of every premium dollar to pay its customers’ medical claims and activities that improve the quality of care, the company has a medical loss ratio of 80%. A medical loss ratio of 80% indicates that the insurer is using the remaining 20 cents of each premium dollar to pay overhead expenses, such as marketing, profits, salaries, administrative costs, and agent commissions.
Insurance companies selling to large groups (usually more than 50 employees) must spend at least 85% of premiums on care and quality improvement. The PPACA sets minimum medical loss ratios for different markets, as do some state laws.
Any insurer that fails the MLR test in a calendar year for all plans in a given market segment (individual or group) must refund excess premiums to consumers enrolled in plans in that market segment.
Essential Health Benefits
As defined by healthcare.gov, The Affordable Care Act ensures health plans offered in the individual and small group markets, both inside and outside of the Health Insurance Marketplace, offer a comprehensive package of items and services, known as essential health benefits. Essential Health Benefits are defined as a set of health care service categories that must be covered in order to be certified and offered in the Marketplace.
Essential health benefits must include items and services within at least the following 10 categories:
- Ambulatory and outpatient care
- Emergency room services
- Hospitalization (inpatient care)
- Maternity and newborn care
- Mental health and substance use disorder services including behavioral health treatment, counseling and psychotherapy
- Prescription drugs
- Rehabilitative services and devices including physical and occupational therapy, speech-language pathology, psychiatric rehabilitation and more
- Laboratory services
- Preventive and wellness services, and chronic disease management
- Pediatric services including oral and vision care
Qualified Health Plan (QHP)
An insurance plan that is certified by the Health Insurance Marketplace that provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts) and meets other requirements. A qualified health plan will have a certification by each Marketplace in which it is sold.
Qualified Health Plan Categories
Plans in the Marketplace are primarily separated into 4 health plan categories (Metal Tiers):
- Bronze (60% coverage)
- Silver (70% coverage)
- Gold (80% coverage)
- Platinum (90% coverage)
Qualified health plans are based on the percentage the plan pays of the average overall cost of providing essential health benefits to members. The plan category chosen affects the total amount an individual is likely spend for essential health benefits during the year. The percentages the plans will spend, on average, are 60% (Bronze), 70% (Silver), 80% (Gold), and 90% (Platinum). This isn’t the same as coinsurance, in which an individual pays a specific percentage of the cost of a specific service.
Actuarial Value
As defined by healthcare.gov, Actuarial Value is the percentage of total average costs for covered benefits that a plan will cover. For example, if a plan has an actuarial value of 70%, on average, the insured would be responsible for 30% of the costs of all covered benefits. However, the insured could be responsible for a higher or lower percentage of the total costs of covered services for the year, depending on the insured’s actual health care needs and the terms of his or her insurance policy.
A fifth tier, titled ‘Catastrophic,’ pays less than 60% of the total average cost of care on average and are only available to individual under age 30 or who have a received a ‘hardship’ exemption. Hardships are life situations (such as being homeless, facing eviction, bankruptcy, having received a shut-off notice from a utility company, have experienced domestic violence, to name a few) that keep an individual from getting health insurance and are received, when applied for, through the Marketplace.
Cost Sharing Reductions
A discount that lowers the amount payable for out-of-pocket for deductibles, coinsurance, and copayments. This reduction is available for individuals who get health insurance through the Marketplace, their income is below a certain level, and they choose a health plan from the Silver plan category. Members of a federally recognized tribe may qualify for additional cost-sharing benefits.
Modified Adjusted Gross Income (MAGI)
The figure used to determine eligibility for lower costs in the Marketplace and for Medicaid and CHIP. Generally, modified adjusted gross income is the adjusted gross income plus any tax-exempt Social Security, interest, or foreign income.
