Frequently Asked Questions

How Does Group Health Insurance Work?
In the 1940's during wartime wage controls, employers began to offer group health insurance to retain employees without increasing their wages. Since then, employer-sponsored group health insurance has become one of the primary ways to finance health care in the United States. As health insurance is currently regulated by individual states, the following describes group health insurance in California.

What are the Advantages of a Group Health Insurance Plan?
Generally, group health insurance offers better benefits, lower deductibles and co-payments for doctor visits and prescription drugs, and lower out-of pocket maximums than individual health insurance plans. Each employee of a business may select any insurance plan that was approved by the employer.

What Kind of Group Insurance Can My Business Purchase?
Currently, group health insurance falls into two categories: small group for groups of 2 to 50 employees and large group for groups of 51+ employees. Underwriting criteria differ for the two categories. Small group health insurance is not medically underwritten; it is "guaranteed issue" under AB 1672, enacted in the 1990's. If your group has more than five employees, you will still need to fill out an application with medical questions to obtain coverage; the medical information will determine the premium the insurance company will charge a small group. Large group health insurance is medically underwritten, similar to an individual health insurance policy. Effective January 1, 2014, recent health care reform legislation redefines small group coverage as 1-100 employees; such insurance will be "guaranteed issue". States may also elect to reduce the maximum number for a small group to 50 for plan years prior to January 1, 2016.

How to Qualify
General. For all group health insurance, you will need to pay the premium with a check from a business checking account. You may need to provide a city business license. Insurance companies require that at least 75% of the "eligible" employees participate in the plan. An "eligible" employee is someone who is not (a) covered under a spouse's group plan or (b) over 65, working full-time and covered by Medicare. Since small group health insurance is not medically underwritten, you will need to show the insurance company that you have a "real" business to qualify. To show that you have a "real" business, you will need to provide certain documentation based upon your business structure. All such documentation must be dated on or before the middle of the calendar quarter prior to the plan effective date or you must be able to show at least six consecutive weeks of payroll prior to the plan effective date and provide all of the required documentation by the plan effective date. For example, for a plan to be effective on January 1, you must provide all required documentation dated on or before November 15 of the prior calendar quarter. If you do not have all of the documentation dated on or before November 15, you may provide six consecutive weeks of payroll and the required documentation dated prior to January 1 for guaranteed issue coverage effective on January 1. To start coverage prior to April 1 (the next calendar quarter), you may apply for coverage that will be medically underwritten. Otherwise, you will need to wait until April 1 to start a guaranteed issue plan.

What Documentation is Required?
For a corporation, you will need to provide articles of incorporation, a statement of information (for an S corp or LLC) or statement by domestic stock corporation (for a C corp) filed with the California Secretary of State, a certificate of authority (if the corporation was formed outside California), a corporate tax return and a federal employer identification number (FEIN.) If the corporation has salaried employees, a Form DE-6 (quarterly wage report) will also be required. For a partnership, you will need to provide a signed partnership agreement prepared by an attorney and notarized, FEIN, Form K-1 (partnership tax return) and, if you have salaried employees, a Form DE-6. For a sole proprietorship, you will need to show your fictitious business name (dba), FEIN and, if you have salaried employees, a Form DE-6

How Are Rates Calculated?
Generally, in the small group market, there is a 20% spread from the lowest rate to the highest rate. Any group with 5 or fewer employees will automatically receive the highest rate regardless of the medical history of the employees and their dependents. Rates for groups of 6 to 50 will be rated within the 20% range based upon medical history of the employees and any covered dependents shown on the employee applications. If you obtain quotes from an agent, you should ask for the highest rate (at the top of the range) to avoid getting a quote less than what the insurance company will offer once your application is reviewed. Rates are determined by the insurance company's medical underwriter; no agent has authority to guarantee a rate.

Section 125 Cafeteria Plans - What Are They?
Under Section 125 of the IRS Code, an employer may set up a plan that allows participating employees to use pre-tax dollars to pay for certain benefit costs. If you are an employer and you lower the taxable income of all participating employees through creation of a Section 125 plan, you may also reduce your overall share of FICA and FUTA taxes as well as your workers compensation insurance premium.

What Happens if I am Terminated, Get Married or Divorced or Die?
Following certain life events, such as divorce or death of an employee and certain other events, or termination of employment, federal law (COBRA) and State law (Cal-COBRA) allow the employee to continue or add coverage for a spouse. COBRA covers groups of 20 employees or more and Cal-COBRA generally covers groups with 2 - 19 employees. Cal-COBRA only applies to companies headquartered in California. The initial period of coverage under both laws lasts for up to 18 months. Cal-COBRA coverage may be extended for an additional 18 months for any California headquartered company, regardless of size. COBRA and Cal-COBRA are technical laws and you should speak with your COBRA administrator for more information. Generally, COBRA and Cal-COBRA coverage is fairly expensive as the employee is paying the entire premium. When an insurable employee terminates employment, he or she may seek individual coverage at a lower cost.

What Happens if You are Injured or Sick and Cannot Work?
Disability income insurance can protect your family and your business if you are injured or become sick and are unable to work. If you generate income from a business that is not passive and is over a minimum amount, you are eligible for a disability income insurance policy. Passive income is income that will continue to come in even if you are disabled; examples are rental income and investment income. The minimum income to qualify for a disability policy is usually $20,000 or more and varies by company. Disability insurance is purchased less frequently than health or life insurance and is offered by very few companies. Since there are so many components to a disability policy, we recommend that you contact Suffolk Benefits to assist you.

When Would You Purchase Disability Income Insurance?
There are three circumstances when you may want a disability income insurance policy. First, if you are employed, you may want to ensure a continuing income stream if you become injured or sick and unable to work. Next, if you are a business owner and generate income for your business, you may purchase "business overhead" insurance to cover salaries of non-income producing employees and other business expenses that would go unpaid if you became disabled. Lastly, disability insurance may be used to fund a buy-sell agreement. If you are a business owner, partner or employed officer of a business entity and one of the owners, partners or employed officers becomes disabled and unable to work, the entity may use the proceeds of a disability insurance policy to fund the buyout of the disabled person's interest in the business.

How Can I Cover My Business Expenses if I Become Disabled?
"Business overhead" insurance is appropriate for a small business in which one or more of the owners, partners or officers is the primary income-producer. If that individual(s) is or are disabled for more than a year, the business would probably not be able to continue. These policies are owned by the business and cover "business overhead" expenses, such as salaries of non-income-producing employees, rent, supplies, utilities, insurance and other expenses necessary to keep the business operational, for one or two years. The business owner may insure up to 100% of the businesses' tax-deductible expenses (as compared to a personal policy that will cover 50-60% of income.) Since these policies cover only a limited time period and are covering expenses on a reimbursement basis, the premiums for these policies are usually less expensive than premiums for a traditional disability income insurance policy. To cover personal expenses a business owner may want a separate traditional disability income insurance policy.

How Can a Business Protect Itself if an Owner is Permanently Disabled?
A business may also purchase disability income insurance to fund a buy-sell agreement. This agreement will protect business owners or partners from having an outsider not selected by them become a decision-maker in the business when a business owner or partner becomes disabled. The buy-sell agreement is a formal agreement prepared by an attorney. These policies usually have a long waiting period, typically one year, before any payment will be made to determine if the disabled person will be able to return to his or her duties. The insurance policy proceeds are used to fund the purchase (buy-out) of the interest of the disabled owner/partner from the other owners/partners.

What Governmental Benefits Cover a Disabled Employee?
If you are a salaried employee of a company in California, you would qualify for State disability benefits that start after a 7-day waiting period and last for one year. The maximum benefit is based upon gross income and usually is not sufficient to cover all of the disabled person's monthly living expenses. Since this is a limited benefit, even if you are eligible, you may want to supplement it with an individual or group disability income insurance policy. Beginning in the thirteenth month of "total and permanent disability," an individual may become eligible for Social Security disability benefits. Very few people actually receive this benefit because of the stringent qualification requirements. Generally, eligible recipients need to supplement this benefit with an individual or group disability income insurance policy. If a disabled person qualifies for State or Social Security disability benefits and is also covered by an individual disability income insurance policy, the total benefits received will generally be the benefit stated in the policy; any benefits from a government plan will usually be deducted from the benefits paid by the private plan. There are exceptions to this general rule; Suffolk Benefits will be able to assist you in determining whether any exception will apply.

How Disability Policies Work
The most important feature of a disability policy is how it defines "total disability" and "partial disability." The ideal definition says that if you cannot perform the "important and substantial duties" of your current occupation ("own occupation benefit"), you will be eligible for a benefit. The worst definition says that even if you cannot perform "the important and substantial duties" of your current occupation, the insurance company may still deny benefits because it determines that you may perform another occupation based upon your education or training. An example would be if you are currently a surgeon and can no longer perform surgeries, the insurance company could say that you could teach surgery and therefore are not eligible.

Are My Premiums Tax Deductible?
Disability income insurance premiums are generally not tax-deductible by the owner while the benefits are received income tax-free. The maximum benefit you may purchase is generally about 50 - 60% of your gross income and is based roughly upon after-tax income. If you deduct a disability insurance premium, the benefit will be fully taxable. Similar to life insurance, Section 162 of the Internal Revenue Code allows a corporation to pay a "reasonable" bonus to an employee who can use the bonus to pay a disability insurance premium. The corporation may deduct the bonus pursuant to Section 162. You should consult your attorney or tax advisor for further information.

Health Insurance Underwriting for Individual Plans
Health care reform legislation was recently enacted with most of the changes taking effect on January 1, 2014. The changes that take effect in 2010 will be described below. This description is based upon information available in March 2010.

What Happens When You Apply for an Individual Health Insurance Policy?
When you apply for an individual health insurance policy, the insurance company will make one of three decisions - to offer a policy at standard rates, to offer a policy at a higher (rated) premium or to decline your application. Rated premiums usually range from 20 to 50% above standard rates; some companies will rate a policy higher (75 to 200%) before declining the application.

How Can I Get Health Insurance if I am Declined?
Recent health care legislation states that a temporary high risk pool program for people who cannot obtain individual health insurance coverage due to pre-existing conditions will begin within 90 days of the legislation's enactment. Currently, this program is estimated to be effective in June 2010. The recent health care reform legislation also states that individual health plans will have to cover pre-existing conditions for children 19 and under for plan years beginning on or after six months from the legislation's enactment. The current estimated effective date for this provision is in September 2010. Currently, an applicant who is declined by an insurance company may apply for guaranteed coverage through the California Major Risk Medical Insurance Program (MRMIP); rates for these policies are much higher due to the increased risk. The program is only authorized to issue a specific number of policies; when the maximum number is reached, no more policies may be issued so there is often a waiting period for coverage under these policies.

What Does an Underwriter Look at in Evaluating my Application?
A medical underwriter will look primarily at your health history, height and weight, and lifestyle. Underwriting guidelines for a particular health condition, especially if minor, vary from company to company. As prescription drug costs have escalated dramatically over the last eight or nine years, medical underwriters scrutinize these costs more closely in evaluating health insurance applications. While the insured may pay only a small co-payment for a brand-name or generic drug, the insurance company pays the wholesale drug cost. Generally, if the total wholesale drug cost for all prescriptions taken by an applicant is more than one-third of the monthly premium, the premium will be rated up or the application declined. Even if the total wholesale drug cost is one-third or less of the monthly premium, the premium may be rated up or declined depending upon the medication and why it is taken.

Why is the Medical Underwriter so Strict?
Since the underwriter is responsible for managing the risks that a company is assuming, underwriters take a very conservative view and assume the highest cost outcome when looking at a medical condition.

How Can I Maximize my Chances of Being Approved?
Since many conditions can be managed at reasonable cost, an applicant with a medical condition needs to be very specific in describing how the condition is managed. For example, someone with seasonal allergies whose symptoms occur for short periods two or three times a year is a different risk than someone with allergies requiring hospitalizations or use of a daily inhaler. Another example is an applicant who is 5'8' and 230 pounds. An underwriter might picture someone who is very overweight, but if this applicant is a bodybuilder with very low body fat, the underwriter would evaluate the applicant very differently. Suffolk Benefits will be able to help you with the underwriting process and advise you on company underwriting guidelines to avoid an unnecessary application denial. If there are any medical conditions,Suffolk Benefits also will advise you how best to disclose them.

Does the Underwriter Look at Any Paperwork Other Than My Application?
A medical underwriter may also request physician records. Sometimes a doctor may note a possible condition in the records without a formal diagnosis or testing. The underwriter may require an explanation or follow-up before the application will be approved. In other circumstances a doctor may recommend a procedure. If a second medical opinion concludes that the procedure is unnecessary, the applicant will need to show the underwriter the second medical opinion. If there is no second opinion, the insurance company may require that the applicant have the procedure done prior to insuring him or her.

What is a PPO Plan and How Does it Work?
"A preferred provider plan (PPO plan) gives you freedom of choice of medical providers, including physicians, hospitals and medical laboratories. If you have a PPO plan, you do not need a referral from a primary care physician to see a specialist.

Network Provider vs. Non-Network Provider
Under a PPO plan, a health care provider who contracts with an insurance company to provide services to subscribers of the company's plans at negotiated rates (the fee schedule) is called a network provider. Any provider who has not contracted with an insurance company is called a non-network provider.

Does it Matter if My Doctor is a Non-Network Provider?
Under a fee schedule, the negotiated rates are approximately 30% - 50% of the provider's stated rates. While your provider is contracted with the insurance company, the total liability (for both you and the insurance company) is limited to the contracted rate. These contracts state that the fee schedule is confidential and may not be disclosed to anyone. Any provider who is not contracted with your plan has not agreed to accept reduced fees. If you select any non-network provider, including a specialist, the insurance company will pay a smaller amount of the bill and you will be responsible for paying the remaining balance. Generally, the insurance company pays 50% of the fee schedule (the discounted network contracted rate). Sometimes the plan provides for payment of 50% of the doctor's stated rate as long as the rate is approximately what is called the usual, customary and reasonable or UCR charge. UCR means the average fee charged for the procedure by a percentage (70% - 90%) of network and non-network doctors from the same community. Here is an example. The out of network doctor bill is $100. Let's assume that UCR for this procedure is $100. A network provider charges $50 for the same service. The insurance company pays 50% on all out of network charges. Based upon the fee schedule, the insurance company will pay 50% of $50. You are responsible for the remainder of the bill, which would be $75. Based upon UCR charges, the insurance company will pay 50% of $100. You are responsible for the remainder of the bill, which would be $50.

What is the Deductible?
The deductible is an amount that you will pay out-of-pocket for medical expenses before the insurance company will make any payment for medical services. The insurance company will credit your medical expenses at the network negotiated rate against the deductible amount before it will pay any amount to a medical provider. Some insurance plans will cover certain preventive care services without requiring you to pay any deductible.

Will I Always Have a Deductible if I Purchase a PPO Plan?
Deductibles are common on traditional PPO plans. Some PPO plans have eliminated the deductible for some procedures (such as office visits, consultations, and annual physical exams) while other plans have eliminated the deductible altogether. In lieu of paying the deductible for the procedures mentioned above, you will pay a small co-payment. A co-payment is a set fee payable for that service. Co-payments for doctor visits and annual physical exams generally range from $10 to $50. You will be responsible for paying the co-payment at the time of the visit. Deductibles generally range from $500 to $5,000 on an individual plan and from $0 to $5,000 on a group plan. Higher deductibles are available with some insurance companies. Except as described above, the deductible must be paid before the insurance company will pay any portion of the bill.

Will I Have Any Out-of-Pocket Costs (Other than the Deductible) if I Purchase a PPO Plan?
Once the deductible is paid, the balance of the bill will be split between you and the insurance company. The insurance company will pay a percentage of the contract rate for an in-network provider (50% to 90%). You will pay the remaining (member's) portion of the network contract amount. If you received service from a non-network provider, you will also pay any additional fees charged by that provider over and above the contract amount; these may be substantial.

Do All Payments to Network and Non-Network Providers Count Towards My Deductible and Co-Insurance?
If you receive services from both network and non-network providers, under most plans, the insurance company will account for payments to network providers separately from payments to non-network providers. As a result, you will have to pay two deductibles and co-insurance payments with two out-of pocket maximums - one for network providers and the other for non-network providers. If you have any dependents (such as a spouse and/or children) enrolled on your plan, each family member on the plan has his or her own deductible and out-of-pocket maximum and all medical expenses incurred by a family member are applied to that member's deductible and out-of-pocket maximum. The insurance company usually will double the single-person deductible and out-of-pocket maximum for the family deductible and family out-of-pocket maximum. Only after two family members have reached their separate deductibles will any remaining deductible amounts for other family members be waived. Out-of-pocket maximums are calculated similarly. Under a few plans, the insurance company will triple the deductible and out-of-pocket maximum and at least three family members will be required to meet the individual deductibles and out-of-pocket maximums before any other family members deductible or out-of-pocket maximum will be waived. If you have a high-deductible health plan and a health savings account (HSA), your deductible and out-of-pocket maximum may be the same amount. These plans differ in certain ways from the traditional PPO plans described above.

Will a PPO Plan Cover my Medical Costs if I Have a Baby or My Wife has a Baby (Maternity Coverage)?
Very few individual or family plans available as of March 2010 cover maternity or complications of maternity. If maternity coverage is a consideration, you should select your plan very carefully. Most group plans cover maternity. Currently, it is expected that legislation will change these provisions in 2014.

Are my Medications Covered Under a PPO Plan?
Insurance companies break prescription drugs into three categories: generic, formulary brand name and non-formulary brand name. All individual plans and some group plans do not cover brand name drugs (formulary and non-formulary) until a separate deductible is reached. The deductibles range from $100 to $500 on a group plan and from $150 to $2,000 on an individual plan. Formulary brand name drugs are discounted by the manufacturer for anyone with insurance coverage while non-formulary brand name drugs are not discounted.

Who pays for Mental Health, Physical Therapy, Chiropractic Care and/or Acupuncture?
Coverage for mental health (non-severe), physical therapy, chiropractic care and acupuncture is limited under all plans. About 15 years ago, insurance companies perceived abuse on the part of a small number of physicians providing these services. These physicians were billing the insurance companies for a large number of visits for conditions that generally required far fewer visits. As a result, benefits are limited for these services. Some companies will make exceptions on a case-by-case basis. Suffolk Benefits will be able to advise you on these benefits when you select your plan.

What is an HMO?
Insurance companies offer health maintenance organization (HMO) plans as an alternative to preferred provider organization (PPO) plans. The key advantage of an HMO plan is the low out of pocket cost for doctor and hospital visits. In addition, there are no claim forms, which makes administration easier. The disadvantages are that you are much more limited in the selection of doctors and hospitals and you may have a long wait (up to 60 days) to see a specialist.

What is a primary care doctor and do I need one?
In an HMO plan, you choose a primary care doctor. You must use your primary care doctor for all initial medical care. Your primary care doctor is in an independent practice association (IPA). The IPA is made up of primary care doctors and specialists.

Can I make an appointment to see a specialist? If you want to see a specialist, you will need a referral from your primary care doctor who is sometimes called a "gatekeeper"; your primary care doctor will refer only to a specialist who is in the same IPA as your primary care doctor. Your primary care doctor will send a request for approval of the referral to his or her IPA. The IPA may approve or deny your doctor's request; any approval may take up to two months. Suffolk Benefits may be able to expedite the referral process. Some HMOs will allow you to self refer to a specialist who is in the same IPA as your primary care doctor. Some plans may allow you to self refer to any doctor in the insurance company's preferred provider network (PPO) for treatment that will be performed in the doctor's office. The co-payment for these visits is usually higher than the regular doctor visit co-payment.

What is a Co-Payment and who pays the co-payment under an HMO plan? You will be responsible for making a co-payment for most services. This co-payment is a set fee rather than a percentage of cost. Doctor visit co-pays generally range from $10 to $50. Health insurance plans offer a variety of co-payment options to cover in-patient hospital charges. The co-payments range from $0 to $5,000. Generally, the higher your premium payments, the lower your co-payments for doctor and hospital visits will be.

How is Maternity Covered? Maternity is covered similarly to any other illness under an HMO plan.

Are my drugs covered under an HMO plan? HMO plans offer a few options for prescription drug coverage. All HMO plans have different co-payment amounts for generic, formulary brand name and non-formulary brand name drugs. Most HMO plans also have a separate brand name drug deductible, ranging from $100 to $1,000.

How to Select a Health Plan Since managed care in California is very prevalent, you must make sure that your doctor is a network provider for the specific plan you choose. Some doctors are PPO providers but not HMO providers. Some doctors are providers on group plans but not individual plans. Do not choose a health plan solely based on the premium. A low premium does not necessarily mean that you will save money. Look at the benefits. To estimate your out of pocket costs for a plan, first calculate the annual premium. Next, figure out how many times you go to the doctor each year for routine visits, treatment for specific conditions, sport injuries, etc. Figure out how much you pay per doctor visit on each plan you are considering. Add the total cost for the doctor visits to the annual premium. Compare the total costs for each plan to determine which plan is the most cost effective. This calculation will give you a realistic picture of you out of pocket costs.

Should I Consider Setting Up a Health Savings Account? Health savings accounts in conjunction with high-deductible health insurance plans are designed for people who are concerned about limiting their cost for catastrophic care but are willing to pay for routine medical care. There are generally two components to these plans - a tax-deferred savings account (this is optional) and a high-deductible health insurance PPO plan.

Are There Any Restrictions on Who Can Set up A Health Savings Account? Your health insurance plan must meet two criteria before you are eligible for a savings account: (1) the deductible must be at least $1,000, and (2) the only service that may be covered prior to reaching the deductible is an annual physical (including female examination) for an adult and a wellness examination for a child.

High Deductible Health Insurance Plan - How Does It Work? Some of the plans cover all services at 100% for the balance of the calendar year once the deductible is reached; other plans offer a co-insurance split after the deductible. Currently, your total out-of-pocket cost from the deductible and co-insurance would range from about $1,500 to $5,000 for an individual and $3,000 to $10,000 for a family of two or more on the same plan. In general, these plans are similar to traditional PPO plans except in calculating the deductible. In a traditional PPO plan, more services are provided for a co-payment prior to meeting the deductible. Also, under a traditional family PPO plan, the deductible is calculated per individual; once two family members have met their separate deductibles, any remaining amounts under the deductibles for the remaining family members are waived. Under a high-deductible PPO plan, any service provided to a family member on the plan is allocated to the family deductible. A few group high-deductible family PPO plans have an embedded deductible; as soon as one family member reaches the individual deductible amount, the remaining deductible will be waived and member payments under the plan will be based upon the co-payment or co-insurance amounts. As with any plan with a deductible, you are self-funding all costs up to the deductible amount. Since most people have more costs for minor and routine medical care, premium costs for high-deductible health insurance plans are generally 20% to 30% lower than costs for traditional PPO plans. These high-deductible plans work best for someone who rarely sees a doctor or who anticipates only very large expense(s) in the current year because many of these plans have low out-of-pocket maximums.

How Much Life Insurance Do I Need? Many people avoid purchasing life insurance because it requires them to consider their own mortality. However, it is an essential part of an individual's financial plan. Often a prospective client has asked me for life insurance quotes for several different death benefit amounts. What many people do not realize is that the death benefit amount should reflect the insured's personal financial situation and therefore be based upon his or her income, debts and expenses, wealth, family status and other individual factors. Without evaluating your true needs, you may be overpaying for life insurance you do not need or not adequately protecting your loved ones by purchasing too little coverage. To help you evaluate your life insurance needs, here are some general considerations that apply to most people; please keep in mind that other considerations may also apply to your particular circumstances. At the end of this discussion is a chart to help you calculate your life insurance needs. We suggest that you base your calculations on your current financial situation.

Dependent Care Costs One of the expenses often overlooked is dependent care. If you have primary responsibility for your children currently, your surviving spouse may need to pay someone to provide child care. Are you the primary care giver for other family members such as elderly parents or grandparents? Who will take care of them in your absence? In addition to the direct dependent care costs, you may also want to provide for your children's future education, either at private elementary or secondary schools, or higher education. The appropriate amount to include will depend in part on the children's ages and your expectations of their future educational needs. For example, do you anticipate that they will attend a two-year community college or a four-year private university followed by graduate school? There are many considerations in determining how much life insurance you need and it may seem overwhelming to figure this out. If you would like assistance, please call your Suffolk Benefits life insurance specialist at 310-215-1222 or 888-252-5340.

Why Do I Need Individual Life Insurance? There are several reasons why individuals purchase life insurance. If you are purchasing life insurance to cover a need that will last less than 30 years, you probably will be better off with a term (temporary) insurance policy. If your need will last 30 years or more, then you probably will be better off with a permanent insurance policy. Of course, the final selection will depend upon your specific needs and your budget. Suffolk Benefits can help you with this decision.

Why Do I Need Life Insurance for my Business? There are several reasons why businesses purchase life insurance; among them are to fund buy-sell agreements, key person insurance or deferred compensation and to secure a business loan. If your business wants to establish a "golden parachute" (lump sum payment to an officer or employee upon retirement), it may want to purchase permanent insurance and use the cash in the tax-deferred savings account to fund the payment. In general, if your business is purchasing life insurance to cover a need that will last less than 30 years, you probably will be better off with a term (temporary) insurance policy. If your need will last 30 years or more, then you probably will be better off with a permanent insurance policy. Another consideration, of course, is cost. If your business wants the lowest cost coverage, term insurance may be the better choice. Of course, final selection of the appropriate policy will depend upon your specific needs and your budget. Suffolk Benefits can help you with this decision.

Tax Deductibility of Life Insurance Premiums In general, if the premium is deducted as a business expense, then the death benefit is fully taxable to the policy beneficiary. However, corporations may be able to deduct the premium and avoid taxability of the death benefit under Section 162 of the United States Internal Revenue Code. An employee in the corporation is paid a "bonus" that the employee uses to pay the premium. The bonus will be treated as a deductible expense to the corporation so long as it is "reasonable" in light of the employee's total compensation. The employee will be taxed on that bonus; the corporation may then pay the employee a second "bonus" (a "double bonus") to cover the tax payment on the first bonus. This second bonus also will be treated as a deductible expense to the corporation. There are many other ways to structure a life insurance policy to meet the insurance needs of a business. Suffolk Benefits will be able to offer additional suggestions.

Health Insurance Underwriting for Individual Plans Health care reform legislation was recently enacted with most of the changes taking effect on January 1, 2014. The changes that take effect in 2010 will be described below. This description is based upon information available in March 2010.

What Happens When You Apply for an Individual Health Insurance Policy? When you apply for an individual health insurance policy, the insurance company will make one of three decisions - to offer a policy at standard rates, to offer a policy at a higher (rated) premium or to decline your application. Rated premiums usually range from 20 to 50% above standard rates; some companies will rate a policy higher (75 to 200%) before declining the application.

How Can I Get Health Insurance if I am Declined? Recent health care legislation states that a temporary high risk pool program for people who cannot obtain individual health insurance coverage due to pre-existing conditions will begin within 90 days of the legislation's enactment. Currently, this program is estimated to be effective in June 2010. The recent health care reform legislation also states that individual health plans will have to cover pre-existing conditions for children 19 and under for plan years beginning on or after six months from the legislation's enactment. The current estimated effective date for this provision is in September 2010. Currently, an applicant who is declined by an insurance company may apply for guaranteed coverage through the California Major Risk Medical Insurance Program (MRMIP); rates for these policies are much higher due to the increased risk. The program is only authorized to issue a specific number of policies; when the maximum number is reached, no more policies may be issued so there is often a waiting period for coverage under these policies.

What Does an Underwriter Look at in Evaluating my Application? A medical underwriter will look primarily at your health history, height and weight, and lifestyle. Underwriting guidelines for a particular health condition, especially if minor, vary from company to company. As prescription drug costs have escalated dramatically over the last eight or nine years, medical underwriters scrutinize these costs more closely in evaluating health insurance applications. While the insured may pay only a small co-payment for a brand-name or generic drug, the insurance company pays the wholesale drug cost. Generally, if the total wholesale drug cost for all prescriptions taken by an applicant is more than one-third of the monthly premium, the premium will be rated up or the application declined. Even if the total wholesale drug cost is one-third or less of the monthly premium, the premium may be rated up or declined depending upon the medication and why it is taken.

Why is the Medical Underwriter so Strict? Since the underwriter is responsible for managing the risks that a company is assuming, underwriters take a very conservative view and assume the highest cost outcome when looking at a medical condition.

How Can I Maximize my Chances of Being Approved? Since many conditions can be managed at reasonable cost, an applicant with a medical condition needs to be very specific in describing how the condition is managed. For example, someone with seasonal allergies whose symptoms occur for short periods two or three times a year is a different risk than someone with allergies requiring hospitalizations or use of a daily inhaler. Another example is an applicant who is 5'8' and 230 pounds. An underwriter might picture someone who is very overweight, but if this applicant is a bodybuilder with very low body fat, the underwriter would evaluate the applicant very differently. DCB will be able to help you with the underwriting process and advise you on company underwriting guidelines to avoid an unnecessary application denial. If there are any medical conditions, DCB also will advise you how best to disclose them.

Does the Underwriter Look at Any Paperwork Other Than My Application? A medical underwriter may also request physician records. Sometimes a doctor may note a possible condition in the records without a formal diagnosis or testing. The underwriter may require an explanation or follow-up before the application will be approved. In other circumstances a doctor may recommend a procedure. If a second medical opinion concludes that the procedure is unnecessary, the applicant will need to show the underwriter the second medical opinion. If there is no second opinion, the insurance company may require that the applicant have the procedure done prior to insuring him or her.

Once I am Approved, Can the Insurance Company Ever Rescind My Policy? Recent health care legislation prohibits health coverage rescissions for plan years beginning on or after six months of enactment, except for cases of fraud or intentional misrepresentation. Coverage may not be cancelled without prior notice to the enrollee. This legislation makes it more difficult for an insurer to rescind a policy and is estimated to be effective in September 2010. Although there is no centralized agency or bureau that maintains individual medical records, it is advisable for an applicant to respond to all questions on the health insurance application accurately to avoid a policy rescission later. Assume that an applicant fails to disclose a medical condition and is approved. Six months later the insured seeks medical treatment for an illness. When the insurance company requests the doctor's chart notes, the company will see the undisclosed condition. Under current law in March 2010, the company may then rescind the policy.

Is a Discount Plan the Same as Insurance? "True" health insurance is designed to limit your liability to a stated out-of-pocket maximum for a calendar year. Discount plans offer you a reduced price for medical services when you use a network provider without any cap on your total liability. A discount plan contracts with a provider network. When you use a provider in the network, you will be charged the reduced negotiated fee; your total liability in a calendar year is unlimited. If, for example, you need heart surgery that costs $40,000 and the network negotiated fee is $25,000, you will be charged the entire $25,000 under a discount plan. If you have a true insurance plan, depending upon the plan benefits, you likely will pay only a small percentage of the $25,000, not to exceed your annual out-of pocket maximum.

What is a PPO Plan and How Does it Work? "A preferred provider plan (PPO plan) gives you freedom of choice of medical providers, including physicians, hospitals and medical laboratories. If you have a PPO plan, you do not need a referral from a primary care physician to see a specialist.

Network Provider vs. Non-Network Provider Under a PPO plan, a health care provider who contracts with an insurance company to provide services to subscribers of the company's plans at negotiated rates (the fee schedule) is called a network provider. Any provider who has not contracted with an insurance company is called a non-network provider.

Does it Matter if My Doctor is a Non-Network Provider? Under a fee schedule, the negotiated rates are approximately 30% - 50% of the provider's stated rates. While your provider is contracted with the insurance company, the total liability (for both you and the insurance company) is limited to the contracted rate. These contracts state that the fee schedule is confidential and may not be disclosed to anyone. Any provider who is not contracted with your plan has not agreed to accept reduced fees. If you select any non-network provider, including a specialist, the insurance company will pay a smaller amount of the bill and you will be responsible for paying the remaining balance. Generally, the insurance company pays 50% of the fee schedule (the discounted network contracted rate). Sometimes the plan provides for payment of 50% of the doctor's stated rate as long as the rate is approximately what is called the usual, customary and reasonable or UCR charge. UCR means the average fee charged for the procedure by a percentage (70% - 90%) of network and non-network doctors from the same community. Here is an example. The out of network doctor bill is $100. Let's assume that UCR for this procedure is $100. A network provider charges $50 for the same service. The insurance company pays 50% on all out of network charges. Based upon the fee schedule, the insurance company will pay 50% of $50. You are responsible for the remainder of the bill, which would be $75. Based upon UCR charges, the insurance company will pay 50% of $100. You are responsible for the remainder of the bill, which would be $50.

What is the Deductible? The deductible is an amount that you will pay out-of-pocket for medical expenses before the insurance company will make any payment for medical services. The insurance company will credit your medical expenses at the network negotiated rate against the deductible amount before it will pay any amount to a medical provider. Some insurance plans will cover certain preventive care services without requiring you to pay any deductible.

Will I Always Have a Deductible if I Purchase a PPO Plan? Deductibles are common on traditional PPO plans. Some PPO plans have eliminated the deductible for some procedures (such as office visits, consultations, and annual physical exams) while other plans have eliminated the deductible altogether. In lieu of paying the deductible for the procedures mentioned above, you will pay a small co-payment. A co-payment is a set fee payable for that service. Co-payments for doctor visits and annual physical exams generally range from $10 to $50. You will be responsible for paying the co-payment at the time of the visit. Deductibles generally range from $500 to $5,000 on an individual plan and from $0 to $5,000 on a group plan. Higher deductibles are available with some insurance companies. Except as described above, the deductible must be paid before the insurance company will pay any portion of the bill.

Will I Have Any Out-of-Pocket Costs (Other than the Deductible) if I Purchase a PPO Plan? Once the deductible is paid, the balance of the bill will be split between you and the insurance company. The insurance company will pay a percentage of the contract rate for an in-network provider (50% to 90%). You will pay the remaining (member's) portion of the network contract amount. If you received service from a non-network provider, you will also pay any additional fees charged by that provider over and above the contract amount; these may be substantial.

Is There any Limit on my Liability for Medical Costs Under a PPO Plan? When your share of the cost reaches the out of pocket maximum per calendar year stated in your policy, the insurance company will pay 100% of the balance for the remainder of the calendar year. If your claims are very high and the insurance company has paid the lifetime maximum under the policy (ranging from $3,000,000 to $7,000,000), you become obligated to pay amounts over that maximum. Under recent health care reform legislation, lifetime maximum provisions in health insurance policies will be eliminated for plan years beginning on or after September 2010. Your annual (calendar year) out of pocket maximum for a network provider generally ranges from $1,500 to $8,000 and for a non-network provider generally ranges from $3,000 to $15,000.

Do All Payments to Network and Non-Network Providers Count Towards My Deductible and Co-Insurance? If you receive services from both network and non-network providers, under most plans, the insurance company will account for payments to network providers separately from payments to non-network providers. As a result, you will have to pay two deductibles and co-insurance payments with two out-of pocket maximums - one for network providers and the other for non-network providers. If you have any dependents (such as a spouse and/or children) enrolled on your plan, each family member on the plan has his or her own deductible and out-of-pocket maximum and all medical expenses incurred by a family member are applied to that member's deductible and out-of-pocket maximum. The insurance company usually will double the single-person deductible and out-of-pocket maximum for the family deductible and family out-of-pocket maximum. Only after two family members have reached their separate deductibles will any remaining deductible amounts for other family members be waived. Out-of-pocket maximums are calculated similarly. Under a few plans, the insurance company will triple the deductible and out-of-pocket maximum and at least three family members will be required to meet the individual deductibles and out-of-pocket maximums before any other family members deductible or out-of-pocket maximum will be waived. If you have a high-deductible health plan and a health savings account (HSA), your deductible and out-of-pocket maximum may be the same amount. These plans differ in certain ways from the traditional PPO plans described above.

Will a PPO Plan Cover my Medical Costs if I Have a Baby or My Wife has a Baby (Maternity Coverage)? Very few individual or family plans available as of March 2010 cover maternity or complications of maternity. If maternity coverage is a consideration, you should select your plan very carefully. Most group plans cover maternity. Currently, it is expected that legislation will change these provisions in 2014.

Are my Medications Covered Under a PPO Plan? Insurance companies break prescription drugs into three categories: generic, formulary brand name and non-formulary brand name. All individual plans and some group plans do not cover brand name drugs (formulary and non-formulary) until a separate deductible is reached. The deductibles range from $100 to $500 on a group plan and from $150 to $2,000 on an individual plan. Formulary brand name drugs are discounted by the manufacturer for anyone with insurance coverage while non-formulary brand name drugs are not discounted.

Will a PPO Plan Cover Preventive Care Services? Most plans do not cover preventive care services from non-network providers. These services include physical exams and routine office visits. When you select your plan, you want to ensure that your doctors are in-network providers for the plan that you select.

Who pays for Mental Health, Physical Therapy, Chiropractic Care and/or Acupuncture? Coverage for mental health (non-severe), physical therapy, chiropractic care and acupuncture is limited under all plans. About 15 years ago, insurance companies perceived abuse on the part of a small number of physicians providing these services. These physicians were billing the insurance companies for a large number of visits for conditions that generally required far fewer visits. As a result, benefits are limited for these services. Some companies will make exceptions on a case-by-case basis. DCB will be able to advise you on these benefits when you select your plan.

How Can I Control my Medical Costs? Some plans are designed to pay more for minor services and less for catastrophic events; these plans have a higher out of pocket maximum. Other plans limit coverage for minor services but provide better coverage for catastrophic events; these plans have a lower out of pocket maximum. DCB can help you select a plan that will best meet your needs.

What is an HMO? Insurance companies offer health maintenance organization (HMO) plans as an alternative to preferred provider organization (PPO) plans. The key advantage of an HMO plan is the low out of pocket cost for doctor and hospital visits. In addition, there are no claim forms, which makes administration easier. The disadvantages are that you are much more limited in the selection of doctors and hospitals and you may have a long wait (up to 60 days) to see a specialist.

What is a primary care doctor and do I need one? In an HMO plan, you choose a primary care doctor. You must use your primary care doctor for all initial medical care. Your primary care doctor is in an independent practice association (IPA). The IPA is made up of primary care doctors and specialists.

Can I make an appointment to see a specialist? If you want to see a specialist, you will need a referral from your primary care doctor who is sometimes called a "gatekeeper"; your primary care doctor will refer only to a specialist who is in the same IPA as your primary care doctor. Your primary care doctor will send a request for approval of the referral to his or her IPA. The IPA may approve or deny your doctor's request; any approval may take up to two months. DCB may be able to expedite the referral process. Some HMOs will allow you to self refer to a specialist who is in the same IPA as your primary care doctor. Some plans may allow you to self refer to any doctor in the insurance company's preferred provider network (PPO) for treatment that will be performed in the doctor's office. The co-payment for these visits is usually higher than the regular doctor visit co-payment.

What is a Co-Payment and who pays the co-payment under an HMO plan? You will be responsible for making a co-payment for most services. This co-payment is a set fee rather than a percentage of cost. Doctor visit co-pays generally range from $10 to $50. Health insurance plans offer a variety of co-payment options to cover in-patient hospital charges. The co-payments range from $0 to $5,000. Generally, the higher your premium payments, the lower your co-payments for doctor and hospital visits will be.

How is Maternity Covered? Maternity is covered similarly to any other illness under an HMO plan.

Are my drugs covered under an HMO plan? HMO plans offer a few options for prescription drug coverage. All HMO plans have different co-payment amounts for generic, formulary brand name and non-formulary brand name drugs. Most HMO plans also have a separate brand name drug deductible, ranging from $100 to $1,000.

How to Select a Health Plan Since managed care in California is very prevalent, you must make sure that your doctor is a network provider for the specific plan you choose. Some doctors are PPO providers but not HMO providers. Some doctors are providers on group plans but not individual plans. Do not choose a health plan solely based on the premium. A low premium does not necessarily mean that you will save money. Look at the benefits. To estimate your out of pocket costs for a plan, first calculate the annual premium. Next, figure out how many times you go to the doctor each year for routine visits, treatment for specific conditions, sport injuries, etc. Figure out how much you pay per doctor visit on each plan you are considering. Add the total cost for the doctor visits to the annual premium. Compare the total costs for each plan to determine which plan is the most cost effective. This calculation will give you a realistic picture of you out of pocket costs.

Should I Consider Setting Up a Health Savings Account? Health savings accounts in conjunction with high-deductible health insurance plans are designed for people who are concerned about limiting their cost for catastrophic care but are willing to pay for routine medical care. There are generally two components to these plans - a tax-deferred savings account (this is optional) and a high-deductible health insurance PPO plan.

Are There Any Restrictions on Who Can Set up A Health Savings Account? Your health insurance plan must meet two criteria before you are eligible for a savings account: (1) the deductible must be at least $1,000, and (2) the only service that may be covered prior to reaching the deductible is an annual physical (including female examination) for an adult and a wellness examination for a child.

High Deductible Health Insurance Plan - How Does It Work? Some of the plans cover all services at 100% for the balance of the calendar year once the deductible is reached; other plans offer a co-insurance split after the deductible. Currently, your total out-of-pocket cost from the deductible and co-insurance would range from about $1,500 to $5,000 for an individual and $3,000 to $10,000 for a family of two or more on the same plan. In general, these plans are similar to traditional PPO plans except in calculating the deductible. In a traditional PPO plan, more services are provided for a co-payment prior to meeting the deductible. Also, under a traditional family PPO plan, the deductible is calculated per individual; once two family members have met their separate deductibles, any remaining amounts under the deductibles for the remaining family members are waived. Under a high-deductible PPO plan, any service provided to a family member on the plan is allocated to the family deductible. A few group high-deductible family PPO plans have an embedded deductible; as soon as one family member reaches the individual deductible amount, the remaining deductible will be waived and member payments under the plan will be based upon the co-payment or co-insurance amounts. As with any plan with a deductible, you are self-funding all costs up to the deductible amount. Since most people have more costs for minor and routine medical care, premium costs for high-deductible health insurance plans are generally 20% to 30% lower than costs for traditional PPO plans. These high-deductible plans work best for someone who rarely sees a doctor or who anticipates only very large expense(s) in the current year because many of these plans have low out-of-pocket maximums.

Tax-Deferred Savings Account - Do I Need One and How Does It Work? Most people set up a tax-deferred savings account with pre-income tax dollars to pay for their out-of-pocket medical costs. To set up a savings account, you must deposit at least $100 and, as of 2010, no more than $3,050 for an individual and $6,150 for a family. You may pay for out-of-pocket medical, dental and vision expenses and certain over-the-counter medications from this account ("medical expenses"). Health insurance premiums may not be paid from this account. Each insurance company that offers these accounts has affiliated itself with a custodial trustee and/or bank to administer them for a monthly fee; there may be a set-up fee or other investment fees also. Some entities act both as trustee and bank. You may choose an independent trustee and/or bank to hold your account. To set up an account, you will need to call a special number to reach a specialist. Some trustees/banks will pay medical bills that you submit; others will give you a debit card or checkbook that you use to pay medical bills. You should keep a copy of any check or receipt and any underlying bill stapled together for your records to assist your accountant or tax advisor and in case you are audited. DCB will be able to assist you in setting up an account. If one family member has a high-deductible health insurance plan with a tax-deferred savings account that does not cover other family members in the same household (spouse, children or dependent parent), any amounts in the tax-deferred savings account may be used to pay for medical expenses of any of these other family members. The maximum deposit to the account will still be the individual amount ($3,050 in 2010.) Currently in 2010, you may deposit any amount up to the maximum at any time during the calendar year. Most banks offer investment options for amounts left on deposit in the account; these earnings accumulate on a tax-deferred basis. These accounts are similar to a Roth IRA; prior to age 59 ½, you may withdraw amounts only for medical expenses without penalty. Any amounts withdrawn prior to age 59 ½ for non-medical expenses are subject to a 10% penalty. By age 70 1/2, you must start withdrawing amounts on deposit. All amounts withdrawn after age 59 ½ and used for non-medical expenses are taxable. Under the recent health care reform legislation, starting in 2011, the penalty for withdrawal for non-medical expenses prior to age 59 ½ will increase from 10% to 20%.

Point-of-Service Plan (POS) A point-of-service plan includes both a PPO plan and an HMO plan. You can choose either the HMO plan or the PPO plan benefits for any given service. Under the PPO plan, you select in-network providers or out-of-network providers (at higher cost). These plans are available for group health plans only and are offered by a limited number of insurance companies.

How Does Group Health Insurance Work? In the 1940's during wartime wage controls, employers began to offer group health insurance to retain employees without increasing their wages. Since then, employer-sponsored group health insurance has become one of the primary ways to finance health care in the United States. As health insurance is currently regulated by individual states, the following describes group health insurance in California.

What are the Advantages of a Group Health Insurance Plan? Generally, group health insurance offers better benefits, lower deductibles and co-payments for doctor visits and prescription drugs, and lower out-of pocket maximums than individual health insurance plans. Each employee of a business may select any insurance plan that was approved by the employer.

What Kind of Group Insurance Can My Business Purchase? Currently, group health insurance falls into two categories: small group for groups of 2 to 50 employees and large group for groups of 51+ employees. Underwriting criteria differ for the two categories. Small group health insurance is not medically underwritten; it is "guaranteed issue" under AB 1672, enacted in the 1990's. If your group has more than five employees, you will still need to fill out an application with medical questions to obtain coverage; the medical information will determine the premium the insurance company will charge a small group. Large group health insurance is medically underwritten, similar to an individual health insurance policy. Effective January 1, 2014, recent health care reform legislation redefines small group coverage as 1-100 employees; such insurance will be "guaranteed issue". States may also elect to reduce the maximum number for a small group to 50 for plan years prior to January 1, 2016.

How to Qualify General. For all group health insurance, you will need to pay the premium with a check from a business checking account. You may need to provide a city business license. Insurance companies require that at least 75% of the "eligible" employees participate in the plan. An "eligible" employee is someone who is not (a) covered under a spouse's group plan or (b) over 65, working full-time and covered by Medicare. Since small group health insurance is not medically underwritten, you will need to show the insurance company that you have a "real" business to qualify. To show that you have a "real" business, you will need to provide certain documentation based upon your business structure. All such documentation must be dated on or before the middle of the calendar quarter prior to the plan effective date or you must be able to show at least six consecutive weeks of payroll prior to the plan effective date and provide all of the required documentation by the plan effective date. For example, for a plan to be effective on January 1, you must provide all required documentation dated on or before November 15 of the prior calendar quarter. If you do not have all of the documentation dated on or before November 15, you may provide six consecutive weeks of payroll and the required documentation dated prior to January 1 for guaranteed issue coverage effective on January 1. To start coverage prior to April 1 (the next calendar quarter), you may apply for coverage that will be medically underwritten. Otherwise, you will need to wait until April 1 to start a guaranteed issue plan.

What Documentation is Required? For a corporation, you will need to provide articles of incorporation, a statement of information (for an S corp or LLC) or statement by domestic stock corporation (for a C corp) filed with the California Secretary of State, a certificate of authority (if the corporation was formed outside California), a corporate tax return and a federal employer identification number (FEIN.) If the corporation has salaried employees, a Form DE-6 (quarterly wage report) will also be required. For a partnership, you will need to provide a signed partnership agreement prepared by an attorney and notarized, FEIN, Form K-1 (partnership tax return) and, if you have salaried employees, a Form DE-6. For a sole proprietorship, you will need to show your fictitious business name (dba), FEIN and, if you have salaried employees, a Form DE-6.

How Are Rates Calculated? Generally, in the small group market, there is a 20% spread from the lowest rate to the highest rate. Any group with 5 or fewer employees will automatically receive the highest rate regardless of the medical history of the employees and their dependents. Rates for groups of 6 to 50 will be rated within the 20% range based upon medical history of the employees and any covered dependents shown on the employee applications. If you obtain quotes from an agent, you should ask for the highest rate (at the top of the range) to avoid getting a quote less than what the insurance company will offer once your application is reviewed. Rates are determined by the insurance company's medical underwriter; no agent has authority to guarantee a rate.

Does My Employer Have to Pay My Premium? An employer is required to pay (1) a minimum of 50% of the employee premium, or (2) a defined contribution of at least $100 per employee under current law. Some insurance companies require a higher minimum premium from the employer. The employer is not required to pay the premium for dependents. Employers have the option to pay up to 100% of the premium for employees and dependents. Employers should pay the same percentage of premium or contribution amount for each employee and his or her dependents within an employee class to avoid violating federal discrimination laws. Employers may create different classes of employees based upon job description/function. An employer may offer health insurance coverage only to certain employee classes; in the small group market, this may eliminate guaranteed issue coverage for the group. Fines ranging from $5,000 to $50,000 may be levied upon employers who violate the discrimination laws. Consult your tax advisor before creating or excluding classes of employees. The employer may pay the entire premium for a specific plan and require employees who select a higher-premium plan to pay the difference.

Section 125 Cafeteria Plans - What Are They? Under Section 125 of the IRS Code, an employer may set up a plan that allows participating employees to use pre-tax dollars to pay for certain benefit costs. If you are an employer and you lower the taxable income of all participating employees through creation of a Section 125 plan, you may also reduce your overall share of FICA and FUTA taxes as well as your workers compensation insurance premium.

Large Group Underwriting - How Does A Large Group Get Approved? Groups with 50 or more employees do not receive guaranteed issue coverage. Based on the medical history of the employees and their dependents, the group will be accepted or rejected.

How is a Large Group Premium Calculated? Generally, for large groups of 50 to about 125, premium rates are fairly standard. For larger groups, the premium may vary substantially based upon medical underwriting and prior claims experience. To get the best price, DCB can help you as large group premiums are negotiable. Once an agent has requested a quote for a group, the company will give the same quote to any other agent requesting a quote for that group so it is important to work with an experienced agent. A large group employer with substantial medical claims who receives a hefty rate increase on an existing plan may need to keep the existing plan and pay the new rate. Since large group health plans are medically underwritten, other coverage may not be available in the market. Quotes for the large group market are based upon the age of the employees and the zip code of the business and any available claims experience from the prior year. Employees must complete a full medical questionnaire and the insurer may request medical records. Particularly in the large group market, it is advisable to work with an experienced large group agent to ensure that you obtain the best rate available in the market.

What Happens if I am Terminated, Get Married or Divorced or Die? Following certain life events, such as divorce or death of an employee and certain other events, or termination of employment, federal law (COBRA) and State law (Cal-COBRA) allow the employee to continue or add coverage for a spouse. COBRA covers groups of 20 employees or more and Cal-COBRA generally covers groups with 2 - 19 employees. Cal-COBRA only applies to companies headquartered in California. The initial period of coverage under both laws lasts for up to 18 months. Cal-COBRA coverage may be extended for an additional 18 months for any California headquartered company, regardless of size. COBRA and Cal-COBRA are technical laws and you should speak with your COBRA administrator for more information. Generally, COBRA and Cal-COBRA coverage is fairly expensive as the employee is paying the entire premium. When an insurable employee terminates employment, he or she may seek individual coverage at a lower cost.

How Much Life Insurance Do I Need? Many people avoid purchasing life insurance because it requires them to consider their own mortality. However, it is an essential part of an individual's financial plan. Often a prospective client has asked me for life insurance quotes for several different death benefit amounts. What many people do not realize is that the death benefit amount should reflect the insured's personal financial situation and therefore be based upon his or her income, debts and expenses, wealth, family status and other individual factors. Without evaluating your true needs, you may be overpaying for life insurance you do not need or not adequately protecting your loved ones by purchasing too little coverage. To help you evaluate your life insurance needs, here are some general considerations that apply to most people; please keep in mind that other considerations may also apply to your particular circumstances. At the end of this discussion is a chart to help you calculate your life insurance needs. We suggest that you base your calculations on your current financial situation.

Final Expenses The first question to ask is how much money do you need to cover final expenses. These expenses usually include funeral costs, unpaid medical bills that are not otherwise covered by insurance, and probate fees.

Mortgage and Other Debt Repayment Next, does your family own a home that is subject to a mortgage? Do you have other debts? These could be student loans, car payments or long-term credit card obligations. If you have any of these debts outstanding at the time of death without providing a source of repayment, then your survivors may be obligated to pay off the debt, depending upon how the debt is structured. Include all these debts (other than credit card debt paid off in full each month) in calculating how much money will need to be repaid. Who earns the income used to make these debt payments? If your income is used to make these payments, you should purchase insurance benefits sufficient to cover the full payments. If you are married and your spouse contributes to these payments, you may need insurance that will cover only a portion of these payments. In your absence, will your spouse be able to continue working? If your spouse will need to stop working to care for dependents, then a larger amount of insurance may be needed. Consider how many years of net income you want to provide for your family. Interest generated from investment of the death benefit may be used to make the monthly mortgage payments. In addition, depending upon your family's income tax bracket, it may be better to pay off the mortgage rather than continue the payments. Lastly, if the surviving spouse decides to sell your home, he or she will not only receive the proceeds of the sale, but also will have received the death benefit proceeds under the insurance policy.

Income Replacement If you are supporting your family or other loved ones, will they be able to make up the lost income in your absence? Will they be able to cover all of their expenses to maintain your family's current lifestyle without your financial contribution? These expenses include rent or mortgage payments (see above), utilities, food, clothing, taxes and other necessities, among others. If not, for how long will additional income be required; is it for life or for a shorter period? If desirable, will the survivor be able to obtain additional education or training to increase his or her income? If so, what is the cost of the additional education or training? Will the survivor be able to work while obtaining the additional education or training?

Dependent Care Costs One of the expenses often overlooked is dependent care. If you have primary responsibility for your children currently, your surviving spouse may need to pay someone to provide child care. Are you the primary care giver for other family members such as elderly parents or grandparents? Who will take care of them in your absence? In addition to the direct dependent care costs, you may also want to provide for your children's future education, either at private elementary or secondary schools, or higher education. The appropriate amount to include will depend in part on the children's ages and your expectations of their future educational needs. For example, do you anticipate that they will attend a two-year community college or a four-year private university followed by graduate school? There are many considerations in determining how much life insurance you need and it may seem overwhelming to figure this out. If you would like assistance, please call your DCB life insurance specialist at 310-215-1222 or 888-252-5340.

Why Do I Need Individual Life Insurance? There are several reasons why individuals purchase life insurance. If you are purchasing life insurance to cover a need that will last less than 30 years, you probably will be better off with a term (temporary) insurance policy. If your need will last 30 years or more, then you probably will be better off with a permanent insurance policy. Of course, the final selection will depend upon your specific needs and your budget. DCB can help you with this decision.

Mortgage Protection One of the most common reasons to purchase individual life insurance is mortgage protection. If the insured dies, the policy proceeds may be applied in a lump sum to pay off the principal balance of the mortgage. Alternatively, the policy proceeds may be invested to generate a stream of interest payments to make the continuing mortgage payments; the survivor continues to receive the tax benefits of owning real property. If the survivor later decides to sell the property, then he or she will receive not only the death benefit proceeds (at death) but also the property's sale proceeds.

College or Other Educational Fund College or other educational funds are generally funded with permanent insurance although this need usually lasts less than 30 years. These policies are designed to ensure that there is money to pay a child's educational expenses whether the income-producing parent lives or dies. If the parent dies, the death benefit is available; if the parent lives, cash in the tax-deferred savings account may be used to pay for educational expenses. A similar risk also exists if a parent becomes disabled and no longer can contribute financially towards a child's education; this topic will be covered in a future article. Often individuals who want to set up a college fund assume that the insured person should be the child who will benefit. There are at least two reasons why the insured should be a parent and not the child. First, the policy covers the risk that the parent's income is no longer available to pay for the child's education due to the parent's death. Death benefit proceeds will then be available to pay these expenses. Secondly, if both parents live, the parents may want to use the cash accumulated in the tax-deferred savings account to pay for all or a portion of the child's educational expenses. Since the child is very young during the life of the policy, the premium will be very low and the amount of cash accumulated from the tax-deferred savings account in the policy will be small and not likely to cover the total educational costs.

Income Replacement Most households rely on two incomes to pay their monthly obligations and maintain their existing lifestyles. Some of the basic monthly obligations are mortgage (see above) or rental payments, food costs, utilities, clothing and medical and other insurance and transportation costs. Some lifestyle obligations include special programs for your children, costs of your hobbies, and child care. Life insurance proceeds may be used to pay these obligations in the event one spouse dies or to provide funds for additional training or education of the surviving spouse to increase his or her income potential. During the period of additional training or education, the proceeds may also be used to support the household. To calculate how much insurance you should have, you will need to estimate these and any other similar expenses.

Final Expenses Since final expenses last a lifetime, permanent insurance is usually used to cover them. Final expenses include the cost of a funeral and unpaid medical bills associated with any final illness or injury, such as outstanding copayments or deductibles, depending upon the deceased's health plan. Other final expenses include probate fees to the attorney or executor; these generally are five to ten percent (5 to 10%) of the gross value of the estate. Estate taxes may be imposed based upon federal legislation. As of 2010, estate taxes have been eliminated by Congress. However, they may be re-enacted in the future. You should speak to your attorney or accountant for advice concerning your particular financial situation. If a life insurance policy is owned by the insured or the insured's spouse, the death benefit is included in the insured's or spouse's estate for estate tax purposes. DCB may be able to assist you in setting up the policy ownership to exclude the death benefit from your estate for estate tax purposes, if applicable.

Supplemental Retirement Income Generally, life insurance should not be used as your sole source of retirement income. There are certain limited circumstances in which a tax-deferred savings account in a permanent policy may be used to provide higher retirement income. You should discuss these circumstances with DCB at the time you purchase a permanent life insurance policy.

Why Do I Need Life Insurance for my Business? There are several reasons why businesses purchase life insurance; among them are to fund buy-sell agreements, key person insurance or deferred compensation and to secure a business loan. If your business wants to establish a "golden parachute" (lump sum payment to an officer or employee upon retirement), it may want to purchase permanent insurance and use the cash in the tax-deferred savings account to fund the payment. In general, if your business is purchasing life insurance to cover a need that will last less than 30 years, you probably will be better off with a term (temporary) insurance policy. If your need will last 30 years or more, then you probably will be better off with a permanent insurance policy. Another consideration, of course, is cost. If your business wants the lowest cost coverage, term insurance may be the better choice. Of course, final selection of the appropriate policy will depend upon your specific needs and your budget. DCB can help you with this decision.

Buy-Sell Agreements One of the most common reasons for a business to purchase life insurance is to fund a buy-sell agreement. Most often, a buy-sell agreement provides for transition of ownership when a business owner or partner or corporate officer dies or becomes disabled. In case of a death, the buy-sell agreement functions similarly to a business "will". The buy-sell agreement provides a mechanism for the surviving owners or partners or officers to purchase (buy-out) of the interest of the deceased owner/partner/officer from his or her estate, beneficiaries or heirs. By purchasing this interest, the surviving parties prevent members of the deceased's estate from becoming decision-makers or getting control of the business. Purchase of the deceased's interest in the business is funded by the insurance policy.

Key Person Insurance Key person insurance is used to protect against the loss of a key income-producing officer or employee. The beneficiary under this kind of policy is the business and the proceeds are used to keep the business operating, including maintaining favorable purchase terms with vendors, while the business searches for a replacement officer or employee.

Deferred Compensation Generally, federal law requires that pension plans and other retirement plans are not permitted to "discriminate" in favor of the owners or higher-paid employees at the expense of lower-paid employees. The cash accumulated in the tax-deferred savings account of a permanent life insurance policy may be used to provide additional retirement compensation to owners or higher-paid employees without violating federal law.

Business Loans When a small business applies for a loan and does not have sufficient assets to secure the loan, the lender may want one or more owners to take out life insurance, usually term insurance, on their lives to ensure that there will be a source of repayment in case one of them dies and the business is unable to continue.

Tax Deductibility of Life Insurance Premiums In general, if the premium is deducted as a business expense, then the death benefit is fully taxable to the policy beneficiary. However, corporations may be able to deduct the premium and avoid taxability of the death benefit under Section 162 of the United States Internal Revenue Code. An employee in the corporation is paid a "bonus" that the employee uses to pay the premium. The bonus will be treated as a deductible expense to the corporation so long as it is "reasonable" in light of the employee's total compensation. The employee will be taxed on that bonus; the corporation may then pay the employee a second "bonus" (a "double bonus") to cover the tax payment on the first bonus. This second bonus also will be treated as a deductible expense to the corporation. There are many other ways to structure a life insurance policy to meet the insurance needs of a business. DCB will be able to offer additional suggestions.

When Should You Purchase Term Life Insurance? In the world of life insurance, there are two main types that you may purchase - temporary and permanent. Temporary life insurance is generally called "term insurance" because it has a defined term of coverage. Permanent life insurance is designed to last for a person's entire life. Permanent life insurance comes in a few flavors, including whole life, universal life, variable life and indexed life. Term insurance is usually used to cover a need that will go away in 30 years or less. Two examples are to pay off a debt such as a mortgage, a student loan, or credit card debt, or to provide income to support minor children or a spouse.

How Does Term Insurance Work? Term insurance provides only a death benefit during a defined period ranging from one year to 30 years. Term insurance does not provide any cash value or savings account and you cannot take a loan against the policy.

Does the Premium Change During the Term of the Policy? During the covered period, the annual premium for a term insurance policy generally remains the same. Term insurance may be compared to renting an apartment for a lease term.; so long as you pay your rent, you may live there. Similarly, so long as you pay your premium, your term insurance policy remains in effect. Also, just as the rent usually increases at the end of a lease term, the premium for a term life insurance policy usually goes up if the owner renews the policy at the end of the term. Since the insured is older at the end of the term, the risk of death is higher and the insurance company charges more to cover this risk. Some term life insurance policies have a one-year term. In these policies, known as "annual renewable term policies," the annual premium simply increases every year. These policies are generally used to cover financial obligations that will be paid off in five years or less, such as a business loan that is expected to be paid off in two years. At the end of the term, the coverage automatically expires. The insured may stay with the same company or seek insurance from another company. Sometimes during the term, insurance rates for new policies will have decreased, for example, if life expectancy has increased. If the insured has developed health issues since the initial policy was issued, the insurance company may highly rate the new policy, resulting in a very high premium payment.

What Options are Available? Term insurance policies offer a number of options that the insured may select, usually by paying additional premium. One of the most significant options allows conversion of a term policy into permanent insurance. This convertibility feature may be available at any time during the term or only during a specified period starting with the policy issue date, depending upon the insurance company. Conversion guarantees that life insurance will be available to the insured for the insured's lifetime, even if the insured's health deteriorates and the insured would become uninsurable or only able to obtain life insurance at an astronomical premium. At the time of conversion, the premium for the permanent policy is calculated based upon the health history of the insured at the time the original term policy was issued. Many insurance companies that offer a convertibility feature only permit conversion into certain specified permanent policies. Often these permanent policies perform poorly for the insured; these policies often have high expense charges and high death benefit costs compared to other permanent products on the market. DCB is available to help ensure that you purchase a life insurance policy that best meets your needs. Since term policies are designed solely to provide a death benefit, they are only issued to persons at or below a maximum age that varies by company. Anyone over that age who wants life insurance will need to purchase a permanent insurance policy or look for another term insurance carrier with a higher maximum age.

When Should You Purchase Permanent Life Insurance? Temporary life insurance is generally called "term insurance" because it has a defined term of coverage. Permanent life insurance is designed to last for a person's entire life. Permanent life insurance comes in a few flavors, including whole life, universal life, variable life and indexed life. DCB can help you select the best kind of permanent life insurance to meet your needs. Permanent policies are used to cover debts that will last a lifetime, such as final expenses and payment of estate taxes, among others.

What are the Key Features of a Permanent Life Insurance Policy? Permanent insurance policies include two components - a death benefit and a tax-deferred savings account. Permanent insurance may be compared to owning a home; just as you build equity in your home by paying your mortgage payments, you may build equity in your permanent insurance policy. If you own a home, you may borrow money with the loan secured by the equity in your home. With a permanent policy, you may also borrow money from the issuing insurance company with the loan secured by money in the tax-deferred savings account.

What Kinds of Death Benefits are Offered? Permanent insurance policies are issued with a level death benefit or an increasing death benefit. With a level death benefit, the beneficiary receives only the level death benefit upon the insured's death. With an increasing death benefit, the beneficiary receives the death benefit plus any cash in the tax-deferred savings account. Assume that a permanent policy has a $250,000 stated death benefit and $50,000 in cash in a tax-deferred savings account. If the policy provides only a level death benefit, upon the insured's death, the beneficiary will receive only $250,000. The $50,000 in the savings account is forfeited to the insurance company. If the policy provides for an increasing death benefit, upon the insured's death, the beneficiary will receive $300,000. Since the insurance company has a greater financial risk with an increasing death benefit, the premium for this type of policy is higher than the premium for a level death benefit policy.

Why are the Premium Payments Higher on a Permanent Policy? Permanent policies generally have higher expense charges than term policies. These charges are not easily determined by the consumer. Each time that you pay your premium, the insurance company deducts the death benefit costs and then its expense charges before allocating the remainder of the premium to your savings account.

How Does My Savings Account Grow? Interest on the savings account is usually calculated on a compounded basis with the compounding method determined by the insurance company. Insurance companies keep as their profit a percentage of the insurance premium dollars that they invest after deducting amounts allocated to death benefit costs and overhead. Generally, the rate that the insurance company uses to calculate interest on the savings account is based upon the overall performance of the company's portfolio.

How are Death Benefit Charges Calculated by the Insurance Company? Insurance companies base their death benefit charges on the Commissioners Standard Ordinary Tables (CSO). The CSO tables are based upon life expectancy and are updated approximately every 10 to 15 years. The most recent tables were updated in 2002 to reflect longer life expectancy; as a result, the death benefit cost for policies based upon the 2002 CSO tables is lower than the death benefit cost for policies based upon prior tables. If you own a permanent policy that was issued based upon CSO tables prior to 2002, your premium will include a higher death benefit cost than a policy based upon the 2002 CSO tables. In addition, some insurance companies are still basing their death benefit costs on prior tables resulting in a higher death benefit cost. The higher death benefit costs reduce the amount available for investment in the tax-deferred savings account, thereby reducing the performance of the policy, all other factors being equal. Effective January 1, 2009, California law requires that all insurance companies calculate death benefit costs using the 2002 CSO tables.

How Do I Avoid Overpaying for Life Insurance? It is advisable to consult with DCB on an annual basis to review your coverage to ensure that your policy best meets your needs and that your policy provides the highest return for your premium. DCB will be able to review the expense ratios and confirm that the death benefit charges are based upon the most current CSO tables. If you purchase a life insurance policy with DCB's assistance, there is no additional charge for those services; the premium will be the same as the premium of a policy purchased online.

Life Insurance Underwriting Understanding how a life insurance company evaluates a life insurance application will help you when filling out the application. When the company receives a life insurance application, the company will undertake medical underwriting to assess the potential risk (risk of death during the policy term) that it is assuming. Based upon the results of the underwriting process, the insurance company will decide whether to make an offer or decline the application. If the insurance company makes an offer, the medical underwriting process will determine the premium (price) at which the policy will be offered.

How are Premium Rates Structured? Generally, premium rates for life insurance policies fall into two categories - one for non-smokers and another for smokers. Within the non-smoker category, there are four rate classes with an approximately 10 - 20% rate difference between classes. For smokers, there are usually two rate classes with an approximately 30 - 40% rate difference between the classes; some insurance companies offer as many as four rate classes for smokers with a 10 - 20% rate difference between classes, similar to the rate class differences for non-smokers. Caution: If you shop for a life policy online, usually you will be quoted a super-preferred rate for which very few people actually qualify once medical underwriting is completed. The rate that will be offered very likely will be higher than the initial online quote.

How Does an Underwriter Evaluate My Health History? Life insurance policy applications include a series of questions designed to help the underwriter evaluate the risk that you will die during the policy term (mortality risk). In addition, for most policies over $100,000 in death benefit or for persons whose age is over 30 years, a medical exam is required. Insurance companies contract with outside medical exam providers to perform these exams. Once your application is submitted, an examiner will come out to see you to take your blood pressure and blood and urine samples and ask a series of medical, lifestyle and family history questions. Medical underwriters will review the results of the medical exam and may order copies of the applicant's doctor's records based upon their review of the application. In some cases, the medical exam has revealed an unknown life-threatening illness of which the applicant or his/her doctor was not aware. The blood and/or urine samples reveal nicotine and drug usage. It is important to disclose any prescription medications that you are taking on the application because certain prescription medications contain similar substances to illegal drugs or narcotics. If these substances are revealed by the blood and/or urine tests without disclosure by the applicant, the insurance company may reject the application. Note: All life insurance companies report to the Medical Information Bureau (MIB). If you are denied coverage by one company because an illegal substance appeared in the blood and/or urine test, the results of that test are available to all insurance companies and your application will also be rejected by every other company. Insurance companies also look to the MIB to determine how much existing life insurance you have at the time of the present application.

What Other Factors Does the Insurance Company Review? Life insurance is designed to cover specific needs and should relate to your particular financial position. If you have or are applying for life insurance that greatly exceeds your net worth, the insurance company may question the need for the additional insurance and may reject the application. The application will ask if you are replacing existing insurance or applying for additional coverage. Having too much insurance raises a red flag that the insured may commit suicide or try in some other way to enable his/her beneficiaries to collect the death benefit. The underwriter will look at health history, age, height and weight, family history and lifestyle choices. Any deviation from what an underwriter would expect to find in a "healthy" person should be explained. For example, if you are 5'8" tall and weigh 230 pounds, the underwriter might conclude that you are overweight; however, if your application indicates that you are a body builder with very low body fat, the underwriter will see a very different picture of your health. Medical underwriting for a life insurance policy differs somewhat from medical underwriting for a health insurance policy because the risks are different. A medical condition that is not life-threatening, such as certain allergies, is of much less concern to a life insurance underwriter than a health insurance underwriter and will have little impact on a life insurance premium. In reviewing family history, underwriters primarily look to see if any parent or sibling died prior to age 60 from heart disease or cancer. For example, if all males in your family have died of heart disease prior to age 50 and you are 45 years old with excellent personal health history, your risk may still be higher than someone else with some personal health issues who comes from a family with long life expectancy. Underwriters also look at lifestyle activities that may result in a serious injury or death. These include skydiving, bungee jumping, car or motorcycle racing, and small airplane piloting, among others. It is advisable to consult with DCB on an annual basis to review your coverage to ensure that your policy best meets your needs and that your policy provides the highest return for your premium. If you purchase a life insurance policy with DCB's assistance, there is no additional charge for our services; the premium will be the same as the premium of a policy purchased online.

What Happens if You are Injured or Sick and Cannot Work? Disability income insurance can protect your family and your business if you are injured or become sick and are unable to work. If you generate income from a business that is not passive and is over a minimum amount, you are eligible for a disability income insurance policy. Passive income is income that will continue to come in even if you are disabled; examples are rental income and investment income. The minimum income to qualify for a disability policy is usually $20,000 or more and varies by company. Disability insurance is purchased less frequently than health or life insurance and is offered by very few companies. Since there are so many components to a disability policy, we recommend that you contact DCB to assist you.

When Would You Purchase Disability Income Insurance? There are three circumstances when you may want a disability income insurance policy. First, if you are employed, you may want to ensure a continuing income stream if you become injured or sick and unable to work. Next, if you are a business owner and generate income for your business, you may purchase "business overhead" insurance to cover salaries of non-income producing employees and other business expenses that would go unpaid if you became disabled. Lastly, disability insurance may be used to fund a buy-sell agreement. If you are a business owner, partner or employed officer of a business entity and one of the owners, partners or employed officers becomes disabled and unable to work, the entity may use the proceeds of a disability insurance policy to fund the buyout of the disabled person's interest in the business.

How Can I Cover My Business Expenses if I Become Disabled? "Business overhead" insurance is appropriate for a small business in which one or more of the owners, partners or officers is the primary income-producer. If that individual(s) is or are disabled for more than a year, the business would probably not be able to continue. These policies are owned by the business and cover "business overhead" expenses, such as salaries of non-income-producing employees, rent, supplies, utilities, insurance and other expenses necessary to keep the business operational, for one or two years. The business owner may insure up to 100% of the businesses' tax-deductible expenses (as compared to a personal policy that will cover 50-60% of income.) Since these policies cover only a limited time period and are covering expenses on a reimbursement basis, the premiums for these policies are usually less expensive than premiums for a traditional disability income insurance policy. To cover personal expenses a business owner may want a separate traditional disability income insurance policy.

How Can a Business Protect Itself if an Owner is Permanently Disabled? A business may also purchase disability income insurance to fund a buy-sell agreement. This agreement will protect business owners or partners from having an outsider not selected by them become a decision-maker in the business when a business owner or partner becomes disabled. The buy-sell agreement is a formal agreement prepared by an attorney. These policies usually have a long waiting period, typically one year, before any payment will be made to determine if the disabled person will be able to return to his or her duties. The insurance policy proceeds are used to fund the purchase (buy-out) of the interest of the disabled owner/partner from the other owners/partners.

What Governmental Benefits Cover a Disabled Employee? If you are a salaried employee of a company in California, you would qualify for State disability benefits that start after a 7-day waiting period and last for one year. The maximum benefit is based upon gross income and usually is not sufficient to cover all of the disabled person's monthly living expenses. Since this is a limited benefit, even if you are eligible, you may want to supplement it with an individual or group disability income insurance policy. Beginning in the thirteenth month of "total and permanent disability," an individual may become eligible for Social Security disability benefits. Very few people actually receive this benefit because of the stringent qualification requirements. Generally, eligible recipients need to supplement this benefit with an individual or group disability income insurance policy. If a disabled person qualifies for State or Social Security disability benefits and is also covered by an individual disability income insurance policy, the total benefits received will generally be the benefit stated in the policy; any benefits from a government plan will usually be deducted from the benefits paid by the private plan. There are exceptions to this general rule; DCB will be able to assist you in determining whether any exception will apply.

How Disability Policies Work The most important feature of a disability policy is how it defines "total disability" and "partial disability." The ideal definition says that if you cannot perform the "important and substantial duties" of your current occupation ("own occupation benefit"), you will be eligible for a benefit. The worst definition says that even if you cannot perform "the important and substantial duties" of your current occupation, the insurance company may still deny benefits because it determines that you may perform another occupation based upon your education or training. An example would be if you are currently a surgeon and can no longer perform surgeries, the insurance company could say that you could teach surgery and therefore are not eligible.

Are My Premiums Tax Deductible? Disability income insurance premiums are generally not tax-deductible by the owner while the benefits are received income tax-free. The maximum benefit you may purchase is generally about 50 - 60% of your gross income and is based roughly upon after-tax income. If you deduct a disability insurance premium, the benefit will be fully taxable. Similar to life insurance, Section 162 of the Internal Revenue Code allows a corporation to pay a "reasonable" bonus to an employee who can use the bonus to pay a disability insurance premium. The corporation may deduct the bonus pursuant to Section 162. You should consult your attorney or tax advisor for further information.

Does My Benefit Increase Each Year? During the life of the policy, the disability benefit is fixed based upon your income at the time of purchase. Insurance companies offer a "cost-of-living adjustment" ("COLA") rider that provides for benefit increases based upon COLA starting at the time of disability. Until the time of disability, there is no increase in the benefit payable.

Can I Increase My Benefit if My Income Goes Up? Insurance companies also offer a "future purchase option" rider. During your working years, your income is likely to increase. Without this rider, the benefit will not increase commensurate with your income. This option allows you to increase your benefit each set number of years, usually every two or three years, without proving medical insurability. The number of years depends upon the insurance policy. Without this rider, you may increase the benefit as your income increases only if you can show medical insurability. If your health has declined since the policy was first issued, the increased benefit will be payable only at a higher premium rate to cover the increased risk. Some insurance companies only offer the "future purchase option" rider on a "use it or lose it" basis. If you do not exercise the option the first time or any succeeding time it becomes available, it may automatically terminate for the remainder of the policy.

When Do My Benefits Start if I Become Disabled? All disability policies contain a "waiting period" calculated from the time of disability to the time benefits first become payable. For example, if you are covered by a disability insurance policy with a 90 day waiting period and become disabled on October 1, you will become eligible for benefits on January 1 of the next year. As disability benefits are payable at the end of each pay period during eligibility, payments will be made commencing on February 1 and the first of each month thereafter. The waiting period will apply to each disability.

How Long Will I Get Benefits? Disability policies cover a specific "benefit period" (two year, five years or to age 65) that you select at the time of purchase. If you are disabled and the disability continues for longer than the benefit period, benefits will stop at the end of the benefit period. If the disability ends prior to the end of the benefit period, then benefits will stop at the end of the disability. If the disability recurs during the benefit period or within the succeeding six months, benefits will be payable for any time remaining in the benefit period. A separate benefit period applies to any new disability. For example, assume that you are covered by a disability policy with a two year benefit period, are disabled for 20 months and considered "cured" at the end of the 20 months. Five months later, you have a recurrence. Benefits under the policy would be payable for another four (4) months. If the disability recurs more than six months after the end of the benefit period, then a new disability period would start and benefits would be payable for another two years. Assume now that you are disabled due to a different cause after benefits have stopped during the initial benefit period or within six months thereafter. You would be eligible for another two year benefit period for the new disability with payment commencing following a new waiting period.

Are Disability Policies Underwritten? Disability policy applications are reviewed by medical underwriters prior to the insurance company decision to offer coverage. Medical underwriters look at medical history, family history, lifestyle, applicant height and weight, and adjusted gross income. Adjusted gross income will be used to determine the maximum monthly income benefit for which you qualify. As mentioned above, the monthly benefit will be about 50% to 60% of your gross income. The insurance company will require at least two years of income tax returns. You may submit tax returns from the most recent two year period or any two consecutive years in the last five years.

How Is My Premium Determined? Occupation is one of the key factors in determining the premium of a disability policy. "White collar" occupations have lower risk generally than "blue collar" occupations and therefore have lower premiums generally. Your premium, however, will depend upon your specific duties in your occupation. The "waiting period" contained in the policy will also affect the premium. The most common waiting period is 90 days; some companies may have a shorter waiting period. All companies also offer a longer waiting period of six months or twelve months. The longer the waiting period, the lower the premium. The benefit period selected will also affect the premium. The longer the benefit period, the more expensive the policy.