Home Work Assignment - Chapter 3

Fin 604 OL1 Summer 2018

07/11/2018

1. The group health insurance could effectively spread the claims risk among the poll of

participants, and having a large group of participants also spreads the administrative

costs of the plan across many people. Also, there are tax benefits for both employer and

employee.

2. There are four different types of renewal provisions: Non-cancelable, Guaranteed

renewable, Conditionally renewable, and Optionally renewable.

a. Non-Cancelable: A provision that prevents the insurance company from

cancelling the policy for any reason provide the policy premium is paid.

b. Guaranteed renewable: A provision that requires the insurance company to

renew the policy for a specified period of time or until the insured attains a certain

age. The insurance company is not required to offer the same premium as

before. However, the premiums may be increased on a class basis, and may not

be increased for one participant.

c. Conditionally renewable: the company may not cancel the policy during the policy

time, however, once the policy has expired and upon a specified event or

occurrence, the company is not required to renew the policy.

d. Optionally renewable: a provision that permit the company cancel the policy at

any time for any reason, except during the term the existing contract. And permit

the insurance company to not renew.

3. The preexisting condition clause prevent adverse selection against the insurance

company, and to permit the risk-spreading function to work. The person who has the risk

cannot insure against the same risk. Because there is no way to spread the risk.
4. Contributions to HSAs are tax deductible as an adjustment to gross income, and

distributions from the HSA to pay for qualified medical expense are excluded from

income.

5. The FSAs do not roll over, and it required the employee to either spend all the money in

the account or forfeit the money to the employer.

6. Once the insured deductible and copays reached its stop limit, the insurance company

pays 100% of any additional health care costs for that year.

7. Employer-provided medical expense coverages are not taxable as income to the

employee, and the premiums paid by the employer are tax deductible as an ordinary and

necessary business expense.

8. When employment terminates, there is a 31 days grace period, so the policy will remain

in force and will not lapse as long as the premium is paid within a specified

number of days after the due date. Also, the employers who offer group health and have

at least 20 employees are required to provide COBRA continuation coverage to their

covered employees. The former employee can purchase group insurance at the same

insurance at the same rate that applies to members of the group plan. And the employer

can charge an additional 2% of premium amount to defray administrative costs.

Multiple-choice:

1. C

2. A 7500-1000=6500, 6500*0.2=1300, 6500-1300=5200

3. D

4. C The stop-loss equals $1,000. 7500*4=30000, 30000-1000=29000

5. B