CFP - Risk Management and Insurance Planning (11% of the exam) - Section C.19

Health insurance and health care cost management (individual and group)

Plan types (HMO, PPO, HDHP), deductibles, coinsurance and out-of-pocket limits, health savings accounts and flexible spending accounts, COBRA continuation, Affordable Care Act marketplace rules and premium tax credits, and Medicare's place for older clients.

COBRAAffordable Care ActHealth savings accounts

Practice question for this objective

Free sampleRisk Management and Insurance Planningmedium

Dana, aged 58, is made redundant on 30 June and loses the group health plan she shared with her employer. The full group premium is 1,200 dollars a month, of which her employer had been paying 900 dollars. Her projected household income for the year is low enough to qualify her for a premium tax credit on the health insurance marketplace, and she does not expect other employment before the year end. What is the most appropriate advice about her cover from 1 July?

AElect continuation cover, which after termination of employment runs for up to 36 months, and defer any marketplace decision until that continuation period has been fully exhausted.
BCompare continuation cover at up to 102 per cent of the full premium, about 1,224 dollars a month, against a marketplace plan, since losing group cover opens a special enrolment period and only marketplace cover carries the premium tax credit. Correct
CElect continuation cover at her former payroll share of 300 dollars a month, because the employer must keep paying its share of the premium for the length of the continuation period.
DElect continuation cover and claim the premium tax credit against those premiums, since the credit follows the individual once employer group cover has ended for a qualifying reason.

Weigh continuation cover priced at up to 102 per cent of the full group premium against a marketplace plan, where only the latter can attract a premium tax credit. Termination of employment is a qualifying event giving a qualified beneficiary up to 18 months of continuation cover, and the plan may charge up to 102 per cent of the full premium, so Dana's cost jumps from her 300 dollar payroll share to about 1,224 dollars a month. The same loss of cover is a triggering event for a special enrolment period on the marketplace, so she is not shut out until open enrolment. The premium tax credit attaches to a qualified health plan bought through the marketplace and cannot be applied to continuation premiums, so the correct advice is to price both routes rather than default to continuation cover.

Why A is wrong: Thirty-six months is a real continuation period, but it applies to qualifying events such as divorce or a dependent ageing off the plan. Termination of employment gives up to 18 months, so the advice rests on the wrong duration.

Why B is correct: Both routes are open to her, and the comparison is the planning work. Continuation cover is priced at up to 102 per cent of the full group premium, while loss of group cover triggers a special enrolment period and the premium tax credit is available only on a marketplace plan.

Why C is wrong: Her payroll deduction was 300 dollars, which makes this look like the status quo. Continuation cover lets the employer stop contributing, so the qualified beneficiary can be charged the full premium plus a 2 per cent administrative loading.

Why D is wrong: The credit does follow the individual rather than the employer, which makes this tempting. It is available only for a qualified health plan bought through the marketplace, so continuation premiums cannot be subsidised by it.

See more CFP practice questions, answers explained.

Exam traps in Risk Management and Insurance Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

She may keep contributing at the full annual limit, including the catch-up amount, because she remains covered by a qualifying high deductible plan and is still an active employee.
Why it is wrong: High deductible cover and active employment are two of the eligibility conditions, so this feels right. It ignores the separate condition that an eligible individual must not be enrolled in Medicare, and Part A alone breaks that condition.
10,400 dollars
Why it is wrong: This is the deductible of 3,000 dollars plus 20 per cent of the remaining 37,000 dollars, which is 7,400 dollars. The arithmetic is right but it ignores the out-of-pocket maximum, which stops the member's spending at 6,500 dollars.
The whole 500,000 dollars is excluded, because proceeds paid by reason of the insured's death keep their income tax free character in the hands of whoever holds the contract.
Why it is wrong: The general exclusion for death proceeds is real, which makes this the default assumption most candidates carry. That exclusion is expressly limited where a policy has been transferred for valuable consideration, so it cannot be applied without first testing the transfer.

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