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  • Can a Flexible Spending Account (FSA) be used for a gym membership?

    The U.S. Internal Revenue Service (IRS) typically does not allow funds from a Flexible Spending Account (FSA) to be used for membership dues for health clubs or gyms. However, the IRS allows FSA funds to be used for paying separate fees charged by gyms and health clubs for specific activities prescribed by doctors.

    Qualified Medical Expenses

    The IRS issued Publication 502, which defines qualified medical expenses as those indicated in the FSA plan that would typically qualify for deduction as medical and dental expenses. The IRS does not consider nonprescription medicines, except for insulin, as qualified medical expenses. All qualified medical expenses must require a doctor's prescription.

    The IRS does not allow FSA funds to be used for paying health insurance premiums and long-term care coverage. Also, the IRS considers gym membership a general health cost a person does not have to necessarily incur to treat a specific medical condition. However, in rare circumstances, a doctor may issue a medical note advising an FSA beneficiary to enroll in a gym to treat his specific condition. In this case, FSA funds may be used to pay for a gym membership. Also, special group exercises or fees paid for classes in a gym that are prescribed by a doctor to treat specific diseases may be considered qualified medical expenses.

    Flexible Spending Accounts

    Employees use FSAs to set money aside to cover various qualified medical expenses. FSAs are typically funded through salary reduction agreements with employers, and contributions to FSAs are exempt from employment and federal income taxes. Also, employers may choose to contribute to FSAs.

    Beneficiaries of FSAs must generally spend the money by the end of a calendar year, otherwise the funds are lost. However, certain plans allow employees to have a grace period or carryover. Distributions from FSAs are typically tax-free if they are used for qualified medical expenses.

  • Can a Flexible Spending Account (FSA) be used for a spouse?

    The U.S. Internal Revenue Service (IRS) allows Flexible Spending Account (FSA) funds to be used for qualified medical expenses incurred by an account owner and his spouse. Additionally, the IRS allows FSA funds to be used by any person claimed as a dependent on the FSA owner's tax return with certain qualifications.

    Flexible Spending Account

    An FSA is a tax-free account that is available to salaried employees; it can be sponsored and maintained by eligible employers. Contributions to an FSA account have an annual limit, which is adjusted for changes in the cost of living by the IRS every year. In 2015, the contribution cap for FSAs is $2,550. Contributions are exempt from federal income tax, federal employment tax, Social Security and Medicare taxes. To qualify for tax-free status, distributions from an FSA must not exceed contributions in a particular calendar year, and distributions funds must be spent on qualified medical expenses.

    Who Can Use FSA Funds?

    In addition to the FSA owner, the owner's spouse can incur qualified medical expenses that can be covered by FSA funds. Distributions from FSAs can also be used by dependents who are claimed on the owner's tax return. If a dependent earns gross income in excess of $3,950, files a joint return or can be claimed as a dependent on somebody else's return, he is not eligible.

    Qualified Medical Expenses

    Funds from an FSA can be used only for qualified medical expenses incurred to treat or alleviate a medical condition. Cosmetic procedures such as teeth whitening, a face-lift or liposuction are not allowed. However, certain cosmetic surgery is allowed, as long as it used to remove body disfigurement due to an illness or accident.

  • Can a Flexible Spending Account (FSA) be used for Lasik?

    The owner of a Flexible Spending Account (FSA) can use money from the account on various eye surgery procedures, including laser-assisted in situ keratomileusis (LASIK). The U.S. Internal Revenue Service (IRS) allows FSA distributions to be used for qualified medical and dental expenses that help prevent and alleviate diseases.

    Flexible Spending Accounts

    Only an eligible employer can start an FSA plan, while self-employed individuals are not allowed to open and maintain FSA accounts. The IRS allows a maximum contribution of $2,550 to an FSA in 2015. Contributions are exempt from federal income and employment taxes. Distributions are exempt from federal and employment tax only if an individual withdraws an amount not exceeding his contribution in that year and uses the funds for qualified medical expenses. An FSA owner can spend his funds on qualified medical expenses incurred by him, his spouse, dependents claimed on his tax return and his children under age 27.

    Qualified Medical Expenses

    Qualified medical expenses include costs necessary to treat or alleviate a health issue. Medical expenses, especially drugs, typically must be accompanied by a doctor's prescription, except for insulin. Even if an individual bought an over-the-counter medication, he must obtain a doctor's note that prescribes him a particular drug. Qualified medical expenses also include various vision and dental procedures, such as LASIK, teeth cleaning, braces, sealants, fillings and X-rays.

    The IRS disallows expenses incurred on various cosmetic procedures, including liposuction, face-lifts and body parts correction. However, the IRS allows certain cosmetic surgery expenses if these procedures are done to correct disfigurements caused by illnesses, trauma or accidents.

  • Can I get dental insurance with Medicare?

    Medicare does not offer dental insurance that will cover dental care and medical supplies, such as cleanings, sealants, extractions, fillings, plates and other dental procedures. Congress established a blanket exclusion for dental services as part of the Medicare program. However, the Medicare makes exceptions for certain dental procedures if they are performed in association with certain diseases and as part of inpatient hospital care.


    Medicare is a national insurance program established and administered by the U.S. federal government. Medicare is designed for U.S. citizens and legal residents who have resided in the United States for at least five years. Medicare participants must be 65 years or above and have worked and made contributions through Medicare tax. Medicare also provides insurance to younger Americans who have certain disabilities. Medicare's primary sources of financing come from payroll tax and premiums paid by Medicare participants.

    Dental Services Exclusion

    While Medicare insurance does not cover dental services, it covers certain dental procedures when they are performed due to the general hospitalization of a patient. Medicare Part A pays for dental expenses incurred in a hospital, if a patient is in emergency or has a complicated dental problem that is dangerous to his life and requires immediate medical intervention.

    Under Medicare Part B, coverage of dental services is determined based on the type of dental procedure and the anatomical structure for which dental service is provided. Part B essentially disallows all regular types of dental procedures. However, Part B has an exception when tooth extraction is performed in preparation of a patient's jaw for radiation treatment of neoplastic disease. Also, Medicare Part B covers services related to a doctor's oral and dental examination for renal transplant surgery or heart valve replacement.

  • Can I get dental insurance with Obamacare?

    The Patient Protection and Affordable Care Act, also known as Obamacare, allows you to obtain dental coverage through the federal insurance marketplace. You can obtain dental coverage at the Health Insurance Marketplace as part of a health plan or as a standalone dental insurance plan. However, to obtain a standalone dental plan, you must simultaneously enroll in a health plan.

    The Affordable Care Act

    The Patient Protection and Affordable Care Act was signed into law by President Barack Obama in 2010 with the intent of improving health outcomes, lower costs and ensure that a larger number of Americans get medical insurance. The law is in the early stages of its existence with much of its provisions being contested, and there are multiple legislative initiatives to repeal Obamacare. While not directly attributable to Obamacare, the number of uninsured persons dropped significantly since the adoption of the law. According to the U.S. Centers for Disease Control and Prevention (CDC), the number of uninsured persons from January to March 2015 was 29 million people of all ages, which is 7 million fewer than in the same period in 2014.

    Dental Insurance

    You can obtain dental coverage, which is part of certain health plans. The Health Insurance Marketplace gives you an easy way to filter plans that offer both dental and health coverage. A single monthly premium for such a plan would cover dental and health insurance. You can add dental insurance separately from your chosen health plan. In this case, you have to pay a separate monthly premium for your dental insurance.

  • Can I get renters insurance without a lease?

    Renters insurance does not require the policy owner to have a lease. For example, many college students acquire renters insurance policies to cover their personal property while they are living in dormitories. The renters insurance can also cover personal property while the goods are in storage or during travel.

    What Is a Renters Insurance Policy?

    Renters insurance is a form of property insurance that typically offers protection from losses due to theft, fire or windstorm. A renters insurance policy covers items such as furniture, clothing, computers, phones, jewelry, cameras and bicycles.

    Take an Inventory of Your Personal Property

    Before making a decision on renters insurance, take an inventory of your personal property and the estimated value of each item. Consider ways to minimize theft and damage by doing a risk assessment of the property. If there are high-value items on your personal property list, ask the insurance company about a separate rider for such unique items as jewelry or antiques.

    Cost and Coverage of Renters Insurance

    Renters insurance policies may vary in cost depending on the type of coverage and the amount of the deductible. Renters insurance offers either replacement cost or actual cash value coverage. The insurance premium will be higher for replacement cost coverage, since the payout for the claim is based on the current cost of a new item. As with most insurance policies, a higher deductible means lower premium costs.

    Information Needed for the Application

    Before applying for a renters insurance policy, gather the following information that may be required on the application form:

    • Identify the location and address where the personal property will be held.

    • Estimate the current value and replacement cost of the personal belongings.

    • Find out if the location where the personal property is held has security alarms and fire alarms.

  • Can my insurance company refuse me coverage?

    Insurance isn't always as straightforward as other products, and insurers can deny coverage in many different instances.

    Non-Renewal of Insurance Coverage

    An insurance company is not obligated to renew an insurance policy for any of its policyholders. Should a policyholder have excessive claims or a change in circumstances that make him or her uninsurable, the company may choose not to renew. In other cases, they may increase the premium to reflect the increased risk. 

    Denied Claims

    Even if you pay your premiums regularly and on time, an insurance company may not pay out claims you report. First, the situation surrounding the claim may not be covered under the policy because it is one of the listed exclusions. One example of this is if homeowners have a flood and file a claim with their home insurance company. Because floods are not covered by home insurance, but by flood insurance, these claims will likely be denied. Second, the claim might not be more than the deductible, which means the insured is responsible for paying it. Finally, the insurance company may find the damage to have been caused by the insured which may allow them to deny the claim. (For related reading, see: Will Filing an Insurance Claim Raise Your Rates?)

    Denied Policies

    If you have one type of insurance with a carrier that offers multiple lines of coverage, they are under no obligation to approve any applications you submit for additional coverage. They will underwrite and evaluate your application just as they would any other applicant and will either approve or decline the policy, based on the risks you present. 

    (For related reading, see: 6 Types of Insurance Coverage You Didn't Think You Needed.)

  • Can roommates share renters insurance?

    Under some all-perils renters insurance policies, roommates can share insurance by both being listed as named insureds on the policy. Some states and carriers do not allow sharing of policies.

    Coverage Limits

    When looking for a renters insurance policy, both roommates should agree on a level of coverage to cover all of their belongings together. Any high-value items should be scheduled on the policy. Speak with a licensed insurance agent when searching for and obtaining adequate coverage to meet your needs.


    One benefit of renters sharing policies could be a lower premium than if each insured had separate coverage. When filing a claim on one policy, only one deductible would apply instead of multiple deductibles.

    Things to Consider

    Roommates should create a contract outlining who is responsible for the deductible in the event of a claim to only one tenant's personal property. All personal property should be inventoried, with photographs of the items, prior to the insurance coverage taking effect. This will also help tenants determine who is owed what in the event of a claim.

    Renters may believe sharing a policy will be cheaper and easier in the short term. Roommates should realize the potential problems that could arise between the parties during a claims process.

    Replacement Cost

    The replacement cost option is available for renters insurance policies. Replacement cost ensures that insureds receive enough compensation to purchase new items of like quality to replace the damage property. If replacement cost is not selected, then claims are settled on an actual cash value basis, which takes depreciation into account. Roommates sharing coverage would have a much better claims experience with the replacement cost option.

  • Can you fund nonqualified deferred compensation plans with life insurance?

    It is possible to fund nonqualified deferred compensation plans with life insurance. A nonqualified deferred compensation plan is a binding contract between an employer and an employee. The employer makes an unsecured promise to pay an employee's future benefits, subject to the specific terms of the contract.

    Funding Nonqualified Deferred Compensation Plans

    Nonqualified deferred compensation plans are unfunded plans that are broken into two parts. The first part is the plan itself, which is equivalent to the contractual agreement between the employer and employee. The second part is the employer's general asset reserve that finances the future liabilities created by the plan. The general asset reserve is what the employer uses to pay the employee for the future benefits.

    The general asset reserve is required by generally accepted accounting principles (GAAP) and can be taxable assets such as mutual funds or employer-owned life insurance. The plan is the legal benefit between the plan participant, or the employee, and the plan sponsor, or the employer. The plan outlines the overall benefits, the distribution schedule, and the vesting and forfeiture stipulations.

    The two main types of nonqualified deferred compensation plans that allow life insurance funding are supplemental executive retirement plans (SERPs) and corporate-owned life insurance (COLI). SERPs are similar to defined-benefit pension plans and give an employee a stated benefit from the employer at the time of retirement.

    With COLI, companies purchase life insurance policies on employees they wish to compensate. The company pays the premium on the life insurance policies, and then pays out benefits to the employees when they retire.

  • Can your insurance company cancel your policy without notice?

    In most states, an insurance company must give a policyholder written notice of at least 30 days before canceling a policy. The policy between the insurance company and the insured is a formal contract that specifies the reasons the insurer can cancel the policy and the time frame and method in which it can do it.

    Rights for the Insured

    Once an insurance policy is issued, an insurance company cannot cancel the policy except for reasons specifically stated in the policy. State laws usually limit what an insurance company can include as reasons for cancellation of the policy. Typical reasons include failure by the insured to make required premium payments, and suspension or revocation of the insured's driver's license in the case of auto insurance. Other reasons include the insured misrepresenting the asset or committing fraud, and the insured intentionally damaging the asset, such as deliberately causing an automobile accident, or causing harm to oneself in the case of life insurance or medical insurance. In some states, homeowner's insurance policies can be canceled for an excessive number of claims or for significant changes in risk.

    Each state has an insurance commission or division charged with protecting consumers while encouraging a financially stable and competitive insurance marketplace. State insurance regulators confirm insurance companies are financially sound so they can pay claims. They also provide services to policyholders to ensure they are treated fairly by making sure claims are handled promptly and accurately, and that insurance companies honor their policies. To find your state insurance commission, visit the National Association of Insurance Commissioners (NAIC).

    (For related reading, see: 5 Insurance Policies Everyone Should Have.)

  • Can your insurance company drop you after an accident?

    It is possible, but highly unlikely, for an insurer to cancel a policy after one accident. If the accident results in a suspended driver's license or is alcohol- or drug-related, however, there is a higher likelihood of the policy being canceled.

    High-Risk Drivers

    Insurance companies are in the business of making money, and they do so by hedging against risk. Just about every driver is in an accident at some point, so one accident is not likely to affect a policy much. If your recent driving record is dotted with other accidents, speeding tickets, moving violations and the like, you are categorized as a high-risk driver. Rather than dropping a high-risk policy, insurance companies often wait until such policies are up for renewal and either raise the premiums or simply do not renew them.

    Do Not Drink and Drive

    Nothing good comes from driving while under the influence of drugs or alcohol. Insurance companies are much more likely to cancel a policy of a driver who has been involved in an accident while driving impaired. Such drivers, if allowed to retain a driver’s license at all, can expect their car insurance premiums to skyrocket. If the car insurance policy is canceled, it is often extremely difficult to find a company that provides coverage to drivers with DUI or DWI convictions.

    Notice of Cancellation

    Insurance companies are required by law to provide prior notice of policy cancellation. You are also given a chance to make an appeal on your behalf to the insurance company.

  • Can your insurance company drug test you?

    Insurance companies have the right to require drug tests for health insurance and life insurance policies, but not all of them ask for these tests. It is common to have blood work and urine samples tested for illegal and prescription drugs and alcohol. Any sign of abuse could lead to higher premiums or even the refusal of coverage.

    Group or Individual Policy

    In most cases, those joining a group policy through an employer are not subjected to drug testing or a physical exam. With the number of people being covered, insurance companies adjust the group’s premiums to account for many risk factors, including recreational drug use. The chances of insurance companies requiring drug tests increase greatly if a person is applying for an individual private policy. There is a good chance if a test is not required, a higher premium is charged to mitigate the risk.

    Doctors often schedule appointments at applicants' homes within a couple days of applying for the policy so applicants do not have time to get the drugs or alcohol out of their systems. People often worry they will be turned into the police as a result of failing a drug test. Drug test results are regarded as private, and in most cases, it is illegal for insurance companies to release the results to a third party. Insurance companies are not interested in your legal affairs, and more importantly, do not like being sued themselves.

    There is little argument that those who use drugs, even recreationally, are at a higher risk for illness and disease than those who do not use them. Insurance companies are taking every step possible to keep their customers as low risk as possible. Some believe it is an invasion of privacy to be subjected to drug tests. Customers are free to purchase their insurance from companies that do not require drug tests, but they have to be prepared to pay extra for that protection of privacy.

  • Dental coverage on flexible spending account (FSA)

    Flexible spending accounts (FSAs) are accounts that allow employees to obtain reimbursement for various medical expenses. Because FSAs are classified as tax-exempt savings accounts, no employment or federal income taxes are deducted from contributions. The IRS states that an FSA has no reporting requirements for the purposes of federal tax returns. Distributions are free provided they are used for qualified medical expenses.

    FSAs can be used to pay for certain dental expenses, including deductibles and co-payments. However, not all types of dental procedures are covered.

    Dental Expenses That Can Be Paid With FSAs

    FSA reimbursement rules generally follow Internal Revenue Service (IRS) deduction rules as spelled out in IRS Publication 502, Medical and Dental Expenses. The basic rule is that anything that treats or prevents a dental disease is eligible for FSA coverage. This includes teeth cleaning, fillings, sealants, crowns, bonding, dentures, tooth extraction, inlays, onlays and all diagnostic and preventative services. Treatments for gingivitis, temporomandibular joint syndrome and disorder, gum recession and oral surgery are also covered. Some FSAs can also be use to pay for orthodontia.

    Expenses That Are Excluded

    FSA plans do not cover any form of cosmetic dentistry. The plans do not cover teeth whitening, veneers or cosmetic orthodontia.

    There is an obvious discrepancy with orthodontia. While the IRS says that some procedures treat disease and some procedures are cosmetic, there is no specific set of rules that defines the specifics regarding which procedures qualify for coverage under an FSA. Your orthodontist should be able to help you determine what your plan covers. 

    Flexible Spending Plans Vary

    The IRS provides general rules for FSA plans, however, each individual FSA provider interprets those rules differently. Talk to your employer and your plan provider before you start any course of treatment. Your dental office should be willing to coordinate with your insurance provider to make sure the services you are receiving are covered under your FSA plan. (For related reading, see: How Flexible Spending Accounts Work.)

  • Difference between a peril and a hazard

    The two related terms, "peril" and "hazard," are often used in reference to the insurance industry. Essentially, a peril is something that causes, or can cause, a loss, while a hazard is something that makes the occurrence of a peril or loss more likely.

    Peril and Hazard Defined

    A peril is an event or circumstance that causes or may potentially cause a loss. Examples of perils include fire, flooding, hailstorms, tornadoes, hurricanes, auto accidents, or home accidents, such as falling. (For related reading, see: The Most Expensive Home Insurance Perils.)

    A hazard is an action, condition, circumstance or situation that makes a peril more likely to occur or a loss more likely to be suffered as the result of a peril. Examples of hazards include dangerous behaviors, such as skydiving or base jumping, that increase the likelihood of injury. Hazards are commonly divided into three classifications: physical, moral and morale.

    Physical Hazards

    Physical hazards refer to actions, behaviors or physical conditions that constitute a hazard. Smoking is considered a physical hazard because it increases the chance of a fire occurring. Smoking is also considered a physical hazard in regard to health insurance because it increases the probability of severe illness. Other physical hazards are frayed electrical wiring, liquid spills and any of a number of dangerous activities, such as working at high altitudes or with dangerous equipment.

    Moral Hazards

    Moral hazards refer to hazards resulting from immoral behavior such as lying or fraud. Health insurance companies are concerned with moral hazards that may lead to fraudulent claims, such as an auto accident victim who exaggerates the injuries he suffered.

    The legal system is sometimes considered a moral hazard because it may encourage people to sue for monetary gain even when they have little, if any, genuine cause for a financial claim. This is because it costs them very little to file a lawsuit, and they risk very little chance of suffering any loss as a result of doing so. This type of moral hazard may also be referred to as a legal hazard. It is an important issue for health insurers. Insurers may face legal hazards that result from large malpractice suits. Legal hazards may also exist through regulations or laws that force insurance carriers to cover risks they would not ordinarily choose to provide coverage for, such as drug addiction.

    Morale Hazards

    Morale hazards are those hazards that result from conditions or circumstances that tend to lead people or institutions to adopt a more careless or reckless attitude and exercise less caution to prevent injury, thus increasing the possibility an injury or loss occurs. The insurance industry itself is sometimes considered a morale hazard, in that having insurance tends to make people less careful about avoiding injuries or illness, due to the fact they know they have insurance to cover medical costs. (For related reading, see: How does the Affordable Care Act affect moral hazard in the health insurance industry?)

    Government bailouts of banks represent a morale hazard in the financial sector. As long as banks are confident of government aid, they are more likely to risk financially overextending themselves.

  • Do flexible spending accounts (FSA) funds roll over?

    An individual can utilize an employer’s cafeteria plan of employee benefits to establish a flexible spending account (FSA). An employee can roll over savings in the account from one year to the next. However, as of 2015, the maximum amount that can be rolled over is $500.

    What Is a Flexible Spending Account?

    A flexible spending account is an account that an employee establishes through his employer, which offers substantial tax advantages. An employee must designate a certain amount of funds for this account. The money from the employee’s paycheck is then diverted into the FSA. The employee is free to draw on the funds in this account to cover medical care costs and costs related to care for dependents. Expenses not covered by the employee’s insurance policies, such as co-pays and deductibles, can be paid by the FSA. Also, medical and dental expenses that exceed the benefits provided by medical and dental insurance policies can be paid using funds from the FSA.

    An FSA offers employees tax advantages, as the money contributed to this account is not subject to payroll tax. As of 2015, an employee must designate at least $100 annually to be diverted to an established FSA. The maximum amount that can be diverted to such an account cannot exceed $2,500 per year.

    It is in the employee’s best interest to utilize as much of the funds in the FSA as possible since no more than $500 can be rolled over from one year to the next. Money in excess of that amount is lost entirely. Some employers, however, allow claims against FSAs to be made into the first quarter of the next year, but this practice is not standard, and each employee must determine what policies his employer follows in regard to claims against FSAs.

  • Do Flexible Spending Accounts (FSAs) expire?

    Flexible Spending Accounts (FSAs) do expire and are considered to be a "use it or lose it" type of plan. They are savings accounts provided by employers to allow employees to defer portions of their salaries to be reimbursed for eligible expenses, such as medical or dependent care expenses. These deferrals are pretax, and as long as employees use the funds toward eligible expenses, the expenses are considered tax-free. As of 2015, the maximum salary reduction a person can put toward an FSA is $2,550.

    Grace Period or Carryover

    Any money deferred into an FSA during the calendar year is forfeited if it is not claimed by the expiration deadline. However, some plans may offer a grace period or carryover. A grace period is a certain amount of time in which the employee may submit a claim that may go past the end of the calendar year; the grace period tends to be around two to three months. However, once the grace period expires, all unused balances are forfeited.

    Some FSA plans also offer a carryover, where plans may allow up to $500 of any unused balance to be used for the following year's expenses. The FSA plan specifies this limit, and it may be less than the maximum of $500.

    It is important to understand specifically how your FSA works, as every plan is different. Each FSA may have a set expiration date, grace period or carryover, so review your plan documents or call your plan provider to get further clarification.

  • Do I still have to pay penalties and taxes on money that I don't roll over from a DROP fund?

    It depends.

    Let's address the two penalties that will apply - the 10% early-withdrawal penalty and the 20% federal withholding - separately.

    Early-withdrawal penalty
    If the distribution from your Deferred Retirement Option Program (DROP) fund is made to you after you separate from service with your employer, and the separation occurred during or after the calendar year in which you reached age 55, then the amount will not be subject to the 10% early-withdrawal penalty, unless you qualify for another exception. (See list of exceptions below.)

    Unless you qualify for an exception, the 10% penalty will apply if you separate from service before the year you reach age 55 and/or if the distribution occurs before you reach age 59.5.

    If only a portion is rolled over to an IRA or other eligible retirement plan, only the portion that you keep (i.e. the amount not rolled over) is subject to the early-withdrawal penalty.

    Federal withholding
    Unless the distribution is processed as a direct rollover to an IRA or other eligible retirement plan, your employer must withhold 20% of the amount for federal tax purposes.

    If only a portion is processed as a direct rollover, only the amount paid to you is subject to the 20% mandatory withholding.

    If the amount is paid to you and you choose to roll over a portion to an eligible retirement plan, the portion that you keep (i.e. the amount not rolled over) is subject to income tax.

    If your employer pays the distribution to you and you later decide to roll over the distribution to an eligible retirement plan, you may either:

    -roll over only the amount you received (the gross distribution minus the withholding tax), OR
    -roll over the gross distribution amount. To do so, you will need to make up the difference (the amount withheld for tax by your employer) out of your regular savings.

    Exceptions to the 10% early-distribution penalty
    The 10% early-distribution penalty will not apply if distributions made before age 59.5 are made in any of the following circumstances:

    -Made to a beneficiary on or after the death of the employee.
    -Made due to the employee having a qualifying disability.
    -Made as part of a series of substantially equal periodic payments beginning after separation from service and made at least annually for the life or life expectancy of the employee or the joint lives or life expectancies of the employee and his or her designated beneficiary. (The payments under this exception - except in the case of death or disability - must continue for at least five years or until the employee reaches age 59.5, whichever is the longer period.)
    -Made to an employee after separation from service if the separation occurred during or after the calendar year in which the employee reached age 55.
    -Made to an alternate payee under a qualified domestic relations order (QDRO).
    -Made to an employee for medical care up to the amount allowable as a medical expense deduction (determined without regard to whether the employee itemizes deductions).
    -Timely made to reduce excess contributions under a 401k plan.
    -Timely made to reduce excess employee or matching employer contributions (excess aggregate contributions).
    -Timely made to reduce excess elective deferrals.
    -Made because of an IRS levy on the plan.

    (For related reading, see Avoiding IRS Penalties On Your IRA Assets.)

    This question was answered by Denise Appleby.

  • Does a Flexible Spending Account (FSA) cover acupuncture?

    A Flexible Spending Account (FSA) covers acupuncture. The Internal Revenue Service (IRS) has defined acupuncture as a qualifying medical expense.

    Qualifying Medical Expenses

    For anything to be covered under your FSA, it must be a qualified medical expense. Most qualifying medical expenses require a prescription or letter of medical necessity before being covered by an FSA. Acupuncture is defined by many plans as a preventative treatment, which qualifies it as a reimbursable medical expense.


    Acupuncture involves pricking the skin and tissues with needles as a way to alleviate pain and treat various medical conditions. The National Center for Complementary and Alternative Medicine says acupuncture can be beneficial for suffers of chronic pain, lower back pain and arthritis. Acupuncture has also been used to treat depression, addictions and the side effects of other health treatments. Many types of alternative medicine are not covered under an FSA. However, the results of acupuncture have been documented through significant research, and it is known as an effective treatment option.

    Use It or Lose It

    At the end of each calendar year, most FSA plans forfeit any remaining funds back to your employer. Acupuncture could be a good way to spend any remaining funds left in your FSA toward the end of the calendar year. Many plans do not offer a rollover option, and if they do, it is typically limited. Some plans provide a 2.5 month grace period for reimbursement. It is best to check your specific plan to determine how any excess funds are distributed or forfeited.

  • Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost of eye exams and eyeglasses or contact lenses.

    What Is a Flexible Spending Account?

    An FSA is a type of tax-advantaged savings account that can be set up through an employer's cafeteria plan of employee benefits. Through an FSA, an employee has a certain amount of money that he designates to be deducted from his paycheck and diverted into the FSA account. The employee can then draw on the money in the account to cover typical medical and dependent care expenses that are not covered by his insurance plan, such as deductibles, co-pays, or medical or dental expenses that exceed the maximum benefit provided by a health or dental insurance policy.

    An FSA offers a tax advantage by virtue of the fact that money contributed to an FSA account is not subject to payroll taxes and thereby offers a significant tax savings for the employee. As of 2015, the minimum annual amount that an employee can designate for contribution to an FSA account is $100, and the maximum annual contribution is $2,500. A maximum of $500 can be carried over from one year to the next. Any funds over the $500 limit are lost. Therefore, it is to the employee's benefit to make sure that he has made use of most of his FSA funds by the end of the year, although some employers allow claims against an FSA account to be made as late as through the first quarter of the following year.

    Expenses That Can Be Paid Using FSA Funds

    FSA funds can pay for nearly all ordinary medical and dental expenses, including prescriptions and over-the-counter medications. Eligible FSA expenses include physician fees, dental work, eye exams and glasses or contact lenses, hearing aids, mental health counseling, lab work and chiropractic services.

    FSAs can also be used to fund dependent care expenses, such as day care services or care of an elderly parent. However, the most common type of FSA account is the basic health FSA account.

  • Does a Flexible Spending Account (FSA) cover Lasik?

    Flexible spending accounts (FSA) can be used to pay for qualifying LASIK procedures. LASIK is not the only laser eye surgery covered under an FSA but it is the most popular laser procedure in the United States.

    Qualifying Medical Expense

    According to the Internal Revenue Service, laser eye surgery is a qualified medical expense for an FSA. For it to be a qualifying medical expense, you must make an appointment with an ophthalmologist to first determine whether the procedure is medically necessary.

    Planning Ahead

    LASIK procedures are considered an elective decision. An ophthalmologist can provide you with an estimate for how much your procedure will cost. You can elect to increase your contribution the next year up to a maximum of $2,550 per year if the costs of your procedure run over what you contributed for that calendar year. By delaying the procedure, you could have less out-of-pocket expenses.

    Typically, LASIK is not covered under medical insurance, and vision insurance may only provide you with a small discount. This leaves your FSA as the only means of paying for LASIK unless you pay out of pocket or take out a medical loan.

    Pros and Cons of an FSA

    You can use your FSA for other vision-related expenses such as glasses, contact lenses, eye exams and optometrist visits. FSA funds are taken out of your paycheck before taxes, saving you money on expenses you would pay for anyways. Employers can elect to contribute to your FSA. FSA funds must be used by the end of the calendar year or they are forfeited back to your employer. FSAs are only available through employer-sponsored health care plans.

  • Does a Flexible Spending Account (FSA) cover teeth whitening?

    Funds from a Flexible Spending Account (FSA) cannot be used for teeth whitening expenses. The U.S. Internal Revenue Service (IRS) issued Publication 502, Medical and Dental Expenses, which specifically excludes various medical expenses spent on unnecessary cosmetic procedures, such as teeth whitening.

    Flexible Spending Accounts

    FSAs are primarily for salaried employees, since only qualified employers can establish and administer FSA plans; self-employed individuals are ineligible from opening FSAs. Both contributions to and distributions from FSAs are exempt from federal income tax and employment tax, as long as FSA beneficiaries use the funds for qualified medical expenses and spend as much as they contributed in a particular year.

    Qualified Medical Expenses

    Publication 502 defines qualified medical expenses as those that are included in an FSA plan description and would qualify for medical and dental expense deductions. To qualify, a medical expense must have a doctor's prescription, even if a drug can be bought over the counter, except for insulin. An FSA beneficiary can also include medical expenses that he used for the prevention and alleviation of dental issues. Preventive dental procedures include teeth cleaning, obtaining sealants and other services that treat and prevent tooth decay. Individuals can also use FSA funds for expenses necessary to treat dental diseases, such as fillings, braces, dentures, extractions and X-rays.

    The IRS specifically prohibits using FSA funds for cosmetic procedures and cosmetic surgery to improve appearance that are not necessary to treat or prevent a disease. Medical expenses on procedures that do not qualify for FSA distributions include face-lifts, liposuction, hair removal and teeth whitening. However, the IRS allows medical expenses paid for cosmetic procedures that are necessary to correct for deformity resulting from congenital issues, an accident, trauma or a disease that caused disfiguration. FSA owners face tax consequences for any unqualified medical expenses.

  • Does dental insurance cover crowns?

    Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental insurance plans, such as Delta Dental, provide a yearly amount of maximum coverage and then you have to pay for any expenses above that amount.

    Dental insurance typically covers procedures that include annual cleanings, X-rays and fillings. A dental crown is typically covered because the procedure is necessary to maintain good dental health, such as a supporting a weak tooth or repairing a cracked tooth. If a dental crown is requested for cosmetic reasons, such as improving the appearance of a smile, it may not be covered. It is best to review the dental policy with the insurance provider and discuss details about exclusions, limitations and waiting periods.

    The Cost of Crowns

    The cost of having dental crowns may vary depending on the type of materials used, which may be porcelain or metal. On average, the cost can range from $600 to $1,500 per crown. The dentist can provide an estimate before doing the procedure, and he may offer a payment plan.

    Saving on Dental Costs

    There are credit plans available such as CareCredit that offer low-interest methods of financing health costs over a period of time. Compare dental plans for cost and coverage before you start a new insurance plan. Consider employer-sponsored dental plans that may have lower premiums due to group coverage. Some dental schools also offer low-cost dental procedures.

  • Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures is covered. Regular deductibles and co-pays still apply, so the actual cost to the patient is always a substantial amount.


    Most insurance companies have a waiting period for new patients. This waiting period applies to non-emergency procedures such as dentures and typically ranges from six to 12 months but may be as long as two years for some companies. Most plans also have an annual limit that can be as low as $1,000, causing a lost filling or cavity earlier in the year to eat up a large portion of that year's dental allowance.

    Some employer dental insurance packages have an option for lower monthly costs but may offer little to no coverage for restorative procedures. Patients must foot the entire bill in these cases. If it is possible to wait, it may be wise to switch providers during open enrollment to an option that includes denture coverage since the savings can easily outweigh the higher monthly cost.

    Discount Plans

    Discount dental plans are not insurance; they represent a group that has negotiated discounts and fixed prices for specific dental procedures at a limited number of dental professionals in the area. Those lacking dental insurance altogether, and those with limited coverage insurance, may find savings of up to 40 to 50% compared to regular prices. Make sure the discount plan coverage meets your needs, and check that the participating dentists in the area do not have prohibitively long waiting lists for new patients.

  • Does dental insurance cover teeth whitening?

    Over 50% of Americans use dental insurance, but it does not tend to cover any sort of cosmetic procedures, including teeth whitening procedures.

    What Does Dental Insurance Typically Cover?

    Dental insurance has a typical yearly maximum amounting approximately between $1,000 to $3,000 for covered procedures. The umbrella of dental coverage includes procedures strictly related to health and wellness: routine cleanings and X-rays, root canals, fluoride treatments, fillings and the like. Some forms of dental coverage only cover a portion of these procedures.

    What Constitutes Cosmetic Dentistry?

    Cosmetic dentistry includes procedures that exist for the main purpose of improving the appearance of the patient's teeth and smile. Whitening treatments, veneers, bonding and straightening procedures, such as Invisalign, are included in this group. These procedures, while widely known and quite popular, tend to not be covered by insurance and require the patient to cover the entire cost.

    What Are Some Common Payment Options for Cosmetic Procedures?

    The median price of in-office teeth whitening procedures in the United States is approximately $399, and it increases or decreases depending on location and office pricing. Since insurance is not involved, there isn't a usual and customary fee, which is why the pricing varies from office to office. Because of the high price for cosmetic procedures, patients must research other payment options. While many cosmetic dental or orthodontic offices are familiar with offering their patients different payment plans, patients can also opt to charge their procedures to zero-interest or low-interest health care credit cards, such as CareCredit.

  • Does FSA cover massages?

    Flexible spending accounts (FSAs) cover massages for certain medical treatments. These treatments must be approved and prescribed by a physician.

    Medical Conditions

    The Internal Revenue Service (IRS) has ruled that massage therapy for the sole purpose of tension and stress relief does not qualify as an eligible expense. Examples of medical conditions that qualify include carpal tunnel, back pain, arthritis, fibromyalgia, anxiety, depression and pain management.

    How to Use an FSA for Massages

    The first step to using your FSA to cover massage therapy expenses is to pay a visit to your primary care doctor or local physician. Let the doctor know you have an FSA and are seeking massage therapy as the solution to a medically eligible condition. The physician will then write a prescription for your massage if she deems it to be medically necessary. The physician must provide three pieces of information on your prescription: why the massage is medically necessary; the number of sessions per month or frequency of your visits; and, the length of treatment.

    About an FSA

    FSAs allow you to set aside pretax money to pay for qualifying medical and dental expenses, including co-pays and deductibles. For 2018, employees can contribute $2,650 to their health FSAs, up from the 2017 limit of $2,600. These plans are only available with employer-based health care plans, and employers can also make contributions. One shortcoming to FSAs is the "use it or lose it" policy. Some plans provide certain rollover or grace period options, but most plans erase any money left in the account at the end of the year. (For related reading, see: 20 Ways to Use Up Your Flexible Spending Account.)

  • Does homeowners insurance cover broken pipes?

    An all-perils homeowners insurance policy does not usually provide coverage for an actual broken pipe. However, the water damage that the broken pipe causes would be covered under most circumstances.

    Broken Pipes

    Most insurance companies would consider a home's plumbing to be under normal homeowner maintenance. The property owner is responsible for repairing or replacing the broken pipe. Leaky pipes are different from broken pipes that could potentially flood the entire home. This type of flood is covered under an all-perils policy. A flood from rising water would require separate flood insurance coverage.


    If you live in a northern climate and your broken pipe is a result of freezing due to a lack of heat in the home, an insurance company could cite your negligence and deny your claim. Broken pipes must happen suddenly and by accident and shouldn't have been easily preventable. If you ignore a leaking pipe, and it subsequently bursts, the insurance company can see evidence of a long-term leak and deny the claim.

    Subsequent Damage

    After a pipe bursts, homeowners insurance covers damage occurring to the carpet, drywall, paint and so on. Any service needed to clean up the water, dry out the home and possibly prevent mold would also be included in this coverage.


    Have your plumbing inspected by a licensed professional on a regular basis. Different portions of your home's plumbing will have various life spans. Replace pipes that are beyond their intended life cycle. In northern climates, be sure to leave your home's heat on, even if it is set to low, during the winter, especially if you are leaving for an extended period of time. Every home, regardless of climate, should have a water shutoff valve. Know where this valve is located, and make sure it is operable in case you need to turn the water off quickly.

  • Does homeowners insurance cover roof leaks?

    Roof leaks are covered under all perils homeowners insurance policies if the leak was caused by an act of nature.

    Acts of Nature

    Acts of nature include things such as storms, hail, ice buildup and fallen trees. These events happen suddenly and by accident. An insurance policy would cover roof leaks caused by these events if you have an all perils policy. For a named peril policy, such an event would need to be specifically listed on your declarations page.


    Neglect and a lack of maintenance is where there are likely to be problems when you file a claim with your insurance company. If the roof is 30 years old and has missing shingles, this is considered neglect and a lack of basic maintenance.

    Report roof leaks to your insurance company as soon as you discover them. If you wait a prolonged period of time before filing a claim, subsequent damage such as mold – or the entire claim – could be denied by your insurance carrier.


    Allstate recommends that you have your roof inspected twice a year by a licensed professional. In reality, that may be costly. The age limit of your roof depends on the type of roof material used on your home. Speak with your homeowners insurance agent to determine the average age at which others with similar types of roofs end up replacing them or beginning to have costly repairs.

    The location of your home should help determine the type and quality of your roof. In a northern climate, you want to protect your home against the forces of snow and ice, while a roof in a tropical climate requires protection from high winds.

    By properly selecting, protecting and maintaining your roof, you can ensure that if an accident does happen, it will be covered under your all perils homeowners insurance policy.

  • Does homeowners insurance cover roof replacement?

    A typical all-perils homeowners insurance policy covers the replacement of a roof, regardless of age, only if it is the result of an act of nature. Roofs that have exceeded their intended life span are not eligible for replacement because they fall under the general maintenance responsibility of the homeowner.

    Act of Nature

    The roof of a home has the most direct exposure to the elements. For northern climates, there is the weight of heavy snow and ice storms. In tropical climates, there is the potential for hurricane-force winds. Damage resulting from acts of nature qualifies the homeowner for a total or partial replacement of the roof as determined by the insurance company.

    General Maintenance

    Different roofing materials have different life spans. It is the responsibility of the property owner to properly care for and maintain his roof. The damage caused by a leaking roof is covered under most all-perils policies. However, the roof repair itself is not.


    Homeowners can take steps to help protect their roofs. The Allstate Corporation recommends hiring licensed professionals perform regular inspections. Many roofing companies will inspect a roof for free in the hopes of earning future business.

    If you live in wind-prone areas, ensure your home and roof are designed to the current building codes to prevent a total loss. Make sure your roof is free of debris and does not hold or collect water. Any trees touching or hanging over the roof should be trimmed back. These steps can minimize the potential of a total roof replacement.

  • Does homeowners insurance cover tree damage?

    An all-perils homeowners insurance policy covers damage from trees in the event that it happens suddenly and by accident. Claims for damage occurring from trees over a long period of time is likely to be denied.

    Overgrown Trees

    When purchasing a new insurance policy, the company sends an inspector out to survey the property. If large trees are touching or overhanging the roof, the policy is flagged for cancelation. The homeowner has a certain period of time to correct these discrepancies to remain insured with that carrier.

    What Is Covered

    The tree itself falls under the general maintenance responsibility of the homeowner. An all-perils insurance policy only provides a small amount of coverage for the actual replacement of landscaping in the event of a loss. Removing and cleaning up tree debris after an insured loss is usually covered by the insurance carrier. Debris that did not cause damage to an insured structure is not covered.

    It does not matter who owns the tree. If a neighbor's tree falls on an insured property, the owner whose house was damaged would be responsible for filing a claim with his own insurance carrier. The only cases where a neighbor is responsible for damages are when negligence can be proven.


    If a car is parked in the garage and a tree falls on the home, damaging the vehicle, that is not covered under a homeowners insurance policy. Separate car insurance with comprehensive coverage would be needed to repair the vehicle.


    Owners can take many steps to prevent trees from damaging a home. Allstate recommends that homeowners prune trees regularly and remove any decaying or damaged limbs. When planting trees, it is best to locate them away from the home and any plumbing, such as septic systems.

  • Does money in a Flexible Spending Account (FSA) roll over?

    As of 2015, according to IRS regulations, the maximum amount of funds in a Flexible Spending Account (FSA) that can be carried over from one calendar year to the next is $500. Any amount of money in excess of the $500 carryover allowance left in an FSA at the end of the year is forfeited. Therefore, it is a good idea for employees with FSAs to check their account balances near the end of the year to make sure they do not leave funds in the account that are then lost at the beginning of the year.

    What Is a Flexible Spending Account?

    An FSA is a type of savings account that can be established as part of an employer's cafeteria plan of employee benefits. The employee selects an amount of money to be deducted from each paycheck and deposited into his FSA. Using an FSA is tax-advantageous because funds deposited in the FSA are pretax deferrals that are not subject to federal income tax or Social Security tax withholding, and are usually not subject to state income tax withholding either. Thus, the employee's total taxable income for the year is reduced by the total amount contributed to the FSA.

    Contribution Limits and Carryover

    As of 2015, the IRS allows a maximum yearly contribution to an FSA of $2,500 per individual. The minimum annual contribution amount an employee can designate in setting up an FSA is $100.

    The carryover allowance of $500 is a recent policy change by the IRS, implemented in 2014. Prior to the policy change, employees could not carry over any amount of their remaining FSA funds from one year to the next. This policy discouraged many employees from establishing FSAs for fear of losing unused funds at the end of the year.

    Expenses Eligible for Payment With FSA Funds

    Employees with FSAs can use the funds in their accounts to pay for virtually any regular medical or dental expenses, such as prescription or over-the-counter medicines, dental expenses, eye exams and glasses, chiropractic treatments and psychological counseling. FSA funds are commonly used to supplement health insurance plans by paying deductibles or required co-pays with FSA money.

  • Does renters insurance cover dog bites?

    A renters insurance policy typically provides liability coverage, up to policy limits, for dog bites unless the coverage is specifically excluded from the policy.

    Coverage May Vary

    Coverage for dog bites varies from state to state and from one insurance company to another. Speak with a licensed insurance agent and let him know about any dogs that reside at the insured residence. Aggressive breeds of dogs are often excluded and should be revealed to the insurance agent. By not revealing the possession of aggressive breeds, you open yourself up to the possibility of policy cancellation. There are companies that insure breeds that have been labeled as aggressive. To properly protect your assets from liability, be honest when seeking any type of insurance coverage.

    Coverage Limits

    Typically, the liability coverage limits on a renters insurance policy range from $100,000 to $300,000. A higher liability limit is a safer option if you have dogs. The price difference between the lower liability option and the higher liability option is usually minimal.


    Some state and local ordinances require your dogs to be on leashes at all times when they are outside. Allowing your dog to roam without a leash could open you up to a higher amount of liability, since negligence can be proven. Any claims or judgements that exceed the policy limits could open you up to a personal lawsuit. If you are a higher net worth individual, look into an umbrella insurance policy for additional coverage. Umbrella policies may also have restrictions on dogs.

  • Does renters insurance cover jewelry?

    Renters insurance provides personal property coverage that covers your personal property – including jewelry – in case of theft, loss or destruction caused by a covered peril, such as a fire or a storm.

    According to the National Association of Insurance Commissioners (NAIC), the average cost of renters insurance is an estimated $15 per month for $30,000 to $50,000 of property coverage with a deductible ranging from $500 to $1,000.

    Property Protection Provided by Renters Insurance

    At a very affordable price, a standard HO-4 renters policy covers your jewelry and other personal property against a long list of perils. For example, the standard HO-4 renters policy insures your jewelry in case of loss or damage due to smoke, vandalism or volcanic eruption.

    However, a standard renters insurance policy does not cover your jewelry against losses from floods or earthquakes. If you live in an area that could be affected by these perils, you would need a separate policy or rider to cover your personal property against floods or earthquakes.

    Tips for Jewelry Owners About Renters Insurance

    When you buy renters insurance for your jewelry and personal property, you still need to take reasonable steps to protect that property. If your insurance provider determines that the loss or damage of your jewelry was caused due to your negligence or an intentional act, then your policy will not cover that loss or damage.

    Standard renters insurance has a dollar limit on coverage for personal property. If you own jewelry, furs, antiques, electronics and other types of expensive personal property, then you may have a gap between the covered value and the actual value of your property. In this case, consider buying a floater insurance to get the additional coverage for your jewelry that you need.

  • Does your car insurance company report accidents to the DMV?

    Your car insurance company does not generally report accidents to the Department of Motor Vehicles (DMV). However, depending on your state of residence, either you or the police are probably required to file a report with the DMV, regardless of whether your insurance company gets involved. In addition, your insurance contract likely requires you to alert your insurance company about any collision you are involved in, even if you do not make a claim.

    Reporting an Accident

    In many states, a DMV report is required following any accident you are involved in, regardless of who is at fault. This requirement is often subject to a property damage threshold that dictates which collisions are accidents that require reporting and which are simply "fender-benders." For example, in New York, all drivers involved in collisions that cause at least $1,001 in collective property damage are required to report to the DMV.

    If someone is injured or killed in a collision, it must be reported to the DMV regardless of your state of residence. In most cases, accidents that meet your state's reporting criteria require the aid of the police or other emergency services. When the police are involved, they are required to make a DMV report. Your state may require you to submit a report first if the police cannot do so in a timely manner.

    If the accident is not severe enough to require the aid of emergency personnel and there is no police report made, the DMV is generally not aware of the incident, even if you make a claim on your insurance.

    When Your Insurance Company Talks to the DMV

    The primary reason your insurance company notifies the DMV about your driving activity is if your insurance does not meet certain standards. In the United States, drivers are required to carry a minimum amount of liability insurance, even if they do not carry insurance to cover damage to their own vehicles. If you allow your insurance policy to lapse, your car insurance company notifies the DMV, which may suspend or revoke your license until you are fully insured.

    In addition, if you are convicted of a serious driving offense, such as driving while under the influence, your insurance company is required to submit monthly paperwork proving you carry the minimum necessary insurance.

  • How can an investor evaluate the leverage of an insurance company?

    For investors conducting fundamental analyses of insurance companies, leverage can have multiple definitions. Insurance leverage is a term that refers to the ratio of deferred insurance liabilities to shareholder equity. A more universal definition of financial leverage is captured by the debt-to-equity ratio. Both definitions draw on balance sheet items, and both are important tools for understanding the financial strength of insurance companies.

    As with any other type of company, the debt-to-equity ratio is an important metric used to measure leverage and assess financial well-being for insurance firms. Debt-to-equity is calculated by dividing total liabilities by total shareholders' equity. Insurers offer risk management services and are financed by investors, holders of corporate debt and customers. As such, their capital structure is necessarily different from that of companies that produce tangible goods or offer other types of services. Debt-to-equity loses explanatory power when used to compare dissimilar companies or industries.

    Another popular method of measuring insurance leverage is the premium-to-surplus ratio, calculated by dividing net written premiums during the year by surplus at end of the year. The surplus is equal to the amount by which policy holder assets exceed policy holder liabilities. Premiums that have already been paid for future coverage are recorded as deferred liabilities on an insurance company's balance sheet, and surplus is analogous to equity in the debt-to-equity ratio. The premium-to-surplus ratio tells investors how well an insurer can handle above-average losses, and a smaller value indicates a lower risk position. This is an industry-specific measure of leverage tailored to insurer operations.

  • How can I apply sensitivity analysis to my investment decisions?

    Use sensitivity analysis to estimate the effects of different variables on investment returns. This form of analysis is designed for project management and profitability forecasts, but you could use it for any type of uncertain projection. The practical benefit of using sensitivity analysis for your investment decisions would be to assess risks and potential error.

    Perhaps the most common investment application of sensitivity analysis involves adjusting the discount rate or other streams of cash flows. This allows you to re-evaluate risks based on specific adjustments.

    Taken one step further, sensitivity analysis offers an insight into how your investment strategy is structured. You can use it to compare investment models by demonstrating how profitability depends on underlying model data or other assumptions.

    Sensitivity analysis does not produce any specific prescriptions or generate any trading signals. It is left up to the individual investor or project manager to decide how best to utilize the generated results.

    [ Sensitivity analysis is an effective tool that can be used to evaluate potential investment decisions, as well as to evaluate performance of a project, department, or an entire business. Learn how to create a detailed financial model that leverages sensitivity analysis through step-by-step instruction and interactive Excel workbooks in Investopedia Academy's Financial Modeling course. ]

    Review of Sensitivity Analysis

    Sensitivity analysis is a calculation procedure that predicts the effects of changes of input data. Investment decisions are wracked with uncertainty and risk. Most investment models have explicit and implicit assumptions about the behaviors of models and the reliability and consistency of input data.

    If these underlying assumptions and data prove incorrect, the model loses its effectiveness. By applying sensitivity analysis, you can examine input values, such as costs of capital, income and the value of investments.

    The fundamental purpose of sensitivity analysis is twofold: insight into the impact of critical model-based parameters and the sensitivity of model-produced profitability to those parameters.

    The Method of Sensitivity Analysis

    To perform sensitivity analysis for your investment models, first identify a set of criteria by which to evaluate the investments' success. These criteria must be quantitative. Normally, this can be set as rate of return (ROR).

    Next, define a set of input values that are important to the model. In other words, find out which independent variables are most important in generating ROR. These can include discount rates, asset prices or your personal income.

    Next, determine the range over which these values can move. Longer-term investments have larger ranges than shorter-term investments.

    Identify the minimum and maximum values that your input variables (and other criteria as necessary) can take while the investment model remains profitable (generating a positive ROR).

    Lastly, analyze and interpret the results of moving factors. This process can be simple or complex based on the types of input variables and their effect on ROR.

    Disadvantages of Sensitivity Analysis for Investment Decisions

    Investments are complex and multifarious. Investment evaluations might depend on asset prices, exercise or strike prices, rates of return, risk-free rates of return, dividend yields, accounting ratios and countless other factors.

    Sensitivity analysis only generates results based on movements for critical independent variables. Any variables not singled out – for which there are many for any given investment decision – are assumed to be constant.

    Independent variables seldom move independently. Independent variables and nonmeasured variables tend to change at the same time.

  • How did Johnson and Johnson's corporate responsibility policy pay off in 1982?

    In late September, 1982, Johnson & Johnson recalled all of its Tylenol products after seven people in the Chicago area died after taking Extra-Strength Tylenol capsules. The company's chairman at the time, James E. Burke, made the difficult and expensive decision to recall 30 million Tylenol products voluntarily. This cost the company over $100 million.

    Johnson & Johnson was not deemed responsible for the product contamination. The pills were tampered with after the products had reached the market shelves. The perpetrator(s) introduced enough potassium cyanide in each altered capsule to kill thousands of people. This crime caused nationwide panic, copycat crimes and even the suspicion that Halloween candy might be poisoned as well. No one was ever found guilty of adding the poison into the capsules. Time magazine lists this as one of its top 10 unsolved crimes.

    The company's actions epitomize the true meaning of corporate social responsibility. Even though Tylenol products were generating approximately 17% of Johnson & Johnson's yearly income, the company acted quickly and decisively to remedy the situation. It removed the products from shelves, offering refunds and safer tablets as replacements free of charge.

    Chairman Burke adhered to the company's credo that outlines its ideal of corporate social responsibility. The first sentence of this, written by former chairman Robert Wood Johnson, states, "We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services."

    The end result of these incidents was that Johnson & Johnson became the first manufacturer to begin using tamper-proof packaging. When Tylenol products were reintroduced into the market two months later, they included seals around and beneath a child-proof cap. The company also launched an extensive marketing campaign touting the new packaging.

    Many believed these events would deal a devastating blow to Johnson & Johnson, but the company's quick, honest and responsible handling of the incident was viewed extremely positively by both the general public and investors. As a result, the company quickly recovered from the financial losses incurred and regained the trust of consumers.

  • How do I become an underwriter?

    To become an insurance underwriter, you typically need a bachelor's degree. However, some employers may hire you as an underwriter without a degree if you have relevant work experience and computer proficiency. To become a senior underwriter or underwriter manager, you need to obtain certification.

    Education Needed to Be an Underwriter

    You don't need a specific bachelor’s degree to become an underwriter, but courses in mathematics, business, economics and finance are beneficial in this field. A good underwriter is also detail-oriented and has excellent skills in math, communication, problem solving and decision making.

    Once hired, you typically train on the job while supervised by senior underwriters. As a trainee, you learn about common risk factors and basic applications used in underwriting. As you become more experienced, you can begin to work independently and take on more responsibility.

    Your employer may require you to get certified as part of your training or to advance to a senior underwriter position. Completing certification courses helps you stay current on insurance policies, technologies, and state and federal insurance regulations.

    Underwriting Training Offered

    The American Institute For Chartered Property Casualty Underwriters offers a training program for beginning underwriters. It also offers two special certifications: associate in personal insurance and associate in commercial underwriting. These certifications typically require two years of coursework and exams to complete. For more experienced underwriters, the institute offers a chartered property and casualty underwriter certification. The American College of Financial Services also offers a certification options for underwriters, the chartered life underwriter designation.

    (For related reading, see: Is Insurance Underwriting Right for You?)

  • How do I calculate the combined ratio?

    The combined ratio is a quick and simple way to measure the profitability and financial health of an insurance company. The combined ratio measures whether the insurance company is earning more revenues from its collected premiums relative to the claims it pays out.

    The combined ratio is calculated by adding the loss ratio and expense ratio. The loss ratio is calculated by dividing the incurred losses, including the loss adjustment expense, by earned premiums. Under a trade basis, the expense ratio is calculated by dividing the incurred underwriting expenses by the net written premiums. On a financial basis, the expense ratio is calculated by dividing the incurred underwriting expenses by the earned premiums.

    For example, insurance company ZYX has incurred underwriting expenses of $10 million, incurred losses and loss adjustment expenses of $15 million, net written premiums of $30 million and earned premiums of $25 million.

    Calculate ZYX's financial basis combined ratio by adding the incurred losses and loss adjustment expenses with the incurred underwriting expenses. The financial basis combined ratio is 1, or 100% (($10 million + $15 million)/$25 million). The financial basis gives a snapshot of the current year's statutory financial statements.

    You can also calculate the combined ratio on a trade basis, where you divide the incurred losses and loss adjustment expenses by earned premiums and add to the incurred underwriting expenses divided by net written premiums. The trade basis combined ratio of insurance company XYZ is 0.93, or 93% ($15 million/$25 million + $10 million/$30 million).

    Under the trade basis combined ratio, the insurance company is paying out less than the premiums it receives. Conversely, under the financial basis combined ratio, the insurance company is paying out the same amount as the premiums it receives.

  • How do I choose which insurance company to use?

    Picking an insurance company to use is not an easy task, nor is it an exciting one, but you will be glad you took the time to find the right one for you if you ever need to file a claim. 

    When choosing your insurance carrier, there are several factors you should consider to help you make a wise decision. Consider some of the following:

    • What is the quality rating of the insurance company, as published by the main rating agencies (Moody's, Standard & Poor's, and AM Best), in comparison with their peers? This rating indicates the ability of the provider to pay a claim and the potential longevity of the company.
    • Is the insurer a specialist in this area of insurance coverage? If you require specific or less common coverage, be sure the company you're considering can meet those needs.
    • Is it easy to speak to a "live" person and will you be working with the same person (agent)? With today's technology, it's easy to find yourself wading through voicemail prompts instead of talking to a real person. Using a company that provides you a personal agent to talk to can be very valuable when you have a problem or need to file a claim.
    • Are the premiums cost-effective when compared to similar insurance companies? While it is important to consider the amount you will be paying in premiums, this is not the only factor. Carriers that offer really low rates may be new to the market, or a policy with a lower premium may not provide as much coverage.
    • What are the deductibles? A deductible is the amount you will be responsible for paying if you file a claim. A lower deductible often means you are paying a higher premium, and vice-versa, so you need to decide what makes the most sense for your situation.
    • What is the claim paying process? Every insurance company sets up its own claim paying process, some of which may be easier to deal with than others. If you have had an accident or suffered an injury or property loss, the easier the process the better.
    • Does the insurer give discounts on premiums for multiple policies? Having your car insurance, motorcycle insurance, RV insurance, homeowner's insurance and even life insurance in one place can save you quite a bit in premiums if the company offers this type of discount.
    • If proximity is important to you, is there a local office nearby? There is something to be said for being able to walk into your insurance agent's office and have a face-to-face conversation. If you like this type of interaction, make sure the closest office isn't 40 miles away.
    • Are there complaints against the company? Your state insurance commissioner may have a record of complaints against certain insurance providers. Also consider the company's record for claim refusal—you don't want to file a claim only to have it denied by your carrier for something that's out of your control.

    One of the best ways to find an insurance company is to ask your friends or family members for recommendations, but in the end, you need to find a provider that is right for your particular situation.

    (For related reading, see: How to Find the Right Car Insurance.)

  • How does a decline in housing prices affect the banking sector?

    When housing prices fall, consumers are more likely to default on their home loans, causing banks to lose money. Also, home equity dries up, meaning that consumers have fewer funds available for spending, saving, investing or paying down their debts. Sometimes, banks are even forced to shut down.

    A recent study of regional real estate booms and busts in the 1980s and 1990s found that banks in states that experienced major housing price declines also suffered high loan default rates and, consequently, low profits and high failure rates. Usually, but not always, these declines followed some sort of an economic shock, such as a fall in commodity prices or a cut in government spending.

    A decline in housing prices was the precipitating factor in the financial crisis that rocked the world in autumn of 2008. Regulations passed in the United States had pressured the banking sector to allow more consumers to become homeowners. As of 2007, Department of Housing and Urban Development (HUD) rules required that 55% of loans issued by Fannie Mae and Freddie Mac go to borrowers either at or below the median income level, and that nearly half of those loans go to low-income borrowers.

    Beginning in 2004, Fannie Mae and Freddie Mac bought up huge numbers of mortgages and mortgage assets characterized by dubious underwriting standards, including Alt-A mortgages which came with high loan-to-value or debt-to-income ratios. In issuing risky mortgages, they charged huge fees and enjoyed high margins, During the same time frame, they used collateral from subprime mortgages to snap up private-label mortgage-backed securities (MBS). When prices on U.S. housing declined and the number of loan delinquencies, defaults and home foreclosures increased, the housing market bubble finally burst.

    Unitl that time, a decline in housing prices was usually a leading indicator of a drop in U.S. stock prices. U.S. house prices peaked in the first quarter of 2006, but the U.S. stock market kept rising until the fourth quarter of 2007. The one-two punch of a fall in two major U.S. asset markets produced a liquidity crisis that froze up interbank lending markets around the globe.

    Under a scenario like this, banks typically decrease their investments and lending. Consumers can find it more difficult to obtain home equity loans. In the U.K., for example, equity withdrawals put an extra 14 billion pounds into the economy before the financial crisis. In contrast, they amounted to negative 8 billion pounds by the end of 2008.

    It is unclear, however, how consumers use the money obtained from home equity loans. Some studies suggest that as much as 60% of the extracted equity is used for consumption spending, but other studies indicate that the money is used for either investments or to help pay down debt.

    Although another drastic decline in housing prices would certainly impact banks adversely, banks today are better capitalized, and regulators are keeping a keen eye on the sector in an attempt to minimize the damage that might be spawned by a collapse of the real estate market.

  • How does the 80% rule for home insurance work, and how do capital improvements affect it?

    The 80% rule refers to the fact that most insurance companies will not fully cover the cost of damage to a house due to the occurrence of an insured event (e.g. fire or flood) unless the homeowner has purchased insurance coverage equal to at least 80% of the house's total replacement value. In the event a homeowner has purchased an amount of coverage less than the minimum 80%, the insurance company will only reimburse the homeowner a proportionate amount of the required minimum coverage that should have been purchased.

    For example, let's say that James owns a house with a replacement cost of $500,000 and his insurance coverage totals $395,000, but an unanticipated flood does $250,000 worth of damage to his house. At first glance, you might assume since the amount of coverage is greater than the cost of the damage ($395,000 vs. $250,000), the insurance company should reimburse the entire amount to James. However, because of the 80% rule, this is not necessarily the case.

    According to the 80% rule, the minimum coverage that James should have purchased for his home is $400,000 ($500,000 x 80%). If that threshold had been met, any and all partial damages to James's home would be paid by the insurance company. But since James did not buy the minimum amount of coverage, the insurance company would only pay for the proportion of the minimum coverage represented by the actual amount of insurance purchased ($395,000/$400,000), which amounts to 98.75% of the damages. Therefore, the insurance company would pay out $246,875 and, unfortunately, James would have to pay the remaining $3,125 himself. (For related reading, see: 5 Myths About Homeowner's Insurance.)

    How Capital Improvements Affect the 80% Rule

    Since capital improvements increase the replacement value of a house, it's possible that coverage that would have been enough to meet the 80% rule before the improvements will no longer be sufficient after.

    For example, let's say James realizes he did not purchase enough insurance to cover the 80% rule, so he goes and purchases coverage that covers $400,000. One year passes and James decides to build a new addition to his house, which raises the replacement value to $510,000. While the $400,000 would have been sufficient to cover the $500,000 house ($400,000/$500,000 = 80%), the capital improvement has driven up the replacement value of the house, and this coverage is no longer enough ($400,000/$510,000 = 78.43%). In this case, the insurance company will once again not fully compensate the cost of any partial damages.

    Inflation can also cause the replacement value of a house to increase, so it would be wise for homeowners to periodically review their insurance policies and home replacement values to see if they have adequate coverage to fully cover partial damages.

    (For related reading, see: Homeowner's Insurance Guide: A Beginner's Overview.)

  • How does the Affordable Care Act affect moral hazard in the health insurance industry?

    To see how the Patient Protection and Affordable Care Act, or "Obamacare," affects moral hazard in the health insurance industry, it is first important to understand moral hazard and the nature of the health insurance market. The Act inflates existing moral hazard in the industry by mandating coverage and community ratings, restricting prices, establishing minimum standards requirements and creating a limited incentive to compel purchases. Moral hazard existed in the U.S. insurance markets before Obamacare, but the Act's flaws exacerbate, rather than alleviate, those problems.

    Moral Hazard

    Moral hazard is a bit of a misnomer. There are no normative, morality-based elements to the economic sense of moral hazard. Instead, moral hazard means that a situation exists where one party has an incentive to use more resources than otherwise would have been used because another party bears the costs. The aggregate effect of moral hazard in any market is to restrict supply, raise prices and encourage overconsumption.

    Moral Hazard and Health Insurance

    Moral hazard is often misunderstood or misrepresented in the health insurance industry. Many argue that health insurance itself is a moral hazard, since it reduces the risks of pursuing an unhealthy lifestyle or other risky behavior.

    This is only true if the costs to the customer, or the insurance premiums and deductibles, are the same for everyone. In a competitive market, however, insurance companies charge higher rates to riskier customers.

    Moral hazard is largely removed when prices are allowed to reflect real information. The decisions to smoke cigarettes or go skydiving look different when it means premiums can increase from $50 per month to $500 per month.

    Insurance underwriting is crucial for this very reason. Unfortunately, many regulations designed to promote fairness end up clouding this process. To compensate, insurance companies raise all rates.

    In the United States, moral hazard in health insurance was already encouraged before Obamacare. Tax incentives encourage employer-based health coverage, placing consumers farther away from medical costs. As economist Milton Friedman once stated: "Third-party payment has required the bureaucratization of medical care ... the patient has little incentive to be concerned about the cost since it's somebody else's money."

    Moral Hazard and the Affordable Care Act

    The Act is 2,500 pages long; it is difficult to discuss its impact with any brevity. Some of the basic provisions are that insurers can no longer deny coverage to those with pre-existing conditions; new government health insurance exchanges are to be set up to determine the type and cost of plans available to consumers; large employers are required to offer employee health coverage; all plans must cover the "10 essential benefits" of health insurance; annual and lifetime limits on employer plans are banned; and plans are only "affordable" if the cost is less than 9.5% of family income.

    Additionally, all uninsured Americans are required to purchase a policy or pay a fine, although there are many "hardship exemptions" to the fine. Knowing the risks and costs to insurance companies would skyrocket, this mandate is intended to keep them in business by forcing low-risk consumers to buy.

    Restricting costs, mandating employer coverage and requiring minimum benefits further drive a wedge between the consumer and the real cost of health care. Premiums have predictably spiked since passage of the Act, consistent with economic theory about moral hazard.

  • How does the grace period work on my Flexible Spending Account (FSA)?

    Some employers offer the grace period option for their employee's flexible spending account, or FSA. The grace period is applicable to a health FSA and a dependent care FSA. It begins the day following the end of the plan year and lasts for two and a half months. It is designed to allow employees the opportunity to take full advantage of their non-taxable contributions when expenses fall short of what was originally projected.

    Any eligible medical expenses accrued during this grace period can be reimbursed with funds remaining in the FSA from the prior plan year. The inclusion of the grace period extends the plan year to 14 months and 15 days as opposed to the 12-month actual plan. For calendar year plans, the grace period begins Jan. 1 and ends March 15. All funds remaining in the account at the end of the grace period are forfeited according to the "use-it-or-lose-it" rule, which requires all remaining funds in an FSA to be forfeited at the end of the plan year. Claims submitted during the grace period are automatically taken out of the prior year's remaining funds before drawing from the current plan year; however, in the event a debit card is used for eligible expenses, the funds are drawn from the current plan year.

    Imagine, for example, your plan year ends on Dec. 31, 2013. At that point, you still have $150 left in unused funds in your FSA. On Feb. 5, 2014, you incur $400 in eligible medical expenses. After your claim is submitted, the remaining $150 from the 2013 plan is used first for reimbursement, and the other $250 is taken out of the funds from the 2014 plan.

    Employers can provide a grace period or a carryover provision but not both. A carryover provision allows you to carry over up to $500 for the next plan year without a time limit of when it has to be used. However, with both the grace period and carryover option, there is still a maximum $2,500 annual contribution limit. To take advantage of the grace period option, FSA plans must be amended to include the option by the end of the prior year. If you were to have a grace period option for the 2015 year, your employer would need to amend your plan by Dec. 31, 2014 for a calendar year plan. Plans cannot be altered mid-year to include the grace period.

    It is important to remember that you have until March 15 of the following year to incur eligible expenses, but claims can be submitted for reimbursement up until March 31. This 16-day window is known as the run-out period. After the run-out period expires, all unused funds are forfeited.

  • How does the insurance sector work?

    The insurance sector is composed of companies that offer risk management in the form of insurance contracts. One party, the insurer, guarantees payment for an uncertain future event. Another party, the insured or the policyholder, pays a smaller premium to the insurer in exchange for that uncertain future protection. As an industry, insurance is regarded as a slow-growing, safe sector for investors. This perception is not as strong as it was in the 1970s and 1980s, but it is still generally true when compared to other financial sectors.

    The Float

    One of the interesting features of insurance companies is that they are essentially allowed to use their customers' money to invest for themselves. This makes them similar to banks but to a greater extent. This is sometimes referred to as "the float." Float occurs when one party extends money to another party and does not expect repayment until after a circumstantial event. This mechanism essentially means insurance companies have a positive cost of capital. This distinguishes them from private equity funds, banks and mutual funds.


    Not all insurance companies offer the same products or cater to the same customer base. Among the largest categories of insurance companies are accident and health insurers; property and casualty insurers; and financial guarantors. Accident and health companies are probably the most well-known. These include companies such as UnitedHealth and AFLAC, which are designed to help people who have been physically harmed. Property and casualty companies insure against accidents of nonphysical harm. This can include lawsuits, damage to personal assets, car crashes and more. Large property and casualty insurers include AIG and Allianz SE.

    Other Products

    Insurance plans are the principal product of the sector. However, recent decades have seen a rise in corporate pension plans and annuities to retirees. This places insurance companies in direct competition with other financial asset providers.

  • How is something "brought over the wall" in an investment bank?

    An analyst who lends his or her expertise to an underwriting department is said to have been "brought over the wall". In financial firms, the separation between the investment analyst and the underwriting departments is described as the "wall", as in the Great Wall of China. The division exists as an ethical boundary to guard against the exchange of insider information between the two departments.

    Bringing an employee from the research department of an investment bank "over the wall" is common practice. The research analyst lends his or her knowledgeable opinion about the company so that the underwriters are better informed during the underwriting process. After the process has been completed, the research analyst is restricted from sharing any information about his or her time "over the wall" until the information has been made public - another measure toward preventing the exchange of insider information.

    (For more on this topic, read The Chinese Wall Protects Against Conflicts of Interest.)

    This question was answered by Bob Schneider.

  • How much do changes in interest rates affect the profitability of the insurance sector?

    Interest rate risk for insurance companies is a significant factor in determining profitability. Although rate changes in either direction may affect insurance company operations, insurance company profitability typically rises and falls in concert with interest rate increases or decreases.

    Changes in interest rates can affect the assets and the liabilities of an insurance company. Insurance companies have substantial investments in interest-rate-sensitive assets, such as bonds, as well as market interest rate-sensitive products for their customers.

    Drops in interest rates can decrease an insurance company's liabilities by decreasing its future obligations to policyholders. However, lower interest rates can also make the insurance company's products less attractive, resulting in lower sales and, thus, lower income in the form of premiums that the insurance company has available to invest. The net impact on the company's profitability is determined by whether the decrease in liabilities is greater or less than any reduction in assets that is experienced.

    Lower interest rates can also negatively impact an insurance company's risk profile as an equity investment if analysts believe the company may have difficulty meeting future financial obligations. Lower levels of equity investment mean lower levels of assets for insurers.

    While the precise effect of interest rate changes on a specific insurance company may be uncertain, historical analysis shows that the overall trend is for the profitability of insurance companies to increase in an environment of rising interest rates . Overall price-to-earnings (P/E) ratios for insurance companies usually increase in fairly direct proportion to increases in interest rates.

  • How much money can Uber drivers make?

    According to the company’s own data released in May 2014, more than half of the Uber drivers operating in New York City earn $90,000 a year; in San Francisco, drivers can earn up to $70,000. However, these figures have been subject to skepticism. In the first place, the figures only included drivers working 40 hours or more a week for Uber, which would not be representative of Uber drivers in general. Secondly, these figures excluded the costs incurred by the drivers in their work.

    Uber drivers must cover their own costs, such as fuel, personal auto insurance (which can vary in cost according to the driver's circumstances), parking costs, maintenance of the car including oil changes and washes, repairs to the vehicle, taxes and 80% of toll payments (Uber pays for the other 20%). Furthermore, the car itself must be owned or rented by the driver, and he or she must cover the costs. These additional costs can be substantial and significantly reduce the driver's take-home pay.

    For example, one driver in New Jersey driving for approximately 12 hours a day took a total in gross fares of $180. However, accounting for Uber's 20% cut of his earnings in addition to tolls, auto insurance, financing his vehicle and self-employment taxes, he had actually earned only $54.50 a day, which amounts to $4.54 an hour. This is below the minimum wage in New Jersey. This driver's experiences may be more representative than the figures quoted by the company.

    Taking these factors into account, financial journalist Felix Salmon calculated that a driver working in San Francisco could earn $75,000 a year, but that driver would have to work for 58 hours a week to do so. While this is considerably more hours than the average Uber driver works in a week, this is an achievable goal and an achievable salary if the driver is not employed elsewhere.

    While Uber's figures may not be representative for its drivers as a whole, it is possible for Uber drivers to earn a strong income by driving for the company if they are willing to put in a significant number of hours per week. Uber's business model allows drivers to work as many hours as they want in a week.

    Additional factors may reduce the amount of money an Uber driver can make. Other drivers for Uber represent competition in two ways. Uber works on dynamic pricing, which means that the price is determined by a ratio of how many drivers are working and how many customers there are. If there are more drivers, the amount each individual driver can make is lower. There have also been instances of Uber drivers picking up customers that were not allocated for them and claiming the fares, undercutting the other drivers.

  • How much of a drug company's spending is allocated to research and development on average?

    Pharmaceutical companies spend, on average, about 18% of revenues on research and development (R&D), making the pharmaceutical industry one of the biggest spenders in this area. Outside of the semiconductor industry, no other industry spends more on R&D.

    R&D Spending in the Pharmaceutical Industry

    The pharmaceutical industry's lifeblood is R&D. The success of major drug companies is almost wholly dependent upon the discovery and development of new medicines, and their allocation of capital expenditures reflects that fact. On average, pharmaceutical companies dedicate approximately 18% of their budget to R&D, and some companies within the industry spend substantially more than that.

    As of 2013, many of the largest pharmaceutical firms spend nearly 20% on R&D. Of the 20 largest R&D spending industrial companies in the world, pharmaceutical companies make up nearly half the list. Eli Lilly is currently spending roughly 23% on R&D. Biogen is right behind, at approximately 22%. Both Roche and Merck are spending just under 20%. Pfizer and AstraZeneca are closer to the 15% level, along with GlaxoSmithKline. Abbott Laboratories is on the lower end of the spectrum, dedicating about 12% of revenues to R&D spending.

    Many smaller pharma companies have lower revenue totals to work with, so they spend significantly higher percentages of their budget on R&D – up to 50% for some firms.

    Average Industrial Research and Development Spending

    A quick survey of other industries clearly shows how much most of them are outspent in R&D by pharmaceutical companies. The overall average spending on R&D by industrial firms engaged in developing new products is a mere 1.3% of sales revenues. The chemicals sector, one of the larger R&D sectors, spends an average of 2 to 3%. Aerospace and defense firms, although they do a great deal of research and development work, still only dedicate about 4 to 5% of revenues to R&D spending.

    Internet companies are closer to pharmaceutical firms in R&D spending, with both Microsoft and Google spending approximately 12% of sales revenues on R&D. However, other technology sector companies don't typically approach that level of spending. Even a company known for technological innovation, such as Apple, spends less than 3% of revenues on R&D, and IBM just a little more than that.

    The semiconductor industry is the only industry that regularly outpaces pharmaceutical companies in R&D spending as a percentage of sales revenues. The major semiconductor firms, such as Broadcom, regularly spend approximately 25 to 28% of revenues on R&D.

    The high level of R&D expenditures in the pharmaceutical industry is easy to understand given the cost of developing a new drug and bringing it to market. The average R&D to marketplace cost for a new medicine is nearly $4 billion, and can sometimes exceed $10 billion.

  • How much renters insurance do you need?

    You should have enough renters insurance coverage to replace lost or damaged items with new ones. On average, renters have approximately $20,000 worth of belongings, but it is important to take inventory of everything you own to calculate exactly how much coverage you need. Extra insurance coverage is recommended for valuables such as art and jewelry.

    Landlords are responsible for insuring rented properties against damages caused by fire and other disasters. Your personal property as an individual renter is not generally covered by the property owner's insurance. While you aren't legally obligated to buy renters insurance, it is strongly encouraged you do to protect yourself from the unexpected.

    Take Inventory and Document Your Possessions

    It is not enough to simply buy a renters insurance policy. If you need to file an insurance claim, you must be able to prove what you owned to make sure you will get enough money to replace your possessions. Document everything of value you own with a camera, walking through every room taking detailed photos of individual items. Go through closets and any storage space where you keep your valuables.

    Once you have visual evidence of your belongings, make an itemized list and update your inventory periodically, especially when you make big purchases. Many insurance companies offer online tools to help with the inventory process.

    Research Prices of Replacement Items

    It is not enough to simply take pictures and make a list of your possessions. Do research to determine exactly how much it would cost to replace them. Shop around, keep a running grand total, and make sure to add a cushion for inflation.

    For expensive items, it may not matter if you know the replacement value. Most renters insurance policies have limits that require special riders to replace items such as jewelry or fine art.

  • How your driving record affect your car insurance?

    While your auto insurance company cannot pull your full motor vehicle report (MVR), it does pull a summary listing your most recent tickets, accidents and convictions. The look-back period for your MVR varies by state and insurance company. Generally, this period is between three and five years, but it can be much longer.

    How Insurance Companies Use Your Driving Record

    When you apply for auto insurance, the insurance company needs to assess your amount of risk. The best way to determine this is to review your previous driving activity. Your insurance company can estimate your level of insurance risk based on the frequency and severity of your recent driving violations and collisions.

    If you have had several accidents or traffic infractions in the past, you are more likely than other drivers to have similar problems in the future. If this is the case, you will probably make multiple insurance claims, so the insurance company may decide you are too risky to insure or charge you an increased rate to compensate for the probability it will need to pay claims on your behalf. (For related reading, see: Will Filing an Insurance Claim Raise Your Rates?)

    What Is Included on Your MVR?

    In addition to any accidents or traffic violations within the past three years, your MVR also includes information about any criminal convictions associated with your driving record, such as DUIs, and any incidents in which you failed to appear at a scheduled court hearing related to a driving infraction.

    Your MVR also supplies your insurance company with information about any license restrictions, such as not being allowed to drive at night due to poor eyesight. Any prior license suspensions or revocations within the look-back period are also included. (For related reading, see: Car Insurance Rates Too High? Check the Record.)

    What if My Record Isn't Clean?

    Luckily, even if you have to pay an increased insurance rate due to a less than favorable MVR, it may not be permanent. Once your infractions are older than the look-back period, they drop off the insurance summary and are no longer considered when determining your premium. If your insurance company has a look-back period of three years, for example, an accident you had in 2015 drops off your record in 2018 and, if you have no new collisions, your insurance rates may decrease at your next policy renewal.