What Is Aggregate Stop-Loss Insurance?

Aggregate stop-loss insurance is a policy designed to limit claim coverage (losses) to a specific amount. This coverage ensures that a catastrophic claim (specific stop-loss) or numerous claims (aggregate stop-loss) do not drain the financial reserves of a self-funded plan. Aggregate stop-loss protects the employer against claims that are higher than expected. If total claims exceed the aggregate limit, the stop-loss insurer covers the claims or reimburses the employer.

Understanding Aggregate Stop-Loss Insurance

Aggregate stop-loss insurance is held for self-funded insurance plans for which an employer assumes the financial risk of providing healthcare benefits to its employees. In practical terms, self-funded employers pay for each claim as it is presented instead of paying a fixed premium to an insurance carrier for a fully insured plan. Stop-loss insurance is similar to purchasing high-deductible insurance. The employer remains responsible for claim expenses under the deductible amount.

Stop-loss insurance differs from conventional employee benefit insurance. Stop-loss only covers the employer and provides no direct coverage to employees and health plan participants.

How Aggregate Stop-Loss Insurance Is Used

Aggregate stop-loss insurance is used by employers as coverage for risk against a high value of claims. Aggregate stop-loss insurance comes with a maximum level for claims. When a maximum threshold is exceeded, the employer no longer needs to make payments and may receive some reimbursements.

Aggregate stop-loss insurance can either be added to an existing insurance plan or purchased independently. The threshold is calculated based on a certain percentage of projected costs (called attachment points)—usually 125% of anticipated claims for the year.

An aggregate stop-loss threshold is usually variable and not fixed. This is because the threshold fluctuates as a percentage of an employer’s enrolled employees. The variable threshold is based on an aggregate attachment factor which is an important component in the calculation of a stop-loss level.

As is the case with high deductible plans, most stop-loss plans will have relatively low premiums. This is because the employer is expected to cover over 100% of the value of claims they receive.

Aggregate Stop-Loss Insurance Calculations

The aggregate attachment associated with a stop-loss plan is calculated as follows: 

Step 1

The employer and stop-loss insurance provider estimate the average dollar value of claims expected by employee per month. This value will depend on the employer’s estimate but often ranges from $200 to $500 per month.

Step 2

Assume the stop-loss plan uses a value of $200. This value would then be multiplied by the stop-loss attachment multiplier which usually ranges from 125% to 175%. Using a claims estimate of $200 and a stop-loss attachment multiplier of 1.25, the monthly deductible would be $250 per month per employee ($200 x 1.25 = $250).

Step 3

This deductible must then be multiplied by the employer’s plan enrollment for the month. Assuming that an employer has 100 employees in the first month of coverage, their total deductible would be $25,000 for the month ($250 x 100).

Step 4

Enrollment can potentially vary per month. Due to enrollment variance, aggregate stop-loss coverage may have either a monthly deductible or an annual deductible.

Step 5

With a monthly deductible, the amount an employer must pay could change every month. With an annual deductible, the amount the employer must pay would be summed for the year and usually based on estimates from the initial month of coverage. Many stop-loss plans will offer an annual deductible that is slightly lower than the summation of deductibles over 12 months.

What Is Average Outstanding Balance?

An average outstanding balance is the unpaid, interest-bearing balance of a loan or loan portfolio averaged over a period of time, usually one month. The average outstanding balance can refer to any term, installment, revolving, or credit card debt on which interest is charged. It may also be an average measure of a borrower’s total outstanding balances over a period of time.

Average outstanding balance can be contrasted with average collected balance, which is that part of the loan that has been repaid over the same period.

Understanding Average Outstanding Balance

Average outstanding balances can be important for several reasons. Lenders often have a portfolio of many loans, which need to be assessed in aggregate in terms of risk and profitability. Banks use the average outstanding balance to determine the amount of interest they pay each month to their account holders or charge to their borrowers. If a bank has a large outstanding balance on its lending portfolio it could indicate that they are having trouble collecting on their loans and may be a signal for future financial stress.

Many credit card companies also use an average daily outstanding balance method for calculating interest applied to a revolving credit loan, particularly credit cards. Credit card users accumulate outstanding balances as they make purchases throughout the month. An average daily balance method allows a credit card company to charge slightly higher interest that takes into consideration a cardholder’s balances throughout the past days in a period and not just at the closing date.

For borrowers, credit rating agencies will review a consumer’s outstanding balances on their credit cards as part of determining a FICO credit score. Borrowers should show restraint by keeping their credit card balances well below their limits. Maxing out credit cards, paying late, and applying for new credit increases one’s outstanding balances and can lower FICO scores.

Interest on Average Outstanding Balances 

With average daily outstanding balance calculations, the creditor may take an average of the balances over the past 30 days and assess interest on a daily basis. Commonly, average daily balance interest is a product of the average daily balances over a statement cycle with interest assessed on a cumulative daily basis at the end of the period.

Regardless, the daily periodic rate is the annual percentage rate (APR) divided by 365. If interest is assessed cumulatively at the end of a cycle, it would only be assessed based on the number of days in that cycle.

Other average methodologies also exist. For example, a simple average may be used between a beginning and ending date by dividing the beginning balance plus the ending balance by two and then assessing interest based on a monthly rate.

Credit cards will provide their interest methodology in the cardholder agreement. Some companies may provide details on interest calculations and average balances in their monthly statements.

Consumer Credit

Outstanding balances are reported by credit providers to credit reporting agencies each month. Credit issuers typically report a borrower’s total outstanding balance at the time the report is provided. Some credit issuers may report outstanding balances at the time a statement is issued while others choose to report data on a specific day each month. Balances are reported on all types of revolving and non-revolving debt. With outstanding balances, credit issuers also report delinquent payments beginning at 60 days past due.

Timeliness of payments and outstanding balances are the top factors that affect a borrower’s credit score. Experts say borrowers should strive to keep their total outstanding balances below 30%. Borrowers using more than 30% of total available debt outstanding can easily improve their credit score from month to month by making larger payments that reduce their total outstanding balance.

When the total outstanding balance decreases, a borrower’s credit score improves. Timeliness, however, is not as easy to improve since delinquent payments are a factor that can remain on a credit report for seven years.

Calculating Average Outstanding Balance

Lenders typically calculate interest on revolving credit, such as credit cardsor lines of credit, using an average of daily outstanding balances. The bank adds all the daily outstanding balances in the period (usually a month) and divides this sum by the number of days in the period. The result is the average outstanding balance for the period.

For loans that are paid monthly, such as mortgages, a lender may instead take the arithmetic mean of the starting and ending balance for a statement cycle. For instance, say a home borrower has a mortgage balance of $100,000 at the start of the month and makes a payment on the 30th of the same month, reducing the outstanding principal amount to $99,000. The average outstanding balance for the loan over that period would be ($100,000-99,000)/2 = $99,500.

Frequently Asked Questions

What is an outstanding balance?

An outstanding balance is the total amount still owed on a loan.

What is an outstanding principal balance?

This is the amount of a loan’s principal amount (i.e. the dollar amount initially loaned) that is still due, and does not take into account the interest or any fees that are owed on the loan.

Where can I find my outstanding balance?

Borrowers can find this information on their regular bank or loan statements. They can also usually be pulled up from a lender’s website for viewing at any time.

What is the difference between outstanding balance and remaining balance?

Outstanding balance refers to the amount still owed on a loan from the perspective of a borrower or lender. Remaining balance instead refers to how much money remains in an account after spending or a withdrawal, from the perspective of a saver or savings bank.

What percentage of an outstanding balance is a minimum payment?

Some lenders charge a fixed percentage, such a 2.5%. Others will charge a flat fee plus a fixed percentage, such as $20 + 1.75% of the outstanding balance as the minimum payment due. Penalty fees like late fees, as well as past due amounts, will typically be added to the calculation. This would increase your minimum payment significantly.

What Is Accounting Conservatism?

Accounting conservatism is a set of bookkeeping guidelines that call for a high degree of verification before a company can make a legal claim to any profit. The general concept is to factor in the worst-case scenario of a firm’s financial future. Uncertain liabilities are to be recognized as soon as they are discovered. In contrast, revenues can only be recorded when they are assured of being received.

How Accounting Conservatism Works

Generally Accepted Accounting Principles (GAAP) insist on a number of accounting conventions being followed to ensure that companies report their financials as accurately as possible. One of these principles, conservatism, requires accountants to show caution, opting for solutions that reflect least favorably on a company’s bottom line in situations of uncertainty.

Accounting conservatism is not intended to manipulate the dollar amount or timing of reporting financial figures. It is a method of accounting that provides guidance when uncertainty and the need for estimation arise: cases where the accountant has the potential for bias.

Accounting conservatism establishes the rules when deciding between two financial reporting alternatives. If an accountant has two solutions to choose from when facing an accounting challenge, the one that yields inferior numbers should be selected.

A cautious approach presents the company in a worst-case scenario. Assets and revenue are intentionally reported at figures potentially understated. Liabilities and expenses, on the other hand, are overstated. If there is uncertainty about incurring a loss, accountants are encouraged to record it and amplify its potential impact. In contrast, if there is a possibility of a gain coming the company’s way, they are advised to ignore it until it actually occurs.

Recording Revenue

Accounting conservatism is most stringent in relation to revenue reporting. It requires that revenues are reported in the same period as related expenses were incurred. All information in a transaction must be realizable to be recorded. If a transaction does not result in the exchange of cash or claims to an asset, no revenue may be recognized. The dollar amount must be known to be reported.

Advantages of Accounting Conservatism

Understating gains and overstating losses means that accounting conservatism will always report lower net income and lower financial future benefits. Painting a bleaker picture of a company’s financials actually comes with several benefits.

Most obviously, it encourages management to exercise greater care in its decisions. It also means there is more scope for positive surprises, rather than disappointing upsets, which are big drivers of share prices. Like all standardized methodologies, these rules should also make it easier for investors to compare financial results across different industries and time periods.

Disadvantages of Accounting Conservatism

On the flip side, GAAP rules such as accounting conservatism can often be open to interpretation. That means that some companies will always find ways to manipulate them to their advantage.

Another issue with accounting conservatism is the potential for revenue shifting. If a transaction does not meet the requirements to be reported, it must be reported in the following period. This will result in the current period being understated and future periods to be overstated, making it difficult for an organization to track business operations internally. 

Using Accounting Conservatism

Accounting conservatism may be applied to inventory valuation. When determining the reporting value for inventory, conservatism dictates the lower of historical cost or replacement cost is the monetary value.

Estimations such as uncollectable account receivables (AR) and casualty losses also use this principle. If a company expects to win a litigation claim, it cannot report the gain until it meets all revenue recognition principles.

However, if a litigation claim is expected to be lost, an estimated economic impact is required in the notes to the financial statements. Contingent liabilities such as royalty payments or unearned revenue are to be disclosed, too.

What Is Accumulated Depreciation?

Accumulated depreciation is the cumulative depreciation of an asset up to a single point in its life. Accumulated depreciation is a contra asset account, meaning its natural balance is a credit that reduces the overall asset value.

Understanding Accumulated Depreciation

The matching principle under generally accepted accounting principles (GAAP) dictates that expenses must be matched to the same accounting period in which the related revenue is generated. Through depreciation, a business will expense a portion of a capital asset’s value over each year of its useful life. This means that each year a capitalized asset is put to use and generates revenue, the cost associated with using up the asset is recorded.

Accumulated depreciation is the total amount an asset has been depreciated up until a single point. Each period, the depreciation expense recorded in that period is added to the beginning accumulated depreciation balance. An asset’s carrying value on the balance sheet is the difference between its historical cost and accumulated depreciation. At the end of an asset’s useful life, its carrying value on the balance sheet will match its salvage value.

When recording depreciation in the general ledger, a company debits depreciation expense and credits accumulated depreciation. Depreciation expense flows through to the income statement in the period it is recorded. Accumulated depreciation is presented on the balance sheet below the line for related capitalized assets. The accumulated depreciation balance increases over time, adding the amount of depreciation expense recorded in the current period.

How to Calculate Accumulated Depreciation

There are several acceptable methods for calculating depreciation. These methods are allowable under Generally Accepted Accounting Principles (GAAP). A company may select the depreciation method they wish to use.

Straight-Line Method

Under the straight-line method of accounting, a company deducts the asset’s salvage value from the purchase price to find a depreciable base. Then, this base is accumulated evenly over the anticipated useful life of the asset. The straight-line method formula is:

Annual Accumulated Depreciation = (Asset Value – Salvage Value) / Useful Life in Years

Imagine Company ABC buys a building for $250,000. The building is expected to be useful for 20 years with a value of $10,000 at the end of the 20th year. The depreciable base for the building is $240,000 ($250,000 – $10,000). Divided over 20 years, the company would recognized $20,000 of accumulated depreciation every year. 

Declining Balance Method

Under the declining balance method, depreciation is recorded as a percentage of the asset’s current book value. Because the same percentage is used in every year while the current book value decreases, the amount of depreciation decreases each year. Even though accumulated depreciation will still increase, the amount of accumulated depreciation will decrease each year.

Annual Accumulated Depreciation = Current Book Value * Depreciation Rate

For example, imagine Company ABC buys a company vehicle for $10,000 with no salvage value at the end of its life. The company decided it would depreciate 20% of the book value each year. In Year 1, Company ABC would recognize $2,000 ($10,000 * 20%) of depreciation and accumulated depreciation. In Year 2, Company ABC would recognize $1,600 (($10,000 – $2,000) * 20%).

Double-Declining Balance Method

Under the double-declining balance (also called accelerated depreciation), a company calculates what it’s depreciation would be under the straight-line method. Then, the company doubles the depreciation rate, keeps this rate the same across all years the asset is depreciated, and continues to accumulate depreciation until the salvage value is reached. The percentage can simply be calculated as twice of 100% divided by the number of years of useful life.

Double-Declining Balance Method Rate = (100% / Useful Life In Years) * 2

Double-Declining Balance Method = Depreciable Amount * Double-Declining Balance Method Rate

Let’s imagine Company ABC’s building they purchased for $250,000 with a $10,000 salvage value. Under the straight-line method, the company recognized 5% (100% depreciation / 20 years); therefore, it would use 10% as the depreciation base for the double-declining balance method. The company would recognize $24,000 ($240,000 depreciable base * 10%) in Year 1, and would recognize $21,600 (($240,000 depreciable base – $24,000) * 10%).

Sum-of-the-Years’ Digits Method

Under the sum-of-the-years’ digits method, a company strives to record more depreciation earlier in the life of an asset and less in the later years. This is done by adding up the digits of the useful years, then depreciating based on that number of year.

Annual Accumulated Depreciation = Depreciable Base * (Inverse Year Number / Sum of Year Digits)

Company ABC purchased a piece of equipment that has a useful life of 5 years. The asset has a depreciable base of $15,000. Since the asset has a useful life of 5 years, the sum of year digits is 15 (5+4+3+2+1). The depreciation rate is then the quotient of the inverse year number (Year 1 = 5, Year 2 = 4, Year 3 = 3, etc.) divided by 15. In Year 1, the company will recognize $5,000 ($15,000 * (5/15)) of depreciation and will recognize $4,000 ($15,000 * (4/15)) in Year 2.

Units of Production Method

Under the units of production method, a company estimates the total useful output of an asset. Then, the company evaluates how many of those units were consumed each year to recognize accumulated depreciation variably based on use. The formula for the units of production method is:

Annual Accumulated Deprecation = (Number of Units Consumed / Total Units To Be Consumed) * Depreciable Base

For example, a company buys a company vehicle and plans on driving the vehicle 80,000 miles. In the first year, the company drove the vehicle 8,000 miles. Therefore, it would recognize 10% (8,000 / 80,000) of the depreciable base. In the second year, if the company drives 20,000 miles, it would recognize 25% of depreciable base as an expense in the second year, with accumulated depreciation now equal to $28,000 ($8,000 in the first year + $20,000 in the second year).

Accumulated Depreciation vs. Accelerated Depreciation

Though similar sounding in name, accumulated depreciation and accelerated depreciation refer to very different accounting concepts. Accumulated depreciation refers to the life-to-date depreciation that has been recognized that reduces the book value of an asset. On the other hand, accelerated depreciation refers to a method of depreciation where a higher amount of depreciation is recognized earlier in an asset’s life.

Since accelerated depreciation is an accounting method for recognizing depreciation, the result of accelerated depreciation is to book accumulated depreciation. Under this method, the amount of accumulated depreciation accumulates faster during the early years of an asset’s life and accumulates slower later. The philosophy behind accelerated depreciation is assets that are newer (i.e. a new company vehicle) are often used more than older assets because they are in better condition and more efficient. 

Accumulated Depreciation vs. Depreciation Expense

When an asset is depreciated, two accounts are immediately impacted: accumulated depreciation and depreciation expense. The journal entry to record depreciation results in a debit to depreciation expense and a credit to accumulated depreciation. The dollar amount for each line is equal to the other.

There are two main differences between accumulated depreciation and depreciation expense. First, depreciation expense is reported on the income statement, while accumulated depreciation is reported on the balance sheet. 

Second, on a related note, the income statement does not carry from year-to-year. Activity is swept to retained earnings, and a company “resets” its income statement every year. Meanwhile, its balance sheet is a life-to-date running total that does not clear at year-end. Therefore, depreciation expense is recalculated every year, while accumulated depreciation is always a life-to-date running total.

Special Considerations

Accounting Adjustments/Changes in Estimate

Because the depreciation process is heavily rooted with estimates, it’s common for companies to need to revise their guess on the useful life of an asset’s life or the salvage value at the end of the asset’s life. This change is reflected as a change in accounting estimate, not a change in accounting principle. For example, say a company was depreciating a $10,000 asset over its five year useful life with no salvage value. Using the straight-line method, accumulated depreciation of $2,000 is recognized.

After two years, the company realizes the remaining useful life is not three years but instead six years. Under GAAP, the company does not need to retroactively adjust financial statements for changes in estimates. Instead, the company will change the amount of accumulated depreciation recognized each year. 

In this example, since the asset now has a $6,000 net book value ($10,000 purchase price less $4,000 of accumulated depreciation booked in the first two years), the company will now recognized $1,000 of accumulated depreciation for the next six years. 

Half-Year Recognition

A commonly practiced strategy for depreciating an asset is to recognize a half year of depreciation in the year an asset is acquired and a half year of depreciation in the last year of an asset’s useful life. This strategy is employed to more fairly allocate depreciation expense and accumulated depreciation in years when an asset may only be used part of a year. 

For example, Company A buys a company vehicle in Year 1 with a five year useful life. Regardless of the month, the company will recognize six months worth of depreciation in Year 1. The company will also recognize a full year of depreciation in Year 2 – 5. Then, the company will recognize the final half year of depreciation in Year 6. Although the asset only had a useful life of five years, it is argued that the asset wasn’t used for the entirety of Year 1 nor the entirety of Year 6.

Example of Accumulated Depreciation

Company A buys a piece of equipment with a useful life of 10 years for $110,000. The equipment is estimated to have a salvage value of $10,000. The equipment is going to provide the company with value for the next 10 years, so the company expenses the cost of the equipment over the next 10 years. Straight-line depreciation is calculated as (($110,000 – $10,000) / 10), or $10,000 a year. This means the company will depreciate $10,000 for the next 10 years until the book value of the asset is $10,000.

Each year the contra asset account referred to as accumulated depreciation increases by $10,000. For example, at the end of five years, the annual depreciation expense is still $10,000, but accumulated depreciation has grown to $50,000. That is, accumulated depreciation is a cumulative account. It is credited each year as the value of the asset is written off and remains on the books, reducing the net value of the asset, until the asset is disposed of or sold. It is important to note that accumulated depreciation cannot be more than the asset’s historical cost even if the asset is still in use after its estimated useful life.

The Bottom Line

Many companies rely on capital assets such as buildings, vehicles, equipment, and machinery as part of their operations. In accordance with accounting rules, companies must depreciate these assets over their useful lives. As a result, companies must recognize accumulated depreciation, the sum of depreciation expense recognized over the life of an asset. Accumulated depreciation is reported on the balance sheet as a contra asset that reduces the net book value of the capital asset section.