Chapter 9 - Insurance

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Chapter 9 - Insurance

• Purpose protect against catastrophes
• Risk pooling and diversification
• Policy a contract with an insurance company
• Losses covered, policy cost, beneficiaries
• Charge is called the premium and based on
  probability of loss
• Face amount maximum amount paid for loss

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Life Insurance

• Purpose provide for dependents, replace lost
  income, pay other expenses
• How much? Needs and priorities.
• Start with net worth the higher, the less
  insurance needed
• Earnings multiple-how many times salary?
• Needs approach to maintain lifestyle

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Should You Buy Life Insurance

• Not necessary if
• Single with no dependents
• Double income couple, no children
• Retired
• Consider if
• Have children
• Married, single-income
• If you own your own business

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Insurance Terminology

• Insurer- assumes responsibility for losses
• Policy contract policyholder/ insurer
• Premium fee to insurer to accept risk
• Policy owner grants privileges to holder
• Beneficiary receives cash from life ins
• Insured life or actions covered by policy
• Face amount/indemnity max amount

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Life Insurance Premiums

• Based on mortality assumption (when average
  policyholder in a group will die and what company
  earns on premiums before losses paid out).
• Calculated by actuaries, statisticians
  specializing in probabilities
• Review health history and lifestyle

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Types of Life Insurance

• Term insurance
• "Pure insurance" based on probability that you
  will die based on age, health, occupation.
• Covers only a specified period
• Cash Value Insurance
• Adds a savings feature to term insurance
• Accumulated savings added to face amount

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Term Insurance

• Primary advantage low cost
• Disadvantage costs rise if policy extended
• Contract covers 1, 5, 10, 20 or 30 years
• Variations
• May be renewable regardless of health, decreasing
  term, credit life, convertible term

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Cash-Value Insurance

• Provides death benefit plus cash-value (money the
  policyholder receives if policy is terminated).
• Whole life insurance premiums fixed but you
  usually pay for the rest of your life
• Cash-value may be used to buy paid-up insurance
  can be borrowed without terminating coverage or
  added to indemnity

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Cash-Value Versus Term

• Term insurance is cheaper
• More affordable when you need insurance most
• Cash-value permanent insurance with savings
  feature
• Grows on tax-deferred basis

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Contract Clauses

• Beneficiary and contingent beneficiaries
• Grace period
• Loan clause
• Nonforfeiture
• Suicide clause
• Incontestability

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Buying Life Insurance

• Most sold on a commission basis
• Determine coverage based on needs, not the sales
  pitch use Internet for term quotes
• No federal guarantees but some states offer
• Ratings A. M. Best is best known
• Select agent you feel comfortable with

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Health Coverage Types

• Basic combination of hospital, surgical and
  physician expense
• Major medical covers catastrophic costs beyond
  basic coverage
• Most policies through employers
• If leave, COBRA protects for 18 months
• You pay premium but less than private policy

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Basic Choices

• Fee-for-service traditional indemnity plan
• Requires deductible, co-insurance up to limit
• More expensive but provides choices of doctors
• Managed care provides needed care but only from
  specified sources
• Health Maintenance Organizations (HMO's)
• Preferred Provider Organization (PPO)

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Health Maintenance Organizations (HMOs)

• Patient chooses primary doctor from network who
  coordinates all care
• Gatekeeper decides where to refer you and to
  whom
• Generally no deductible but has nominal fixed
  copays
• Less expensive but less flexible

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Preferred Provider Organizations (PPOs)

• You choose from broad network of doctors
  providing services at agreed rates
• Annual deductible say 250 ????
• Copay until reach maximum out-of-pocket say
  250 ? ???
• Higher cost but more flexibility

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Government Plans

• Medicare (you are not responsible for details)
• Workers' Compensation payment for work-related
  injuries
• Medical reimbursement use pre-tax earnings to
  pay medical expenses
• COBRA continues coverage for a period
• Opting out cash payment if not needed

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Finding the Right Plan

• Need to know
• Who is covered?
• Terms of payment deductible, coinsurance
• Pre-existing illness
• Guaranteed renewability
• Exclusions what's not covered?
• Key point find insurance when healthy

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Disability Insurance

• Provides income if unable to work
• Occupation affects premium
• Usually through employer but self-employed?
• Issues
• Disability definition what if return to work?
• Benefit duration short or long-term, waiting
  period and retraining coverage

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Long-Term Care

• Long-term nursing home care
• Life expectancy increasing
• Can't live on own (stroke, Alzheimer's)
• Unable to perform "activities of daily living"
  (ADL)
• Benefit period and waiting period
• Inflation adjustment extremely important but
  major cost impact