© 2013 pearson education, inc. all rights reserved.9-1 chapter 9 life and health insurance

© 2013 Pearson Education, Inc. All rights reserved. 9-1

Chapter 9

Life and Health Insurance


Learning Objectives

1. Understand the importance of insurance.

2. Determine your life insurance needs and design a life insurance program.

3. Describe the major types of coverage available and the typical provisions that are included.


Learning Objectives

4. Design a health care insurance program and understand what provisions are important to you.

5. Describe disability insurance and the choices available to you.

6. Explain the purpose of long-term care insurance and the provisions that might be important to you.


Introduction

• Health insurance is an issue none of us can afford to dismiss.

• Most of us avoid thinking about and planning for our deaths—most of us do not seek out a life insurance policy.

• When you consider your need for insurance, need to keep in mind its purpose.


The Importance of Insurance

• An insurance policy spells out what losses are covered, what the policy costs, and who receives payment.

• Health insurance provides protection against devastating medical bills.

• Life insurance protects your family if you die.


The Importance of Insurance

• Health care is expensive because:– No incentive to economize.– Medical care is extremely sophisticated.– High malpractice insurance costs.

• High costs mean limited insurance coverage, no health benefits, and higher out-of-pocket payments for medical bills.


Insurance Terminology

• Risk pooling—through insurance, sharing financial consequences of risk

• Premium• Actuaries• Face amount or face of policy—amount of

insurance provided at death.• Policy owner or policyholder.• Beneficiary—designated to receive the

proceeds.• Life insurance doesn’t make sense without

a spouse or dependents


How Much Life InsuranceDo You Need?

• Priorities and goals

• Crunch the numbers—net worth, inflation and future earnings

• Earnings Multiple Approach

• Needs Approach


Earnings Multiple Approach

• Replace a stream of lost annual income.

• Tells you a lump-sum needed to replace that stream of annual income

• Multiply present annual gross income by the appropriate earnings multiple.

• Earnings multiple depends on number of years you need the lost income and rate of return


Table 9.2 Earnings Multiples for Life Insurance


Needs Approach

• Determine the needs of a family after the death of the breadwinner

• Immediate needs at time of death• Debt elimination funds• Immediate transitional funds• Dependency expenses• Spousal life income• Educational expenses for children• Retirement income


Major Types of Life Insurance

• Term insurance—pure life insurance that pays beneficiary a specific amount of money if you die while covered

• Cash-value insurance—has a life insurance and a savings plan


Term Insurance and Its Features

• Pays the death benefit if insured dies during the coverage period.

• Has no face value.

• Primary advantage is affordability.

• Disadvantage is that the cost increases each time the policy is renewed.


Term Insurance and Its Features

• Renewable term insurance

• Decreasing term insurance

• Group term insurance

• Convertible term life insurance


Cash-Value Insuranceand Its Features

• Provides both a death benefit and an opportunity to accumulate cash value.

• Permanent—pay the premiums and eventually you will get paid.

• 3 basic types:– Whole Life– Universal Life– Variable Life


Whole Life Insuranceand Its Features

• Death benefit when the insured dies, turns 100, or reaches the maximum stated age.

• Cash-value—policyholder’s savings

• Nonforfeiture Right—gives the policyholder the right to choose the policy’s cash value in exchange for giving up the death benefit.

• Different premium payment patterns


Universal Life Insuranceand Its Features

• Combines term insurance with tax-deferred savings with flexible premiums and benefits.

• Flexible—premiums can vary.

• Mortality charge or term insurance, cash value or savings, administrative expenses.

• May not end up with the anticipated amount of savings.


Term Versus Cash-ValueLife Insurance

• For most individuals, term insurance is the better alternative:– Low cost– High cash-value premiums can lead to less

coverage than you actually need

• Cash-value insurance has tax advantages.– Growth of the cash-value is tax-deferred.– Life insurance is not considered part of your

estate.


Riders:

• Waiver of Premium for Disability Rider

• Accidental Death Benefit Rider or Multiple Indemnity

• Guaranteed Insurability Rider

• Cost-of-Living Adjustment (COLA) Rider

Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options


Buying Life Insurance

• Choose an efficiently run life insurance company that will be around when your policy matures.

• Selecting an Agent– Most agents make living through commissions– Be aware of agent’s professional designation– List of prospects from good companies– Interview the agents and get a quote


Buying Life Insurance

Making a Purchase: The Net or an Advisor• Shop for term life insurance on the Web

• Check at least 2 Web quote services and call an independent insurance agent

• More complicated to compare cash-value policies—different features and assumptions

• Still get quotes on the Web for different cash-value policies


Health Insurance

• Employer-sponsored health care coverage

• Your choices limited to what employer offers

• Additional coverage, make additional payments

• Pick insurance with only types of coverage you need.


Basic Health Insurance

• Most health insurance—combination of hospital, surgical, and physician expense insurance

• Hospital insurance• Surgical insurance• Physician expense insurance• Major medical expense insurance


Health Insurance

• Dental and Eye Insurance—coverage for minor and regular dental, eye examinations, glasses, and contact lenses

• Dread Disease and Accident Insurance—additional coverage for specific disease like cancer insurance or accident

• Provide protection against major catastrophes—make policy comprehensive


Basic Health Care Choices

• Traditional fee-for-service – reimbursed for medical expenditures and choice of doctor.

• Managed health care – most expenses covered but limited choice of doctors, hospitals, and clinics.


Private Health Care Plans

• Fee-for-service plan or traditional indemnity plans:– Doctor or hospital bills you directly, company

reimburses– Coinsurance or percentage participation provision– Co-payment or deductible

• Managed health care—offered by health management organization (HMO)– Receive all health care at one location– Visit fee or co-payment



Managed Health Care: HMOs– Individual practice association plan (IPA)– Group practice plan– Point-of-service plan (May go outside for service)

• HMOs are cost efficient

• Service can be too quick, waits long

• Lack of choice can be too restricting



Managed Health Care: PPOs

• Preferred provider organization (PPO)

• Cross between traditional fee-for-service plan and an HMO

• Doctors and hospitals agree to pricing system

• Allows for health at a discount



Group Versus Individual Health Insurance • Group health insurance—sold with no

medical exam required to a specific group of individuals who are associated for some purpose– usually employees.

• Individual insurance policy—tailor-made for you, reflects age and health, after medical exam.


Government-SponsoredHealth Care Plans

• State Plans—provide for work-related accidents and illness

– Worker’s Compensation

• Federal Plans—Medicare, Medicaid


Medicare

• Medicare Part A—Hospital Insurance

• Medicare Part B—Supplemental Medical Insurance

• Medicare Part C—Medicare Advantage Plans

• Medicare Part D—Medicare Prescription Drug Coverage

• Medigap Plans (Private Plans)


Controlling Health Care Costs

• Flexible Spending Accounts

• Health Savings Accounts (HSAs)

• COBRA and Changing Jobs

• Choosing No Coverage—or “Opting Out”


Finding the Perfect Plan

Important Provisions in Health Insurance Policies:

• Who’s Covered? • Terms of Payment• Preexisting conditions • Guaranteed Renewability • Exclusions• Emotional and Mental Disorders


Disability Insurance

• Health insurance that provides payments to the insured in the even that income is interrupted by illness, sickness, or accident

• Sources of Disability Insurance

• How much disability coverage should you have?


Disability Features ThatMake Sense

• Definition of Disability

• Residual or Partial Payments

• Benefit Duration

• Waiting Period

• Waiver of Premium

• Noncancelable

• Rehabilitation Coverage


Long-Term Care Insurance

• Pays nursing home expenses and home health care.

• Covers costs associated with long-term care for those against the financial costs of Alzheimer’s, strokes, or chronic diseases.

• Most require that insured cannot perform at least two “activities of daily living” (ADLs)


Long-Term Care Insurance

• Type of Care—nursing home, adult day care, or hospice care for terminally ill

• Benefit Period—can range from 1 year to lifetime

• Waiting Period—0 days – 1 year

• Inflation Adjustment—protected from inflation

• Waiver of Premium—insurance stays in force while receiving benefits


Summary

• Life insurance controls the financial effect on your family when you die.

• There are two types of life insurance—term and cash-value.

• Basic health insurance provides combination of hospital, surgical, and physician expense insurance.


Summary

• Major medical expense insurance covers medical costs not covered by basic health insurance.

• Disability insurance provides income in the event of a disability.

• Long-term care insurance covers the cost of long-term nursing home care


Figure 9.1 The Rising Cost of Yearly Renewable Term Insurance—Annual Premiums for $100,000 Coverage on a 35-Year-Old Nonsmoking Male


Table 9.5 Major Provisions of the Affordable Care Acta


Table 9.5 Major Provisions of the Affordable Care Acta (cont.)


Table 9.6 Appealing Health Insurance Claim Decisions


Table 9.8 A Sampling of What Flexible Spending Accounts Can and Cannot Be Used For


Figure 9.3 Worksheet for Estimating How Much Disability Insurance CoverageYou Need

© 2013 pearson education, inc. all rights reserved.9-1 chapter 9 life and health insurance

Documents

life insurance slide

health insurance slide

life insurance needs

life insurance policy

disability insurance

life insurance program

pearson education

life insurance doesnt