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Understand the importance of insurance, determine your life insurance needs, and design a life insurance program. Learn about health care insurance, disability insurance, and long-term care insurance.
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Chapter 9 Life and Health Insurance
Learning Objectives • Understand the importance of insurance. • Determine your life insurance needs and design a life insurance program. • Describe the major types of coverage available and the typical provisions that are included.
Learning Objectives • Design a health care insurance program and understand what provisions are important to you. • Describe disability insurance and the choices available to you. • 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.
Do You Need Life Insurance? • 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
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 • Credit and mortgage group life 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.
Figure 9.2 Determining the Cash Value on a Universal Life Insurance Policy
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.
Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options Contract Clauses: • Beneficiary Provision • Coverage Grace Period • Loan Clause • Nonforfeiture Clause • Policy Reinstatement Clause • Change of Policy Clause • Suicide Clause • Payment Premium Clause • Incontestability Clause
Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options Riders: • Waiver of Premium for Disability Rider • Accidental Death Benefit Rider or Multiple Indemnity • Guaranteed Insurability Rider • Cost-of-Living Adjustment (COLA) Rider • Living Benefits Rider
Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options Settlement or Payout Options: • Lump-Sum Settlement • Interest-Only Settlement • Installment-Payments Settlement • Life Annuity Settlement • Straight Life Annuity • Period Certain Annuity • Refund Annuity • Joint Life and Survivorship Annuity
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
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 Comparing Costs • Traditional Net Cost (TNC) method—sums up premiums over a stated period (usually 10 to 20 years) and subtracts from this the sum of all dividends over that same period. • Interest-Adjusted Net Cost (IANC) method—incorporates the time value of money
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
Private Health Care Plans Managed Health Care: HMOs • Individual practice association plan (IPA) • Group practice plan • Point-of-service plan • HMOs are cost efficient • Service can be too quick, waits long • Lack of choice can be too restricting
Private Health Care Plans 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
Private Health Care Plans 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
Medicaid • Government medical insurance plan for needy families—as well as aged, blind, and disabled • Joint federal and state program • Some covered by Medicaid also covered by Medicare • Limited in scope
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. • Requires that insured cannot perform “activities of daily living” (ADLs)
