Chapter 9

1. Chapter 9 Life and Health Insurance

2. The Logic Behind Insurance:Risk Management • An insurance policy spells out what losses are covered, what the policy costs, andwho receives payment. • Health insurance provides protection against devastating medical bills. • Life insurance protects your family if you die.

3. The Logic Behind Insurance:Risk Management • Health care is expensive and there is no incentive to economize: • Over 50% of Americans receive some government health care. • 87% of Americans have medical insurance. • Medical care has become extremely sophisticated. • It takes 12 years and over $239 million to develop, test, and certify a new drug. • Cost of litigation has skyrocketed. • Malpractice premiums cost $150,000-$250,000 yearly.

4. Do You Need Life Insurance? • Insurance is based on “risk pooling” - where individuals share the financial risks they face. • The size of the premium depends on the probability you will die. • Face amount - amount of insurance provided at death. • Owner - policy holder. • Beneficiary – designated to receive the proceeds.

5. Earnings MultipleApproach Buy insurance that is 5-15 times your annual gross income. Needs Approach Determines the funds necessary to meet the needs of a family after primary breadwinner’s death. How Much Life InsuranceDo You Need?

6. Needs Approach • What needs must be met after the death of the breadwinner? • Immediate needs at time of death • Debt elimination • Immediate transitional funds • Dependency expenses • Spousal life income • Educational expenses for children • Retirement income

7. Major Types of Life Insurance • There are 2 major types of life insurance: • Term insurance – pure life insurance. • Cash-value insurance – has a life insurance and a savings component.

8. Term Insurance and Its Features • Pays the death benefit if insured dies during the coverage period. • Sole purpose is to provide death benefits to beneficiaries. • Primary advantage is affordability. • Disadvantage is that the cost increases each time the policy is renewed.

9. Renewable Term Insurance • The “term” in a life insurance contract can be from 5 to more than 20 years. • Coverage terminates if not renewed. • Renewable term insurance allows for renewal up to a specified age, regardless of health. • Each time the contract is renewed, the premium is increased.

10. Re-entry Term Insurance • Term insurance is guaranteed renewable at one of 2 possible premium levels in the future. • Regular evaluations of your health determine which premium you are eligible for. • Lower rate if you pass the medical exam. • Higher rate if you fail the medical exam.

11. Decreasing Term Insurance • Premiums remain constant but the face value declines. • Assumes over time your wealth will increase and your needs will decrease. • Some policies decline at a constant, steady rate, others at accelerating rates.

12. Group Term Insurance • Term insurance provided without a medical exam, to a specific group of people. • The group may be employees of the same company or professional group. • The employer may pay part of the premium. • Usually less expensive than an individual policy.

13. Credit or Mortgage GroupLife Insurance • Life insurance provided by a lender for its debtors. • Provides enough coverage for an individual’s outstanding debts. • If debtor dies while policy is in effect, proceeds are used to pay off the debt. • Set up as a form of declining insurance.

14. Convertible Term Life Insurance • Life insurance that converts into cash-value life insurance, at your discretion, regardless of your medical condition and without a medical exam. • This allows you to continue your coverage when your term expires.

15. Cash-Value Insuranceand Its Features • Provides both a death benefit and an opportunity to accumulate cash value. • Permanent type of insurance – you pay the premiums and eventually you will get paid. • Provides protection over the policyholder’s entire lifetime rather than a specific time period. • Over all, payments are higher than they are for term insurance because payouts will be made.

16. Cash-Value Insuranceand Its Features • Cash value can be accessed through loans. • Withdrawals can be used to fund college education or supplement retirement income. • The cash value growth is tax-deferred.

17. Cash-Value Insurance • 3 basic types: • Whole Life • Universal Life • Variable Life

18. Whole Life Insuranceand Its Features • Provides a death benefit when the insured dies, turns 100, or reaches the maximum stated age. • Guarantees minimum cash values, premiums, and death benefits as long as premiums are paid on time. • In early years, deductions are made from the premium. The remaining goes into savings (cash value).

19. Whole Life Insuranceand Its Features • Because of the guarantees, this type of insurance requires the highest premium of all types of permanent insurance • Is the least flexible type of policy. • Are structured to “endow,” which means cash value will equal the policy death benefit at policy maturity (which is normally age 95 or 100).

20. Whole Life Insuranceand Its Features • Although it does provide for both savings and permanent needs, there are disadvantages of whole life: • Not the same level of death protection that term insurance provides for the same price. • Yield on the cash value investment portion of the policy isn’t competitive with yields on alternative investments.

21. Universal Life Insuranceand Its Features • A type of cash-value insurance combining term insurance with tax-deferred savings with flexible premiums and benefits. • Pay the dictated premium which goes into savings, once expenses and mortality charges are subtracted. • Policyholder can increase or decrease the premiums to affect the cash value of the policy.

22. Universal Life Insuranceand Its Features • Universal life funds have 3 parts: • The mortality charge or term insurance • The cash value or savings • Administrative expenses • With fluctuating returns and high expense charges, you may not end up with the anticipated amount of savings. • Insurance company can increase expenses charged against the policy’s cash value.

23. Variable Life Insurance • The cash value is funded by variable-type accounts chosen by the insured from a predetermined list of stock and bond portfolios. • This type of insurance is more suited to clients with comfortable equities. • The cash value and death benefit are tied to and vary according to the performance of the investments chosen by the policyholder.

24. Term Versus Cash-ValueLife Insurance • For most individuals, term insurance is the better alternative. • It provides life insurance needs at a low cost. • The advantage of cash-value insurance is the tax advantages. • Growth of the cash-value is tax-deferred. • Life insurance is not considered part of your estate.

25. Fine-Tuning Your Policy:Contract Clauses and Riders • There are 10 common features in all insurance policies: • Beneficiary provision • Grace period • Loan clause • Nonforfeiture clause • Policy reinstatement clause • Change of policy clause • Suicide clause • Payment premium clause • Incontestability clause • Settlement options

26. Fine-Tuning Your Policy:Contract Clauses and Riders • Beneficiary provision – allows for the naming of a primary and contingent beneficiaries. • Grace period – automatic extension for premium payments, usually 30 days after payment is due. • Loan clause – allows you to take loans against the cash value of the policy.

27. Fine-Tuning Your Policy:Contract Clauses and Riders • Nonforfeiture clause – gives the policyholder the cash value in exchange for giving up death benefit. • Policy reinstatement clause – the conditions necessary to restore a lapsed policy. • Change of policy clause – allows policy holder to change the form of the policy.

28. Fine-Tuning Your Policy:Contract Clauses and Riders • Suicide clause – the policy will not pay for suicide deaths within 2 years of purchase. • Payment premium clause – defines the alternatives available regarding the payment of premiums. • Incontestability clause – insurance company cannot dispute the validity of the contract after a specified number of years.

29. Fine-Tuning Your Policy:Contract Clauses and Riders • Settlement options to receive benefits: • Lump-sum settlement – usually no taxes due on the full face value of the contract. • Interest-only settlement – leave benefits on deposit and receive only the interest. • Installment-payment settlement – cash value distributed over a fixed time period. • Life-annuity settlement – beneficiary receives income for life.

30. Riders • A special provision added to the policy providing extra benefits or limiting the company’s liability. • Waiver of Premium for Disability – pays your premiums if you become disabled. • Accidental Death Benefit – increases benefit if insured dies from an accident and not natural causes. • Guaranteed Insurability – gives you the right to increase insurance protection without a medical exam. • Cost-of-Living Adjustment – COLA increases death benefit at rate of inflation. • Living Benefits – early payout for terminally ill.

31. Buying Life Insurance • Choose an efficiently-run insurance company by evaluating their rating • A.M. Best, Standard & Poor’s, Moody’s, and Duff & Phelps rate an insurance company’s ability to pay off. • Select the right agent by evaluating their designations. • CLU – chartered life underwriter • Compare costs of competing policies.

32. Health Insurance • Basic Health Insurance: • Hospital Insurance - covers costs associated with a hospital stay. • Surgical Insurance - covers cost of surgery. • Physician Expense Insurance – covers physicians’ fees outside of surgery. • Major Medical Insurance – covers catastrophic illness. • Dental and Eye Insurance • Dread Disease and Accident Insurance – covers specific diseases or accidents.

33. Basic Health Care Choices • What types of plans are available? • Traditional fee-for-service – patient billed directly and is reimbursed by the insurance company. • Greatest degree of health provider choice. • Managed health care – most expenses covered but limited choice of doctors and hospitals.

34. Managed Health Care Plans • Health Maintenance Organizations (HMOs) – is a prepaid insurance plan that entitles members to services of participating doctors, hospitals, and clinics. • Pay a flat fee plus a co-payment for every visit • Have a primary care physician • Preferred Provider Organizations (PPOs) – cross between a fee-for-service plan and an HMO. • Wider choice of physicians and hospitals. • Higher co-payment for service from nonmembers.

35. Group Insurance is sold to a specific group of individuals who are associated – usually employees. Individual Policy is tailor-made for you. Tends to be more expensive than group insurance. Group Versus IndividualHealth Insurance

36. State Plans Provide for work-related accidents and illness. State determines the level of benefit. Workers’ compensation laws enacted in early 1900’s. Medicare Provides medical benefits to disabled and those over 65 who get social security. 2 part coverage – hospital benefits (Part A) and voluntary supplemental insurance (Part B). Program enacted in 1968. Government-SponsoredHealth Care Plans

37. Government-SponsoredHealth Care Plans • Medicaid • Is a medical assistance program aimed at the needy. • Provides medical care for the aged, blind, disabled, and needy families with dependent children.

38. Medical Reimbursement Accounts • Savings plans established by the employer allowing employees to deposit pre-tax earnings into a specially-designed account. • Also called a flexible spending account. • Employees withdraw funds to cover un-reimbursed medical or dental expenses or qualified child care. • A “use it or lose it” plan.

39. COBRA and Changing Jobs • Under the Consolidated Omnibus Budget Reconciliation Act (COBRA): • If you work for a company with at least 20 employees, you can continue your coverage for 1 ½ - 3 years after you leave the company, depending on why you left. • You are responsible for the costs of the insurance, but it will be less than buying individual insurance.

40. Look for a plan where the full cost of basic services are covered, and is noncancelable. Consider: Who is covered – individuals or family Terms of payment – define your financial obligation Preexisting conditions Guaranteed renewability Exclusions – certain illnesses or injuries Emotional and mental disorders – policies vary Finding the Perfect Plan

41. Disability Insurance • While related to health insurance, disability insurance is more like earning-power insurance. • Occupation impacts the cost. • Most employers provide some level of disability insurance as part of the benefits package. • You should have enough disability insurance to maintain your standard of living if you are not able to work.

42. Disability Features ThatMake Sense • Definition of Disability – what does your policy consider a disability. • Residual or Partial Payments – may offer partial pay. • Benefit Duration – short term is ½ year - 2 years. • Waiting Period – time period after disability when no benefits occur. • Waiver of Premium – waives payments when disabled. • Noncancelable – cannot be cancelled due to disability. • Rehabilitation Coverage – provides retraining.

43. Long-Term Care Insurance • Pays nursing home expenses and home health care. • Protects against the financial costs of Alzheimer’s, strokes, or chronic diseases. • Requires that insured cannot perform “activities of daily living.”

44. Long-Term Care Insurance • Consider these provisions: • 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 – can range from 0 days – 1 year. • Inflation Adjustment – protected from inflation. • Waiver of Premium – insurance stays in force while receiving benefits.