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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 (HMO’s)

• 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 (PPO’s)

• 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