9-9-11

McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

9 Health and Disability Income Insurance

9-9-33 Health and Disability Income Insurance

Chapter Objectives1. Explain the importance of health insurance in

financial planning2. Analyze the costs and benefits of various types of

health insurance coverage, and major provisions in health insurance policy.

3. Assess the trade-offs of different health insurance plans

4. Explain the importance of disability income insurance in financial planning and identify its sources

9-9-44 Health Care Costs

The US has the highest per capita medical expenditures of any industrialized country in the world.– $5,162 per person in 2001.– This amount is twice as much spent on health care

as the average for the 24 industrialized countries in Europe and North America.

– Medical expenditures were 6% of the GDP in 1965, but rose to 14% of our GDP in 2001 and are predicted to be 17% in 2011.

9-9-55Objective 1: Explain the importance of health insurance in financial planning

What is Health Insurance? Protection that eases the financial burden people

may experience as a result of illness or injury Health insurance includes both medical expense

insurance and disability income insurance Health insurance is purchased in different ways:

group and individual health insurance plans and COBRA

9-9-66

What is Health Insurance? Group plans comprise more than 85% of all

health insurance issued. Most group plans are employer sponsored, and

the employer pays part or most of the cost. The 1996 Health Insurance Portability and

Accountability Act provides federal portability standards, nondiscrimination in health insurance, and guaranteed renewability.– If you changes jobs you need not lose your health

insurance. Individual Health Insurance.

Objective 1: Explain the importance of health insurance in financial planning

(continued)

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You can supplement your group policy.– The coordination of benefits provision in a policy

says that benefits received from all sources are limited to 100% of allowable medical expenses.

COBRA requires many employers to offer employees and dependents the option to continue their group coverage for a set period of time following a divorce. However, the premiums can run as high as $6,000 a year.

What is Health Insurance? (continued)

9-9-88Objective 2: Analyze the costs and benefits of various types of health insurance coverage and major provisions in health insurance policy

Types of Health Insurance Coverage Three choices: Basic, major medical or both. Basic includes…

– Hospital expense insurance.• Hospital room and board and other charges.

– Surgical expense insurance.• Surgeon's fee for an operation.

– Physician expense insurance.• Pays for physician’s care that does not include surgery,

such as office visits, lab tests and X-rays.

9-9-99 Types of Health Care Coverages

Major medical expense insurance.– Covers expenses for a serious injury or long-term

illness. Has a deductible, coinsurance, and a stop-loss provision.

Comprehensive major medical insurance. – Low deductible offered without a separate, basic

plan. Covers hospital, surgical, and other bills. Hospital indemnity.

– Pays a fixed amount for each day you are in a hospital. Best for people in high-risk groups.

(continued)

9-9-1010 Types of Health Care Coverages

Dental expense insurance.– Covers exams, cleaning, x-rays, fillings, root canals, and

oral surgery. Dread disease policies.

– Focus on unrealistic fears, and only pays out for very specific conditions. Often sold by people working on commission. Poor value.

Vision care– Exams, contact lenses, and glasses

Long term care insurance.– Virtually unknown 25 years ago, but now is growing faster

than any other form of insurance.

(continued)

9-9-1111 Major Provisions in a Health Insurance Policy

Eligibility.– Varies with age, marital status,

and dependency. Assigned benefits.

– Insurance pays your doctor or hospital directly. Internal limits.

– Fixed amount per day for a hospital room. Copayment.

– Cost sharing in the form of a flat dollar amount you pay, such as $15.00 per office visit or $10 per prescription.

9-9-1212 Major Provisions in a Health Insurance Policy

Service benefits - entitlement. Benefit limits - maximum dollar

amount or maximum number of days in the hospital.

Exclusions and limitations. Guaranteed renewable. Cancellation and termination -

explains the circumstances.

(continued)

9-9-1313Objective 3: Assess the trade-offs of different health insurance plans

Trade-Offs in Choosing a Policy Reimbursement versus indemnity. Internal limits versus aggregate limits. Deductibles and coinsurance. Out-of-pocket limit, or stop-loss. Benefits based on reasonable and customary

charges.

9-9-1414Objective 4: Evaluate the differences among health care plans offered by private companies and by the government

Private Health Care Plans Private Insurance Companies.

– Individual policy.– Group policy sold to an employer.

Hospital and Medical Service Plans.– Health Maintenance Organizations (HMOs)

– Blue Cross - hospital care benefits.

– Blue Shield - surgical and medical services benefits.

– Managed care.• Prepaid health plan.• Primary care physician.

9-9-1515 Private Health Care Plans

Health Maintenance Organization.– Contracts with selected care providers.– Fixed pre-paid monthly premium.– Focus is on prevention and wellness.– Basic and supplemental services.

Preferred Provider Organization.– Several providers to choose from.– Costs more than a HMO, but you have more

choices, and fewer restrictions.– If you go to a non PPO provider you pay more.

(continued)

9-9-1616 Private Health Care Plans

Point-of-Service – Combines the features of HMOs and PPOs

Home Health Care Agencies– Offer medical care for elderly and terminally ill in a home

setting for a fraction of the cost of hospitals Employer Self-Funded Health Plans

– Companies that run their own insurance plans, collecting premiums from employees and paying medical benefits as needed

(continued)

9-9-1717 Government Health Care Programs

Medicare - federal program for those age 65 and older, and certain disabled persons.– Part A - compulsory.

• Covers hospital costs including doctor– Part B - voluntary if have proof of coverage.

• Doctor’s office visits & prescriptions. Medigap - may pay what Medicare doesn’t. Medicaid.

– Low income people of all ages.– State administered with federal guidelines.

9-9-1818Objective 5: Explain the importance of disability income insurance in financial planning and identify its sources

Disability income insurance No matter what your age, you are more likely to become

disabled than to die. Young, healthy people don’t think about risks related to

all their future earning potential. Provides regular cash income lost by employees as the

result of an accident, illness or pregnancy. If you become disabled your income

drops but your expenses go up.

9-9-1919 Sources of Disability Income Workman’s Compensation.

– If you are injured at work or your injury is a result of your type of employment.

Employer (many, but not all, offer this).– Group disability policy may be short or long term

but is usually not enough by itself. Social Security.

– Covers total disability that lasts more than twelve months. Private Income insurance programs

– You get it to supplement other income sources to achieve 70-80% of your take home pay.

9-9-2020 Disability Income Insurance Trade-Offs Carefully read a policy’s definition of disability.

– Look for a policy that pays if you are unable to work at your regular job.– May only pay if you can’t work at any job.

Aim for a benefit that when added to your other income will equal 60-70% of your gross pay.

Waiting or Elimination Period Duration of Benefits Amount of Benefits Accident and Sickness Coverage Guaranteed Renewability Your disability Income needs