Life and Health Insurance 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

Table 9.1 Should You Buy Life Insurance?

How Much Life Insurance Do 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

Table 9.3 What’s What in Life Insurance

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 Insurance and 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 Insurance and 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 Insurance and 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-Value Life 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 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 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

Table 9.4 Insurance Company Ratings

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

Checklist 9.1

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

Checklist 9.2

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-Sponsored Health 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

Table 9.7 Medicare Benefits and Services

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”

Table 9.7 Medicare Benefits and Services (cont.)

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 That Make 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)

Table 9.9 Long-Term Health Care Provisions

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 9.5 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 Coverage You Need