1 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

2 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

3 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

4 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

5 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

6 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

7 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

8 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

9 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

10 Contract Clauses Beneficiary and contingent beneficiaries Grace period Loan clause Nonforfeiture Suicide clause Incontestability

11 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

12 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

13 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)

14 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

15 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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17 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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19 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

20 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

21 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