© 2013 Pearson Education, Inc. All rights reserved.9-1 Chapter 9 Life and Health Insurance

© 2013 Pearson Education, Inc. All rights reserved.9-2 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.

© 2013 Pearson Education, Inc. All rights reserved.9-3 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.

© 2013 Pearson Education, Inc. All rights reserved.9-4 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.

© 2013 Pearson Education, Inc. All rights reserved.9-5 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

© 2013 Pearson Education, Inc. All rights reserved.9-6 Table 9.1 Should You Buy Life Insurance?

© 2013 Pearson Education, Inc. All rights reserved.9-7 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

© 2013 Pearson Education, Inc. All rights reserved.9-8 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

© 2013 Pearson Education, Inc. All rights reserved.9-9 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

© 2013 Pearson Education, Inc. All rights reserved.9-10 Table 9.3 What’s What in Life Insurance

© 2013 Pearson Education, Inc. All rights reserved.9-11 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.

© 2013 Pearson Education, Inc. All rights reserved.9-12 Term Insurance and Its Features Renewable term insurance Decreasing term insurance Group term insurance Credit and mortgage group life insurance Convertible term life insurance

© 2013 Pearson Education, Inc. All rights reserved.9-13 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

© 2013 Pearson Education, Inc. All rights reserved.9-14 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

© 2013 Pearson Education, Inc. All rights reserved.9-15 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.

© 2013 Pearson Education, Inc. All rights reserved.9-16 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.

© 2013 Pearson Education, Inc. All rights reserved.9-17 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

© 2013 Pearson Education, Inc. All rights reserved.9-18 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

© 2013 Pearson Education, Inc. All rights reserved.9-19 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.

© 2013 Pearson Education, Inc. All rights reserved.9-20 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

© 2013 Pearson Education, Inc. All rights reserved.9-21 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

© 2013 Pearson Education, Inc. All rights reserved.9-22 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

© 2013 Pearson Education, Inc. All rights reserved.9-23 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

© 2013 Pearson Education, Inc. All rights reserved.9-24 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

© 2013 Pearson Education, Inc. All rights reserved.9-25 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?

© 2013 Pearson Education, Inc. All rights reserved.9-26 Table 9.9 Long-Term Health Care Provisions

© 2013 Pearson Education, Inc. All rights reserved.9-27 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

© 2013 Pearson Education, Inc. All rights reserved.9-28 Figure 9.1 The Rising Cost of Yearly Renewable Term Insurance—Annual Premiums for $100,000 Coverage on a 35-Year-Old Nonsmoking Male

© 2013 Pearson Education, Inc. All rights reserved.9-29 Table 9.5 Major Provisions of the Affordable Care Act a

© 2013 Pearson Education, Inc. All rights reserved.9-30 Table 9.5 Major Provisions of the Affordable Care Act a (cont.)

© 2013 Pearson Education, Inc. All rights reserved.9-31 Table 9.5 Major Provisions of the Affordable Care Act a (cont.)