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

© 2013 Pearson Education, Inc. All rights reserved.9-2 Learning Objectives 1.Understand the importance of insurance. 2.Determine your life insurance needs and design a life insurance program. 3.Describe the major types of coverage available and the typical provisions that are included.

© 2013 Pearson Education, Inc. All rights reserved.9-3 Learning Objectives 4.Design a health care insurance program and understand what provisions are important to you. 5.Describe disability insurance and the choices available to you. 6.Explain the purpose of long-term care insurance and the provisions that might be important to you.

© 2013 Pearson Education, Inc. All rights reserved.9-4 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.9-5 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.9-6 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.9-7 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.9-8 Table 9.1 Should You Buy Life Insurance?

© 2013 Pearson Education, Inc. All rights reserved.9-9 How Much Life Insurance Do You Need? Priorities and goals Crunch the numbers—net worth, inflation and future earnings Earnings Multiple Approach Needs Approach

© 2013 Pearson Education, Inc. All rights reserved.9-10 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.9-11 Table 9.2 Earnings Multiples for Life Insurance

© 2013 Pearson Education, Inc. All rights reserved.9-12 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.9-13 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.9-14 Table 9.3 What’s What in Life Insurance

© 2013 Pearson Education, Inc. All rights reserved.9-15 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.9-16 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.9-17 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.9-18 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.9-19 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.9-20 Figure 9.2 Determining the Cash Value on a Universal Life Insurance Policy

© 2013 Pearson Education, Inc. All rights reserved.9-21 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.9-22 Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options Contract Clauses: Beneficiary Provision Coverage Grace Period Loan Clause Nonforfeiture Clause Policy Reinstatement Clause Change of Policy Clause Suicide Clause Payment Premium Clause Incontestability Clause

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

© 2013 Pearson Education, Inc. All rights reserved.9-24 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 Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options

© 2013 Pearson Education, Inc. All rights reserved.9-25 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.9-26 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.9-27 Table 9.4 Insurance Company Ratings

© 2013 Pearson Education, Inc. All rights reserved.9-28 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

© 2013 Pearson Education, Inc. All rights reserved.9-29 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

© 2013 Pearson Education, Inc. All rights reserved.9-30 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.9-31 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.9-32 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.9-33 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.

© 2013 Pearson Education, Inc. All rights reserved.9-34 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.9-35 Checklist 9.1

© 2013 Pearson Education, Inc. All rights reserved.9-36 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

© 2013 Pearson Education, Inc. All rights reserved.9-37 Checklist 9.2

© 2013 Pearson Education, Inc. All rights reserved.9-38 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

© 2013 Pearson Education, Inc. All rights reserved.9-39 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.

© 2013 Pearson Education, Inc. All rights reserved.9-40 Government-Sponsored Health Care Plans State Plans—provide for work-related accidents and illness Worker’s Compensation Federal Plans—Medicare, Medicaid

© 2013 Pearson Education, Inc. All rights reserved.9-41 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.9-42 Table 9.7 Medicare Benefits and Services

© 2013 Pearson Education, Inc. All rights reserved.9-43 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.9-44 Controlling Health Care Costs Flexible Spending Accounts Health Savings Accounts (HSAs) COBRA and Changing Jobs Choosing No Coverage—or “Opting Out”

© 2013 Pearson Education, Inc. All rights reserved.9-45 Table 9.7 Medicare Benefits and Services (cont.)

© 2013 Pearson Education, Inc. All rights reserved.9-46 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

© 2013 Pearson Education, Inc. All rights reserved.9-47 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.9-48 Disability Features That Make Sense Definition of Disability Residual or Partial Payments Benefit Duration Waiting Period Waiver of Premium Noncancelable Rehabilitation Coverage

© 2013 Pearson Education, Inc. All rights reserved.9-49 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)

© 2013 Pearson Education, Inc. All rights reserved.9-50 Table 9.9 Long-Term Health Care Provisions

© 2013 Pearson Education, Inc. All rights reserved.9-51 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.9-52 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.

© 2013 Pearson Education, Inc. All rights reserved.9-53 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

© 2013 Pearson Education, Inc. All rights reserved.9-54 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.9-55 Table 9.5 Major Provisions of the Affordable Care Act a

© 2013 Pearson Education, Inc. All rights reserved.9-56 Table 9.5 Major Provisions of the Affordable Care Act a (cont.)

© 2013 Pearson Education, Inc. All rights reserved.9-57 Table 9.5 Major Provisions of the Affordable Care Act a (cont.)

© 2013 Pearson Education, Inc. All rights reserved.9-58 Table 9.6 Appealing Health Insurance Claim Decisions

© 2013 Pearson Education, Inc. All rights reserved.9-59 Table 9.8 A Sampling of What Flexible Spending Accounts Can and Cannot Be Used For

© 2013 Pearson Education, Inc. All rights reserved.9-60 Figure 9.3 Worksheet for Estimating How Much Disability Insurance Coverage You Need