1. Life and Health Insurance
Chapter 9
Life and Health Insurance

2. 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.

3. 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.

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.

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.

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.

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

8. Table 9.1 Should You Buy Life Insurance?

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

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

11. Table 9.2 Earnings Multiples for Life Insurance

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

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

14. Table 9.3 What’s What in Life Insurance

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.

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

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

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

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.

20. Figure 9.2 Determining the Cash Value on a Universal Life Insurance Policy

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.

22. 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

23. 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

24. 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

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

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

27. Table 9.4 Insurance Company Ratings

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

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

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.

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

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

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.

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

35. Checklist 9.1

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

37. Checklist 9.2

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

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.

40. Government-Sponsored Health Care Plans
State Plans—provide for work-related accidents and illness
Worker’s Compensation
Federal Plans—Medicare, Medicaid

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

42. Table 9.7 Medicare Benefits and Services

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

44. Controlling Health Care Costs
Flexible Spending Accounts
Health Savings Accounts (HSAs)
COBRA and Changing Jobs
Choosing No Coverage—or “Opting Out”

45. Table 9.7 Medicare Benefits and Services (cont.)

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

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?

48. Disability Features That Make Sense
Definition of Disability
Residual or Partial Payments
Benefit Duration
Waiting Period
Waiver of Premium
Noncancelable
Rehabilitation Coverage

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)

50. Table 9.9 Long-Term Health Care Provisions

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

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.

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

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

55. Table 9.5 Major Provisions of the Affordable Care Acta

56. Table 9.5 Major Provisions of the Affordable Care Acta (cont.)

57. Table 9.5 Major Provisions of the Affordable Care Acta (cont.)

58. Table 9.6 Appealing Health Insurance Claim Decisions

59. Table 9.8 A Sampling of What Flexible Spending Accounts Can and Cannot Be Used For

60. Figure 9.3 Worksheet for Estimating How Much Disability Insurance Coverage You Need