© 2013 pearson education, inc. all rights reserved.9-1 chapter 9 life and health insurance
TRANSCRIPT
© 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.
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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.
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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.
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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.
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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.
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Insurance Terminology
• 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
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How Much Life InsuranceDo You Need?
• Priorities and goals
• Crunch the numbers—net worth, inflation and future earnings
• Earnings Multiple Approach
• Needs Approach
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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
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Table 9.2 Earnings Multiples for Life Insurance
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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
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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
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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.
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Term Insurance and Its Features
• Renewable term insurance
• Decreasing term insurance
• Group term insurance
• Convertible term life insurance
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Cash-Value Insuranceand 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
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Whole Life Insuranceand 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
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Universal Life Insuranceand 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.
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Term Versus Cash-ValueLife 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.
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Riders:
• Waiver of Premium for Disability Rider
• Accidental Death Benefit Rider or Multiple Indemnity
• Guaranteed Insurability Rider
• Cost-of-Living Adjustment (COLA) Rider
Fine-Tuning Your Policy: Contract Clauses, Riders, and Settlement Options
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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
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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
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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.
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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
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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
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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.
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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
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Private Health Care Plans
Managed Health Care: HMOs– Individual practice association plan (IPA)– Group practice plan– Point-of-service plan (May go outside for service)
• HMOs are cost efficient
• Service can be too quick, waits long
• Lack of choice can be too restricting
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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
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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.
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Government-SponsoredHealth Care Plans
• State Plans—provide for work-related accidents and illness
– Worker’s Compensation
• Federal Plans—Medicare, Medicaid
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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 (Private Plans)
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Controlling Health Care Costs
• Flexible Spending Accounts
• Health Savings Accounts (HSAs)
• COBRA and Changing Jobs
• Choosing No Coverage—or “Opting Out”
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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
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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?
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Disability Features ThatMake Sense
• Definition of Disability
• Residual or Partial Payments
• Benefit Duration
• Waiting Period
• Waiver of Premium
• Noncancelable
• Rehabilitation Coverage
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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.
• Most require that insured cannot perform at least two “activities of daily living” (ADLs)
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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
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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. 9-39
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. 9-40
Figure 9.1 The Rising Cost of Yearly Renewable Term Insurance—Annual Premiums for $100,000 Coverage on a 35-Year-Old Nonsmoking Male
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Table 9.5 Major Provisions of the Affordable Care Acta
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Table 9.5 Major Provisions of the Affordable Care Acta (cont.)
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Table 9.5 Major Provisions of the Affordable Care Acta (cont.)
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Table 9.6 Appealing Health Insurance Claim Decisions
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Table 9.8 A Sampling of What Flexible Spending Accounts Can and Cannot Be Used For