insuring your health and your life © 2010 pearson education, inc. all rights reserved chapter 7
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Insuring Your Health and Your Life
© 2010 Pearson Education, Inc.All rights reserved
Chapter 7
Learning Objectives
• Explain why health insurance is important
• Describe different features of health insurance
• Explain the need for life insurance
• Describe the ways people obtain insurance
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The Importance of Health Insurance
• Health insurance provides payments to people who suffer a financial loss as a result of illness or injury
• People covered by health insurance limit their potential liabilities
• It ensures that they receive adequate medical care
• Medical care can be very expensive• Adequate health insurance is an
important component of your financial plan
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Sources of Health Insurance
• Health insurance is available in many forms
• Some people get their coverage from private companies
• Many people get coverage as a company benefit
• See Figure 7.1 for an example of Employer-Provided Health Care Coverage
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Figure 7.1
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Sources of Health Insurance
• Medicare is a government-sponsored health insurance plan that is funded largely by taxes that most working people pay.
• Medicaid is a government-sponsored program that provides health insurance for low-income individuals
• The federal government has two health care plans that are available to some individuals:– Medicare
– Medicaid
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Sources of Health Insurance
• A premium is a regular payment in return for insurance coverage
• Medicare provides benefits to senior citizens or to individuals who are disabled
• Medicare consists of two components: Part A and Part B
• Part A is hospital insurance, which recipients receive at no cost to them
• Part B covers doctor visits and other care provided outside a hospital
• Part B recipients must pay some premium for this coverage
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Sources of Health Insurance
• Medicaid is administered on a state-by-state basis
• The coverage is designed for the elderly, blind, disabled, and needy families with dependent children
• Many people have no health care coverage
• These people can face very expensive health charges
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Health Care Costs
• Health care can be very expensive (see Figure 7.2)• Health insurance is a critical risk-reduction tool of
your financial plan• In 2010, health care spending by Americans averaged
nearly $8,233 for each man, woman, and child• Your decision is not whether to purchase health
insurance• Instead, decide what type of plan to get and how
much coverage to obtain
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Figure 7-2
Check Your Financial IQ
• Why is health insurance a critical part of your financial plan?
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Check Your Financial IQ
• People without health insurance could find all of their net worth quickly eliminated with one major health problem
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Health Insurance Features and Terms
• Insurance plans come in many forms and provide a range of coverage and services
• Know about the features and terms commonly used when deciding what health care plan is right for you
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Indemnity Plans versus Managed Care
• Health care plans are classified as indemnity plans or managed care plans
• Indemnity plans allow participants to seek health care from any qualified medical provider
• Managed care plans limit participants to a specific list of providers
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Family Coverage
• A policyholder is a person who buys a health insurance policy or subscribes to it through an employer.
• Many health insurance plans provide coverage for immediate family members
• Children may become ineligible for coverage once they reach a certain age or status
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Group Plans
• Groups plans are insurance plans that cover a large group of individuals
• An individual’s high risk or loss is spread across the entire pool of group members
• Each group member has the same access to health care
• Each member also pays the same coverage even if some have more health problems than others
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Math for Personal Finance
• Michael needs laser eye surgery to correct his vision. After a visit to the ophthalmologist, he learns that the surgery will cost about $4,500 but that the procedure is not covered.
• How much will Michael be required to pay for the surgery?
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Math for Personal Finance
• Solution: Michael will be responsible for the entire cost of the surgery ($4,500) because it is not a covered procedure
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Location Restrictions
• Location Restrictions can apply to some health insurance coverage
• Some United States insurance companies will cover medical care delivered inside the US only.
• Others will provide coverage in foreign countries
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Preexisting Conditions and Cancellation Options
• Preexisting conditions are health conditions that existed before your policy was granted
• Insurance policies may exclude coverage for preexisting conditions
• Some health insurance plans allow the insurance company to cancel the policy at any time
• Others guarantee coverage as long as you pay your insurance premiums on time
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Deductibles
• A deductible is the amount the policyholder has to pay before insurance policies begin paying claims.
• Some insurance policies pay claims after the policyholder has paid a certain amount of money (deductible)
• After you pay a deductible, your insurance company will begin to pay for some of the covered expenses
• The higher the deductible, the lower your cost for insurance
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Math for Personal Finance
• Jontell needs surgery on her foot. Assume that she has insurance and the surgery cost $5,000 and she has a $500 deductible. She also has 20 percent co-pay.
• How much will Jontell have to pay for the surgery?
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Math for Personal Finance
• Solution: Jontell will have to pay the $500 deductible and then 20 percent of the remaining amount. Therefore, she will pay $500 + .20($5,000 - $500)= $1,400
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Coverage Limits
• Many policies limit the total amount they will pay for certain procedures
• Some policies may exclude some procedures completely
• Many policies limit the number of days of hospital care they will pay for or the frequency of certain treatments
• Policies also differ on coverage for prescription drugs
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Coinsurance
• Coinsurance is the term used for the share of costs for covered services that the insured person is required to pay out of his or her pocket
• Coinsurance is often called a co-pay
• Co-pay amounts usually apply to most medical services
• For example, most policies have a $20 co-pay for a doctor’s visit
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Provider Networks
• Managed health care plans limit your choice of health care provider to a specific list of medical professionals.
• The two most common types of provider networks are:– Health Maintenance Organizations (HMOs) – Preferred Provider Organizations (PPOs).
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Provider Networks
• HMOs are based on negotiated agreements with specific doctors to provide health care.
• Individuals choose a primary care physician from an approved list
• Individuals must be referred for any additional specialized care.
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Provider Networks
• PPOs are similar to HMOs, but provide a larger network of providers
• PPOs typically cost more than HMOs
• Refer to Figure 7.3 for a comparison of the different types of private health insurance plans
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Figure 7.3
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Auto Policies
• Your automobile insurance will contain limited accident coverage
• This insurance may also pay a portion of your medical costs associated with a vehicle accident
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Check Your Financial IQ
• Why is it important to understand the different features and terms used in health care plans?
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Check Your Financial IQ
• Different features can greatly affect your costs and the level of service you receive
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Life Insurance
• Life insurance provides a payment to a specific person or persons when the policy holder dies
• A beneficiary is the person who receives the payment
• People buy life insurance from a company
• These policyholders pay periodic premiums
• Many employers provide fully or partially paid life insurance coverage for their employees as a benefit
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Role of Life Insurance
• Life insurance is a component of your financial plan
• Life insurance helps to ensure that those who depend on you have financial support in the event of your death
• Some people carry life insurance to cover the costs incurred when they die
• Some people get life insurance when they are young because it can be costly or difficult to obtain it as you get older
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Types of Life Insurance
• Life insurance comes in several different forms:– Term insurance– Whole life insurance– Universal life insurance
• These forms differ in the following ways:– how long they provide coverage– how much they cost– whether or not they provide any sort of benefit
besides a payment at death.
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Types of Life Insurance: Whole Life Insurance
• Whole life insurance provides coverage for as long as the policyholder continues to pay the premium
• Whole life insurance is sometimes referred to as permanent insurance
• These types of policies build up savings for the policyholder over time
• Part of what you pay in premiums goes into an account over time
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Types of Life Insurance: Whole Life Insurance
• As the account builds a “cash value, you may be able to borrow against it or even take cash out.
• At some point, the cash value of the policy may be used to pay your premiums until your death
• Whole life insurance policies can serve as a source of liquidity and as an investment in your financial plan
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Types of Life Insurance: Term Insurance
• Term insurance is life insurance provided over a specific period of time
• Term insurance policy builds no savings and does not serve as an investment
• It usually ranges between 5 and 20 years
• For these reasons, it generally has lower premiums
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Types of Life Insurance: Universal Life Insurance
• Universal life insurance provides coverage for a specified term and builds savings for the policyholder
• Universal life insurance is a combination of term insurance and whole life insurance
• Universal life allows more flexibility than other types of life insurance
• For example, you can add units of term coverage for periods of time
• You can also alter your payments during your life
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Math for Personal Finance
• The premiums to Janice’s $200,000 whole life policy total $1,300 a year. A term insurance policy for $200,000 might cost Janice $400 in premiums. Janice bought the term policy and invested the difference, earning a rate of 8 percent.
• How much money could she “make” in a year?
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Math for Personal Finance
• Solution: Janice would have $900 to invest. $900 x .08 = $72
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Check Your Financial IQ
• What is the main purpose for buying life insurance?
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Check Your Financial IQ
• People buy life insurance to make sure that when they die their dependents have financial support
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Getting Insurance
• Most Americans rely on their employers for access to health insurance
• Employers usually pay some or even all the premiums for health or life insurance
• Employer-provided coverage can represent a large portion of the employee’s overall compensation
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Getting Insurance
• There are laws that help ensure that a person who leaves a job can continue to get access to health coverage
• This is true even if he or she has developed a serious health problem
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Getting Insurance
• The Health Insurance Portability and Accounting Act (HIPAA) ensures that workers can continue their health insurance coverage even if they switch jobs
• Consolidated Omnibus Budget Reconciliation Act (COBRA) allows you to continue health insurance coverage for up to 18 months after your employment ends
• HIPAA prohibits insurance companies from denying new employees access to coverage based on their health or preexisting conditions
• With COBRA you are required to pay the premiums that your previous employer was paying for your coverage
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Getting Insurance
• COBRA and HIPAA make sure people switching jobs can maintain health insurance coverage during and after the switch
• Some companies offer employees a chance to get health coverage after retirement
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Getting Insurance
• Disability insurance provides regular payments to replace lost income in the event injury or illness makes it impossible to work
• Employers often provide other insurance-related benefits, such as: – Disability insurance
– Dental insurance
– Vision insurance
• If your employer does not offer it or if you are self-employed, you may want to buy disability insurance
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Getting Insurance
• Insurance has different kinds of coverage and prices
• The Internet can inform you about the different types of products and services
• Insurance agents are also available to discuss these options
• Choosing insurance coverage is a major financial decision and should be made with as much information as possible about your options
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Check Your Financial IQ
• What has been the most common means of obtaining health insurance in recent years?
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Check Your Financial IQ
• An employer-offered plan is the most common
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Summary
• Insurance is the promise of payment to be made in the event of some kind of loss
• Health insurance provides payment to policyholders who suffer a loss as a result of illness or injury
• Health insurance is available in different forms such as: Medicare or Medicaid, private companies, or through employers
• Insurance plans come in many forms and provide a range of coverage and services
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Summary
• Some issues to be aware of when considering insurance programs include:
– family coverage
– location
– preexisting conditions
– cancellation options
– Deductibles
– coverage limits
– Coinsurance
– provider networks
– referral limits
– prescription coverage
– student policies
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Summary
• Life insurance is an important component of your financial plan
• Life insurance ensures your dependents have financial support in the event of your death
• Several options are available– term insurance– whole life insurance– universal life insurance
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Summary
• Employers are a main source of insurance
• An individual may purchase health or life insurance
• It is important to investigate all your options before you purchase insurance
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Key Terms and Vocabulary
• Beneficiary• COBRA• Coinsurance• Deductible• Disability insurance• Fraud• Group plan• Heath insurance• HIPAA• Insurance
• Liability• Life insurance• Medicaid• Medicare• Policyholder• Preexisting condition• Premium• Term insurance• Universal life insurance• Whole life insurance
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URLs
• www.medicare.gov
• www.insurancefraud.com
• http://www.kaiseredu.org/topics
• www.nchc.org/facts/cost.shtml
• www.census.gov
• www.insure.com
• www.insuweb.com
• www.ehealthinsurance.com
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