Insurance Principles and Resources:What Financial Educators Need to Know

militaryfamilieslearningnetwork.org/event/22064/

1This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,and the Office of Military Family Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.

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Connecting military family service providers and Cooperative Extension professionals to research

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2This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,and the Office of Military Family Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.

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Dr. Barbara O’NeillFinancial Resource Management Specialist for Rutgers Cooperative ExtensionShe earned a Ph.D. in family financial management from Virginia Tech and has received over three dozen awards for professional achievements and over $900,000 in funding for financial education programs and research.

Today’s Presenter

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Why a Webinar About Insurance?

• Insurance is a complex topic: – Lots of types and terminology – Many personal decisions (e.g., coverage, deductible)

• A topic educators feel least confident teaching: http://afcpe.org/assets/pdf/vol20_2way_holden.pdf

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What Are the Most Frequent Insurance Questions or

Issues That Your Hear From Clients?

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Webinar Topics• Basic insurance terms

• Auto insurance

• Homeowners and renters insurance

• Umbrella insurance

• Life insurance

• Health insurance

• Disability insurance

• Long-term care insurance 6

Life is Full of Risks…Many Have Financial Consequences

• Damage to car in an accident

• Loss of home and/or possessions

• Loss of income due to disability

• Loss of a household earner’s income

• Loss of a homemaker’s services

• Large medical bills for disease or injury

• A court judgment of liability for damages 7

Five Ways to Manage Risk1. Do nothing and

hope for the best

2. Risk avoidance

3. Risk reduction

4. Risk acceptance

5. Risk transfer (insurance)

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Types of Financial Risk• Personal Risks– Loss of income or life– Illness and disability

• Property Risks– Losses to property– Caused by perils such as fire or

theft

• Liability Risks– Losses caused by negligence– Resulting in injury or property

damage to others

12019/Pixabay.com

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How Insurance Works

Insurance Policy – Contract between a person buying insurance (the insured) and an insurance company (the insurer).

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The Essence of Insurance• Insurance consists of two basic elements:

1. Reduction of risk 2. Sharing of losses

• Law of Large Numbers – As the number of members in a group increases, predictions about the group’s behavior become increasingly more accurate

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An Insurable Interest Must Exist to Buy Insurance

• Insurable Interest – When a person or organization stands to suffer a financial loss from a specific risk

• Example #1: The person that lives in an house that is insured

• Example #2: The spouse of a person who is covered by life insurance

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Insurance Basics• Protect against risk by paying a premium

• “Large Loss Principle” (size of loss matters)

• Major “large-loss” risks:

– Loss of income due to disability

– Loss of a household earner’s income

– Destruction of one’s home (fire, flood, etc.)

– Liability losses due to a court judgment

– Large medical expenses (e.g., cancer treatment)13

Common Insurance Errors

• Not following the “large loss principle”

• Unfamiliarity with employer-provided (and public) insurance benefits

• Lack of disability insurance

• Lack of adequate liability insurance

• Not checking credit rating of insurance companies

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Parts of an Insurance Contract

• Declarations page• Insuring Agreements• Exclusions• Endorsements and Riders

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Policy Features That Limit Coverage

• Benefit coordination clauses

• Deductible

• Elimination period

• Co-payment

• Co-insurance

• Policy limit16

General Insurance Tips• Insure for major losses

• Choose a highly rated insurance company

• Select the highest deductible you can afford

• Pay premiums annually or semi-annually

• Avoid duplicating coverage

• Ask about available discounts

• Follow “The Rule of Three”17

Any Questions or Additions on Insurance Basics?

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Property and Liability Insurance• Home, automobiles, furniture, clothing, personal belongings

– Risk #1: Physical damage caused by perils (e.g., fire)

– Risk #2: Loss or damage caused by criminal behavior

• Liability = Legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable)

– Liability due to negligence

– Vicarious liability for actions of another person, such as a child

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Factors That Affect Auto Insurance • Vehicle Type

– Year, make, model, and theft rate

• Rating Territory– Accident, auto theft, and

vandalism rates in the area where you live

• Driver Classification– Age, sex, marital status,

credit history, driving record, driving habits

– Assigned risk pool for those unable to obtain insurance

Toby_Parsons/Pixabay.com

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Factors That Affect Auto Insurance

Reducing Automobile Insurance Premiums• Compare Companies

• Premium Discounts– Establishing and maintaining a good driving record– Installing security devices such as a car alarm– Multiple policies with the same company– Larger deductibles

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Motor Vehicle Bodily Injury Coverage

• Medical Payments Coverage– Covers health care for persons injured in your car, including yourself– Also covers you or family members injured while riding in or hit by

another vehicle

• Uninsured Motorist’s Protection– Protection against the risk of getting into an accident with someone with

no insurance

• Underinsured Motorist’s Coverage– Pays costs if your car is hit by a person who doesn’t have enough

insurance to cover the damage they did to you and your car

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Automobile Liability Insurance Policy Limits

Source: Personal Finance by Garman and Forgue, Houghton-Mifflin (2017) 23

State Auto Insurance Liability Limits• Vary from state to state

– New Jersey: 15 per person/30 per accident/5 property damage

– Florida: 10 property damage/10 personal injury

• While drivers may be “legal” with minimum limits, they do not have enough coverage to pay for damages to others (i.e., they are under-insured)

• Do you know your state liability limits?

https://www.thebalance.com/understanding-minimum-car-insurance-requirements-2645473

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Collision CoveragePays for damage to your automobile, regardless of who is at fault.

– If you are not at fault, your insurer will try to collect from the other driver’s property damage liability first.

– Coverage limited to current retail value of your vehicle

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Comprehensive Physical DamageCovers damage to your vehicle not caused by a collision, such as:– Fire, theft, or vandalism– Glass breakage– Hail, sand, or wind storm– Falling objects or hitting an animal

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– Covers damage to, or destruction of, your house and other structures on the property

• Garage, tool shed, trees, and shrubs

– Additional Living Expenses• May be limited to 20-30% of property value• May be limited to 6-9 months• Covers housing costs when building is uninhabitable

Homeowners Insurance

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Homeowners Insurance Coverage– Personal Property

• Furniture, appliances and clothing

• Household inventory advisable• A percentage of building coverage (e.g., 50%-75%)• Limits on certain items such as jewelry

– Personal Liability Coverage• Covers injuries to others on property (e.g., fall on ice)

– Specialized Coverage• Earthquake endorsement• Flood insurance policy

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Factors That Affect Homeowners Insurance

• Location of Home (e.g., rural vs. urban)• Type of Structure (e.g., brick vs. wood)• Coverage Amount and Policy Type• Home Insurance Discounts

– Alarm system– Smoke detectors– If you insure car with the same company (bundling)

• Company Differences– Compare costs and coverage

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Renters Insurance• May be a requirement of tenants in leases, especially

those with pets (liability concerns)

• Includes liability coverage, personal property coverage to replace belongings if damaged or stolen, and additional living costs (if you can’t stay in apartment)

• Buy replacement cost coverage- not ACV

• Basic policy generally costs less than $20 per month

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How Umbrella Insurance Policies Work

Source: Personal Finance by Garman and Forgue, Houghton-Mifflin (2017)

Provides protection against major claims; extends the liability limits of underlying homeowners and auto insurance policies

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Any Additional Property Insurance Recommendations?

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Life Insurance• Premium is based on life expectancy and projections for

payouts for persons who die (actuarial tables)– Older people pay more because they will die sooner– Age and gender are key variables (women live longer)

• Face Amount- Dollar value of protection listed in the policy and amount used to calculate the premium (e.g., $100,000)

• Group Term Insurance- Issued to people as members of a group rather than as individuals

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Do You Need Life Insurance?• Do you have people you need

to protect financially?

• Will your death cause people financial hardship?

Examples:

– Spouse, children, or parents dependent on income

– Parents who co-signed private student loans

Skeeze/Pixabay.com

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Why Do People Need Life Insurance?

• Income-Replacement Needs – Lost income and employee benefits resulting from premature death

• Major Expenses- Two examples are a mortgage and children’s college expenses

• Final Expenses – One-time medical and funeral expenses occurring just prior to or after a death.

• Readjustment-Period Needs – Allows surviving spouse/family members to pay ongoing expenses

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Estimating Life Insurance Requirements

• The Easy Method– 70% of your salary for seven years while your family adjusts– Assumes a typical family

• The DINK Method– Dual income, no kids– Assumes spouse earnings will continue– Cover funeral + ½ debts

• The “Family Need” Method– More thorough than the first three methods– Considers employer provided insurance, Social Security benefits,

income and assets36

Life Insurance Needs Worksheet

Source: https://www.slideshare.net/BarbaraONeill/money-talk-book-chapter-2

Buying Life Insurance• Research insurance company ratings by major

rating firms:

• A. M. Best

• Standard and Poor’s

• Duff & Phelps

• Moody’s

• Weiss Research

• Talk to friends, colleagues, or advisors

• Online premium quote services38

Term Life InsuranceTerm Life– Protection for a specified period of time

– At the end of term (or if you stop paying premiums), coverage stops

Types of Term Insurance:

– Renewable Term- Can renew; higher premium charged

– Multiyear Level Term- Same premium for set period

– Conversion Term- Allows change to permanent policy

– Decreasing Term- Face value decreases over time39

Whole Life InsuranceStraight-Life or Whole-Life Insurance– Pay the premium as long as you live– Accumulates a cash value you can borrow against – Look carefully at the rate of return on your money

Types:• Limited Payment Policy

– Pay premiums for a stipulated period– Policy then “paid up” and you are insured for life

• Variable Life Policy- Fixed premiums; investment subaccounts

• Adjustable Life Policy- Can change coverage with needs

• Universal Life- Can change premium, time period, benefit40

Buy Term Life Insurance and Invest the Difference?

Source: Personal Finance by Garman and Forgue, Houghton-Mifflin (2017) 41

Servicemembers’ Group Life Insurance (SGLI)

• Provides low-cost term life insurance • Eligible service members are automatically enrolled for

$400,000 of coverage unless they opt out or reduce coverage• Coverage available in $50,000 increments up to $400,000 • 120 days of free coverage from date of separation

References: https://www.benefits.va.gov/insurance/sgli.asp

https://www.benefits.gov/benefit/585

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Any Additional Life Insurance Recommendations?

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Health Insurance• Health Care Plan- Any program that pays or

provides reimbursement for health care expenses

• Group Health Care Plan – Coverage sold to an entire group of persons rather than to individuals

• Open Enrollment Period – During this time, you can begin or make changes in coverage or switch among alternative plans

– Requirements are generally waived for family changes (e.g., birth of a child, adoption, marriage)

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Health Insurance Sources• Employers

• Private Market (Individual/Family Policy)

• Government-Facilitated Exchanges

• Government Programs

• TRICARE (Military)45

Different Levels of ACA Plans• 4 Levels of ACA Plan Coverage – “The Metals”:

Bronze, Silver, Gold, and Platinum

• Each has a different value for level of coverage

• Bronze: 60%. Silver: 70%. Gold: 80%. Platinum: 90% (Refers to

adequacy values: how much plan vs. insured pays)

• Any costs not covered by the plan are paid by individuals through

deductibles, co-pays, and co-insurance

• Each plan level must cover the same set of

minimum essential health benefits

• What differs is amount of cost-sharing required

• Example: The bronze plan will have the least generous coverage

(60%) with more out-of-pocket costs

http://www.healthcare.gov for more information

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More About TRICARE• Webinar: TRICARE in 2019: What You Need to Knowhttps://militaryfamilieslearningnetwork.org/event/29427/

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• Group Plans:

– Usually employer sponsored (also unions, trade groups)

– Employer pays part or most of cost

• Coordination of Benefits: Combine benefits from >1 plan– Benefits received from all sources limited to 100% of

allowable medical expenses– Married couples/partners need to consider

Group Health Insurance

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Research: Few Americans Can Apply Insurance Terms

https://www.sciencedirect.com/science/article/abs/pii/S0167629613000532

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Health Insurance Literacy Questions

Do You Understand Health Insurance?

Which of the following describes an (in-network) Out-of-Pocket

Maximum? Assume that all the responses refer to in-network expenses.

• After meeting the out-of-pocket maximum, all medical expenses are covered 100%

• After meeting the in-network out-of-pocket maximum, copays must still be paid, but all other medical expenses are covered 100%

• After meeting the out-of-pocket maximum, you must pay 100% of your medical expenses

Which of the following best describes Coinsurance?

• A specified dollar amount you pay for a specific service • The total amount you are required to pay until you reach your deductible • The percent of the cost of medical services that the insurer pays • The amount the employer contributes to paying for your health premium

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Health Insurance Literacy QuestionsWhich of the following best describes a Copayment (Copay)?• A specific dollar amount you pay for a specific service • A specific dollar amount your insurer pays for a specific service • A fixed percent of the cost of a procedure that you have to pay (insurer pays

the remainder) • The amount your employer contributes to paying for your health premium

Which best describes a Deductible? • An amount deducted from your paycheck to pay for your insurance premium • The amount deducted (covered) out of your total yearly medical expenses • The amount you pay before your insurance company pays benefits • The amount you pay before your health expenses are covered in full

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University of MD Extension Smart Choice Health Insurance Workbook

Promotes “Rule of Three” (compare 3 options)https://www.extension.umd.edu/sites/default/files/_images/programs/insure/My%20Smart%20Choice%20Health%20Insurance%20Guide%204-3-13.pdf

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Compare Available OptionsBenefits Premier Plan Standard Plan

In Network Deductible $500 $1,000

Out of Network Deductible $1,000 $1,500

In – Network Co-Pay perOffice VisitCo-insurance

$20 PCP/ $40 Specialist90% after deductible

$30 PCP /$50 Specialist80% after deductible

Out of Network Co-insurance 70% after deductible 60% after deductible

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Compare Available Options

Tier 1

Tier 2

Tier 3

RETAIL

$10 Co-pay30 Day Supply

$30 Co-pay30 Day Supply

$50 Co-pay30 Day Supply

MAIL ORDER

$20 Co-pay90 Day Supply

$60 Co-pay90 Day Supply

$100 Co-pay90 Day Supply

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Disability Income Insurance • Protects against loss of income and “earning power”

• Most overlooked type of insurance

• Young, healthy people often don’t consider the risks related to their future earning potential

• Provides regular cash income lost by employees as the result of an accident or illness

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Sources of Disability Insurance• Workers’ Compensation

– Disability from on-the-job accident or illness

• Employer Plans– Short or long-term group disability policy

• Social Security– Covers total disability lasting > 12 months – Strict definition of disability to qualify

• Private Disability Insurance – Supplements other disability income sources– Normally provides 40-60% of income (up to 75%) 56

Disability Insurance Terms• Policy’s definition of disability

• Own Occupation- can no longer perform previous job

• Any Occupation- can’t work at any job

• Waiting or elimination Period

• Duration of benefits

• Amount of benefits

• Cost-of-Living Adjustments (adjusts benefit for inflation)

• Partial benefits (benefit if person can only work part-time) Stevepb/Pixabay.com

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Long-Term Care Insurance• Covers care needed to perform essential activities of

daily living (ADLs)

• Certain “triggers” needed to qualify for benefits

• Key features: – Waiting or elimination Period

– Duration of benefits

– Amount of benefits

– Cost-of-Living Adjustments (adjusts benefit for inflation)58

Long-Term Care Insurance• “LTC” means wide range of services:

– Home health care

– Assisted living

– Nursing home care

• Three ways to handle risk of LTC costs:

– Retain it (self-insure)

– Avoid it (no guarantees)

– Transfer it (LTC insurance)59

Additional LTC Insurance Tips• Understand how to trigger benefits (ADLs)

• Buy a “compound” inflation rider

• Consider key policy features:

– Elimination period

– Length of time benefits will be paid

– Benefit amount ($ per day)

• Contact local SHIP office for information60

Any Additional Health Insurance Recommendations?

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General Insurance Tips• Insure for major losses

• Choose a highly rated insurance company

• Select the highest deductible you can afford

• Pay premiums annually or semi-annually

• Avoid duplicating coverage

• Ask about available discounts

• Follow “The Rule of Three”62

Insurance Action Steps• Review existing insurance policy features

– Coverage limits

– Deductibles

– Exclusions

• Identify “big ticket” insurance gaps

• Contact your insurance agent(s) for a policy review

• Get three policy quotes for any new insurance

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Rutgers Cooperative ExtensionInsurance Lesson Plans

• Insuring and Protecting Property Insurance

• Comparing Insurance How Health Insurance Works

• The Costs and Benefits of Renter's and Homeowner's Insurance

• Self Insurance: What Is It and When to Do It?

https://njaes.rutgers.edu/money/

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Insurance Worksheets

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militaryfamilieslearningnetwork.org

69This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture,and the Office of Military Family Readiness Policy, U.S. Department of Defense under Award Number 2015-48770-24368.

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