insuring your health and your life © 2010 pearson education, inc. all rights reserved chapter 7

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

© 2010 Pearson Education, Inc. All rights reserved 0-2

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


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


Figure 7.1



• 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



• 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



• 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


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



Figure 7-2

Check Your Financial IQ

• Why is health insurance a critical part of your financial plan?



• People without health insurance could find all of their net worth quickly eliminated with one major health problem


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


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


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


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


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?



• Solution: Michael will be responsible for the entire cost of the surgery ($4,500) because it is not a covered procedure


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


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


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



• 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?



• 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


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


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


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).


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.


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


Figure 7.3


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



• Why is it important to understand the different features and terms used in health care plans?



• Different features can greatly affect your costs and the level of service you receive


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


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


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.


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


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


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


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



• 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?



• Solution: Janice would have $900 to invest. $900 x .08 = $72



• What is the main purpose for buying life insurance?



• People buy life insurance to make sure that when they die their dependents have financial support


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


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


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


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


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


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



• What has been the most common means of obtaining health insurance in recent years?



• An employer-offered plan is the most common


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


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


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


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


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


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


insuring your health and your life © 2010 pearson education, inc. all rights reserved chapter 7

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