Transcript Chapter 9 Life and Health Insurance PART 3: PROTECTING YOURSELF WITH INSURANCE

PART 3:
PROTECTING YOURSELF WITH INSURANCE
Chapter 9
Life and Health Insurance
The Logic Behind Insurance:
Risk Management
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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 Logic Behind Insurance:
Risk Management
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Health care is expensive and there is no incentive to
economize:
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Medical care has become extremely sophisticated.
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Over 50% of Americans receive some government health
care.
87% of Americans have medical insurance.
It takes 12 years and over $239 million to develop, test, and
certify a new drug.
Cost of litigation has skyrocketed.
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Malpractice premiums cost $150,000-$250,000 yearly.
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Do You Need Life Insurance?
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Insurance is based on “risk pooling” - where individuals
share the financial risks they face.
The size of the premium depends on the probability
you will die.
Face amount - amount of insurance provided at death.
Owner - policy holder.
Beneficiary – designated to receive the proceeds.
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How Much Life Insurance
Do You Need?
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Earnings Multiple
Approach
Buy insurance that is
5-15 times your
annual gross income.
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Needs Approach
Determines the
funds necessary to
meet the needs of a
family after primary
breadwinner’s death.
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Needs Approach
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What needs must be met after the death of the
breadwinner?
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Immediate needs at time of death
Debt elimination
Immediate transitional funds
Dependency expenses
Spousal life income
Educational expenses for children
Retirement income
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Major Types of Life Insurance
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There are 2 major types of life insurance:
Term insurance – pure life insurance.
 Cash-value insurance – has a life insurance and a
savings component.
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Term Insurance and Its Features
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Pays the death benefit if insured dies during the
coverage period.
Sole purpose is to provide death benefits to
beneficiaries.
Primary advantage is affordability.
Disadvantage is that the cost increases each time
the policy is renewed.
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Renewable Term Insurance
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The “term” in a life insurance contract can be
from 5 to more than 20 years.
Coverage terminates if not renewed.
Renewable term insurance allows for renewal up
to a specified age, regardless of health.
Each time the contract is renewed, the premium
is increased.
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Re-entry Term Insurance
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Term insurance is guaranteed renewable at one of
2 possible premium levels in the future.
Regular evaluations of your health determine
which premium you are eligible for.
Lower rate if you pass the medical exam.
 Higher rate if you fail the medical exam.
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Decreasing Term Insurance
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Premiums remain constant but the face value
declines.
Assumes over time your wealth will increase and
your needs will decrease.
Some policies decline at a constant, steady rate,
others at accelerating rates.
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Group Term Insurance
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Term insurance provided without a medical
exam, to a specific group of people.
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The group may be employees of the same company
or professional group.
The employer may pay part of the premium.
Usually less expensive than an individual policy.
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Credit or Mortgage Group
Life Insurance
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Life insurance provided by a lender for its
debtors.
Provides enough coverage for an individual’s
outstanding debts.
If debtor dies while policy is in effect, proceeds
are used to pay off the debt.
Set up as a form of declining insurance.
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Convertible Term Life Insurance
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Life insurance that converts into cash-value life
insurance, at your discretion, regardless of your
medical condition and without a medical exam.
This allows you to continue your coverage when
your term expires.
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Cash-Value Insurance
and Its Features
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Provides both a death benefit and an
opportunity to accumulate cash value.
Permanent type of insurance – you pay the
premiums and eventually you will get paid.
Provides protection over the policyholder’s entire
lifetime rather than a specific time period.
 Over all, payments are higher than they are for term
insurance because payouts will be made.
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Cash-Value Insurance
and Its Features
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Cash value can be accessed through loans.
Withdrawals can be used to fund college
education or supplement retirement income.
The cash value growth is tax-deferred.
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Cash-Value Insurance
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3 basic types:
Whole Life
 Universal Life
 Variable Life
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Whole Life Insurance
and Its Features
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Provides a death benefit when the insured dies,
turns 100, or reaches the maximum stated age.
Guarantees minimum cash values, premiums, and
death benefits as long as premiums are paid on
time.
In early years, deductions are made from the
premium. The remaining goes into savings (cash
value).
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Whole Life Insurance
and Its Features
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Because of the guarantees, this type of
insurance requires the highest premium of all
types of permanent insurance
Is the least flexible type of policy.
Are structured to “endow,” which means cash
value will equal the policy death benefit at policy
maturity (which is normally age 95 or 100).
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Whole Life Insurance
and Its Features
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Although it does provide for both savings and
permanent needs, there are disadvantages of
whole life:
Not the same level of death protection that term
insurance provides for the same price.
 Yield on the cash value investment portion of the
policy isn’t competitive with yields on alternative
investments.
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Universal Life Insurance
and Its Features
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A type of cash-value insurance combining term
insurance with tax-deferred savings with flexible
premiums and benefits.
Pay the dictated premium which goes into savings, once
expenses and mortality charges are subtracted.
Policyholder can increase or decrease the premiums to
affect the cash value of the policy.
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Universal Life Insurance
and Its Features
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Universal life funds have 3 parts:
The mortality charge or term insurance
 The cash value or savings
 Administrative expenses
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With fluctuating returns and high expense
charges, you may not end up with the anticipated
amount of savings.
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Insurance company can increase expenses charged
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against the policy’s cash value.
Variable Life Insurance
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The cash value is funded by variable-type
accounts chosen by the insured from a
predetermined list of stock and bond portfolios.
This type of insurance is more suited to clients
with comfortable equities.
The cash value and death benefit are tied to and
vary according to the performance of the
investments chosen by the policyholder.
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Term Versus Cash-Value
Life Insurance
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For most individuals, term insurance is the better
alternative.
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It provides life insurance needs at a low cost.
The advantage of cash-value insurance is the tax
advantages.
Growth of the cash-value is tax-deferred.
 Life insurance is not considered part of your estate.
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Fine-Tuning Your Policy:
Contract Clauses and Riders
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There are 10 common features in all insurance policies:
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Beneficiary provision
Grace period
Loan clause
Nonforfeiture clause
Policy reinstatement clause
Change of policy clause
Suicide clause
Payment premium clause
Incontestability clause
Settlement options
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Fine-Tuning Your Policy:
Contract Clauses and Riders
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Beneficiary provision – allows for the naming of
a primary and contingent beneficiaries.
Grace period – automatic extension for premium
payments, usually 30 days after payment is due.
Loan clause – allows you to take loans against the
cash value of the policy.
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Fine-Tuning Your Policy:
Contract Clauses and Riders
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Nonforfeiture clause – gives the policyholder the
cash value in exchange for giving up death
benefit.
Policy reinstatement clause – the conditions
necessary to restore a lapsed policy.
Change of policy clause – allows policy holder to
change the form of the policy.
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Fine-Tuning Your Policy:
Contract Clauses and Riders
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Suicide clause – the policy will not pay for suicide
deaths within 2 years of purchase.
Payment premium clause – defines the
alternatives available regarding the payment of
premiums.
Incontestability clause – insurance company
cannot dispute the validity of the contract after a
specified number of years.
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Fine-Tuning Your Policy:
Contract Clauses and Riders
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Settlement options to receive benefits:
Lump-sum settlement – usually no taxes due on the
full face value of the contract.
 Interest-only settlement – leave benefits on deposit
and receive only the interest.
 Installment-payment settlement – cash value
distributed over a fixed time period.
 Life-annuity settlement – beneficiary receives income
for life.
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Riders
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A special provision added to the policy providing
extra benefits or limiting the company’s liability.
Waiver of Premium for Disability – pays your premiums
if you become disabled.
 Accidental Death Benefit – increases benefit if insured
dies from an accident and not natural causes.
 Guaranteed Insurability – gives you the right to increase
insurance protection without a medical exam.
 Cost-of-Living Adjustment – COLA increases death
benefit at rate of inflation.
 Living Benefits – early payout for terminally ill.
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Buying Life Insurance
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Choose an efficiently-run insurance company by
evaluating their rating
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Select the right agent by evaluating their designations.
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A.M. Best, Standard & Poor’s, Moody’s, and Duff & Phelps
rate an insurance company’s ability to pay off.
CLU – chartered life underwriter
Compare costs of competing policies.
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Health Insurance
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Basic Health Insurance:
Hospital Insurance - covers costs associated with a
hospital stay.
 Surgical Insurance - covers cost of surgery.
 Physician Expense Insurance – covers physicians’
fees outside of surgery.
 Major Medical Insurance – covers catastrophic
illness.
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Dental and Eye Insurance
Dread Disease and Accident Insurance – covers
specific diseases or accidents.
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Basic Health Care Choices
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What types of plans are available?
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Traditional fee-for-service – patient billed directly
and is reimbursed by the insurance company.
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Greatest degree of health provider choice.
Managed health care – most expenses covered but
limited choice of doctors and hospitals.
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Managed Health Care Plans
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Health Maintenance Organizations (HMOs) – is a
prepaid insurance plan that entitles members to services
of participating doctors, hospitals, and clinics.
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Pay a flat fee plus a co-payment for every visit
Have a primary care physician
Preferred Provider Organizations (PPOs) – cross
between a fee-for-service plan and an HMO.
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Wider choice of physicians and hospitals.
Higher co-payment for service from nonmembers.
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Group Versus Individual
Health Insurance
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Group
Insurance is sold to a
specific group of
individuals who are
associated – usually
employees.
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Individual
Policy is tailor-made for
you.
Tends to be more
expensive than group
insurance.
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Government-Sponsored
Health Care Plans
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State Plans
Provide for work-related
accidents and illness.
State determines the level
of benefit.
Workers’ compensation
laws enacted in early
1900’s.
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Medicare
Provides medical benefits to
disabled and those over 65
who get social security.
2 part coverage – hospital
benefits (Part A) and
voluntary supplemental
insurance (Part B).
Program enacted in 1968.
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Government-Sponsored
Health Care Plans
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Medicaid
Is a medical assistance program aimed at the needy.
 Provides medical care for the aged, blind, disabled,
and needy families with dependent children.
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Medical Reimbursement
Accounts
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Savings plans established by the employer
allowing employees to deposit pre-tax earnings
into a specially-designed account.
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Also called a flexible spending account.
Employees withdraw funds to cover unreimbursed medical or dental expenses or
qualified child care.
A “use it or lose it” plan.
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COBRA and Changing Jobs
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Under the Consolidated Omnibus Budget
Reconciliation Act (COBRA):
If you work for a company with at least 20
employees, you can continue your coverage for 1 ½ 3 years after you leave the company, depending on
why you left.
 You are responsible for the costs of the insurance,
but it will be less than buying individual insurance.
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Finding the Perfect Plan
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Look for a plan where the full cost of basic
services are covered, and is noncancelable.
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Consider:
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Who is covered – individuals or family
Terms of payment – define your financial obligation
Preexisting conditions
Guaranteed renewability
Exclusions – certain illnesses or injuries
Emotional and mental disorders – policies vary
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Disability Insurance
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While related to health insurance, disability
insurance is more like earning-power insurance.
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Occupation impacts the cost.
Most employers provide some level of disability
insurance as part of the benefits package.
You should have enough disability insurance to
maintain your standard of living if you are not
able to work.
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Disability Features That
Make Sense
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Definition of Disability – what does your policy consider a
disability.
Residual or Partial Payments – may offer partial pay.
Benefit Duration – short term is ½ year - 2 years.
Waiting Period – time period after disability when no benefits
occur.
Waiver of Premium – waives payments when disabled.
Noncancelable – cannot be cancelled due to disability.
Rehabilitation Coverage – provides retraining.
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Long-Term Care Insurance
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Pays nursing home expenses and home health
care.
Protects against the financial costs of
Alzheimer’s, strokes, or chronic diseases.
Requires that insured cannot perform “activities
of daily living.”
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Long-Term Care Insurance
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Consider these provisions:
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 – can range from 0 days – 1 year.
 Inflation Adjustment – protected from inflation.
 Waiver of Premium – insurance stays in force while
receiving benefits.
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