Transcript Keown_PF5_CH09

Life and Health
Insurance
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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Do You Need Life Insurance?
 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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Table 9.1
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How Much Life Insurance
Do You Need?
 Priorities and goals
 Crunch the numbers—networth, 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
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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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Table 9.3
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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
 Credit and mortgage group life insurance
 Convertible term life insurance
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Cash-Value Insurance
and 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 Insurance
and 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 Insurance
and 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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Figure 9.2
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Term Versus Cash-Value
Life 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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Fine-Tuning Your Policy:
Contract Clauses, Riders, and
Settlement Options
Contract Clauses:
 Beneficiary Provision
 Coverage Grace Period
 Loan Clause
 Nonforfeiture Clause
 Policy Reinstatement Clause
 Change of Policy Clause
 Suicide Clause
 Payment Premium Clause
 Incontestabilty Clause
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Fine-Tuning Your Policy:
Contract Clauses, Riders, and
Settlement Options
Riders:
 Waiver of Premium for Disability Rider
 Accidental Death Benefit Rider or Multiple
Indemnity
 Guaranteed Insurability Rider
 Cost-of-Living Adjustment (COLA) Rider
 Living Benefits Rider
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Fine-Tuning Your Policy:
Contract Clauses, Riders, and
Settlement Options
Settlement or Payout Options:
 Lump-Sum Settlement
 Interest-Only Settlement
 Installment-Payments Settlement
 Life Annuity Settlement
 Straight Life Annuity
 Period Certain Annuity
 Refund Annuity
 Joint Life and Survivorship Annuity
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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
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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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Table 9.4
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Buying Life Insurance
Comparing Costs
 Traditional Net Cost (TNC) method—sums up
premiums over a stated period (usually 10 to 20
years) and subtracts from this the sum of all
dividends over that same period.
 Interest-Adjusted Net Cost (IANC) method—
incorporates the time value of money
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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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Checklist 9.1
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Private Health Care Plans
Managed Health Care: HMOs
 Individual practice association plan (IPA)
 Group practice plan
 Point-of-service plan
 HMOs are cost efficient
 Service can be too quick, waits long
 Lack of choice can be too restricting
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Checklist 9.2
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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-Sponsored
Health 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
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Table 9.5
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Medicaid
 Government medical insurance plan for
needy families—as well as aged, blind, and
disabled.
 Joint federal and state program
 Some covered by Medicaid also covered by
Medicare.
 Limited in scope
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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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Table 9.6
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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 That
Make 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 thoseagainst the financial costs of
Alzheimer’s, strokes, or chronic diseases.
 Requires that insured cannot perform
“activities of daily living” (ADLs)
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Table 9.7
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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.
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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
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