Chapter 9

1. Chapter 9 Life and Health Insurance

2. Learning Objectives • Reduce your financial risk through insurance. • Determine your life insurance needs and design a life insurance program. • Describe the major types of coverage available and the typical provisions that are included. • Design a health care insurance program and understand what provisions are important to you. • Explain the purpose of long-term care insurance and the provisions that might be important to you.

3. The Logic Behind Insurance:Risk Management • An insurance policy spells out what losses are covered, what the policy costs, andwho receives payment. • Health insurance provides protection against devastating medical bills. • Life insurance protects your family if you die.

4. The Logic Behind Insurance:Risk Management • Health care is expensive and there is no incentive to economize: • Over 50% of Americans receive some government health care. • 87% of Americans have medical insurance. • Medical care has become extremely sophisticated. • It takes 12 years and over $239 million to develop, test, and certify a new drug. • Cost of litigation has skyrocketed. • Malpractice premiums cost $150,000-$250,000 yearly.

5. Do You Need Life Insurance? • 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.

6. Earnings MultipleApproach Buy insurance that is 5-15 times your annual gross income. Needs Approach Determines the funds necessary to meet the needs of a family after primary breadwinner’s death. How Much Life InsuranceDo You Need?

7. Needs Approach • What needs must be met after the death of the breadwinner? • Immediate needs at time of death • Debt elimination • Immediate transitional funds • Dependency expenses • Spousal life income • Educational expenses for children • Retirement income

8. Major Types of Life Insurance • There are 2 major types of life insurance: • Term insurance – pure life insurance. • Cash-value insurance – has a life insurance and a savings component.

9. Term Insurance and Its Features • Pays the death benefit if insured dies during the coverage period. • Has no face value. • 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.

10. Renewable Term Insurance • 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.

11. Re-entry Term Insurance • 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.

12. Decreasing Term Insurance • 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.

13. Group Term Insurance • Term insurance provided without a medical exam, to a specific group of people. • 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.

14. Credit or Mortgage GroupLife Insurance • 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.

15. Convertible Term Life Insurance • 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.

16. Cash-Value Insuranceand Its Features • 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. • 3 basic types: • Whole Life • Universal Life • Variable Life

17. Whole Life Insuranceand Its Features • Provides a death benefit when the insured dies, turns 100, or reaches the maximum stated age. • Face value is paid provided premiums were paid. • In early years, deductions are made from the premium. The remaining goes into savings (cash value). • The policyholder can borrow against the cash value. • Nonforfeiture right gives the policyholder the policy’s cash value in exchange for giving up the death benefit.

18. Modified Whole Life Premiums begin below comparable whole life and gradually rise until final premiums are above comparable whole life. Combination Whole Life Includes elements of whole life and decreasing term insurance. Face amount remains constant while coverage shifts from term to whole life. Whole Life Insuranceand Its Features

19. Whole Life Insuranceand Its Features • 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.

20. Universal Life Insuranceand Its Features • 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.

21. Universal Life Insuranceand Its Features • Universal life funds have 3 parts: • The mortality charge or term insurance • The cash value or savings • Administrative expenses • With fluctuating returns and high expense charges, you may not end up with the anticipated amount of savings.

22. Term Versus Cash-ValueLife Insurance • For most individuals, term insurance is the better alternative. • 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.

23. Fine-Tuning Your Policy:Contract Clauses and Riders • There are 10 common features in all insurance policies: • Beneficiary provision • Grace period • Loan clause • Nonforfeiture clause • Policy reinstatement clause • Change of policy clause • Suicide clause • Payment premium clause • Incontestability clause • Settlement options

24. Fine-Tuning Your Policy:Contract Clauses and Riders • 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.

25. Fine-Tuning Your Policy:Contract Clauses and Riders • 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.

26. Fine-Tuning Your Policy:Contract Clauses and Riders • 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.

27. Fine-Tuning Your Policy:Contract Clauses and Riders • 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.

28. Riders • 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 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.

29. Buying Life Insurance • Choose an efficiently-run insurance company by evaluating their rating • A.M. Best, Standard & Poor’s, Moody’s, and Duff & Phelps rate an insurance company’s ability to pay off. • Select the right agent by evaluating their designations. • CLU – chartered life underwriter • Compare costs of competing policies. • Traditional net cost method • Interest-adjusted net cost method

30. Health Insurance • 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. • Dental and Eye Insurance • Dread Disease and Accident Insurance – covers specific diseases or accidents.

31. Basic Health Care Choices • What types of plans are available? • Traditional fee-for-service – reimbursed for medical expenditures and choice of doctor. • Managed health care – most expenses covered but limited choice of doctors and hospitals.

32. Private Health Care Plans • Fee-for-service plan allows doctors to bill you, then company reimburses you. • Managed health care – HMO’s pay for and provide health care services. • A point-of-service plan allows treatment from affiliated and nonaffiliated doctors. • A preferred provider organization is a cross between traditional and HMO.

33. Group Insurance is sold to a specific group of individuals who are associated – usually employees. Individual Policy is tailor-made for you. Tends to be more expensive than group insurance. Group Versus IndividualHealth Insurance

34. State Plans Provide for work-related accidents and illness. State determines the level of benefit. Workers’ compensation laws enacted in early 1900’s. Medicare Provides medical benefits to disabled and those over 65 who get social security. 2 part coverage – hospital benefits and voluntary supplemental insurance. Program enacted in 1968. Government-SponsoredHealth Care Plans

35. Medicare • Sold by private insurance companies to bridge the gap in coverage. • Once 65 years old, you are automatically eligible to buy Medigap insurance. • Policies are standard but prices vary. • While Medicare may absolve you of some future financial responsibility, it may not be around in its present form when you need it.

36. Medicare Reform • The 2006 Medicare Modernization Act (MMA) adds a new voluntary drug benefit. • The Drug Benefit – Medicare Part D - opportunity to buy federally-mandated drug coverage. • Medigap Plans – 2 new plans help with long-term hospital stays. • Medicare Advantage – brings in more choices including HMO’s and PPO’s. • Medicaid – medical assistance for the needy.

37. Medical Reimbursement Accounts • Savings plans established by the employer allowing employees to deposit pre-tax earnings into a specially-designed account. • Employees withdraw funds to cover un-reimbursed medical or dental expenses, or qualified child care. • A “use it or lose it” plan.

38. COBRA and Changing Jobs • 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.

39. Look for a plan where the full cost of basic services are covered, and is noncancelable. Consider: Who’s 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 Finding the Perfect Plan

40. Disability Insurance • While related to health insurance, disability insurance is more like earning-power insurance. • 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.

41. Disability Features ThatMake Sense • Definition of Disability – when you can’t perform your “own occupation.” • Residual or Partial Payments – may offer partial pay. • Benefit Duration – short term is ½ year - 2 years. • Waiting Period – time when no benefits occur. • Waiver of Premium – waives payments when disabled. • Noncancelable – cannot be cancelled due to disability. • Rehabilitation Coverage – provides retraining.

42. Long-Term Care Insurance • 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.”

43. Long-Term Care Insurance • 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.