Chapter 9

Life and Health Insurance

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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 deathsmost 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 poolingthrough insurance, sharing financial consequences of risk Premium Actuaries Face amount or face of policyamount of insurance provided at death. Policy owner or policyholder. Beneficiarydesignated to receive the proceeds. Life insurance doesnt make sense without a spouse or dependents
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Table 9.1 Should You Buy Life Insurance?

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How Much Life Insurance Do You Need?

Priorities and goals Crunch the numbersnet worth, 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 Earnings Multiples for Life Insurance

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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 insurancepure life insurance that pays beneficiary a specific amount of money if you die while covered Cash-value insurancehas a life insurance and a savings plan

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Table 9.3 Whats What in Life Insurance

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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. Permanentpay 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-valuepolicyholders savings Nonforfeiture Rightgives the policyholder the right to choose the policys 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. Flexiblepremiums 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 Determining the Cash Value on a Universal Life Insurance Policy

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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 Incontestability 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 agents professional designation List of prospects from good companies Interview the agents and get a quote

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Table 9.4 Insurance Company Ratings

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Buying Life Insurance

Comparing Costs
Traditional Net Cost (TNC) methodsums 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 policiesdifferent features and assumptions

Still get quotes on the Web for different cashvalue 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 insurancecombination 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 Insurancecoverage 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 catastrophesmake 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 careoffered 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 insurancesold with no medical exam required to a specific group of individuals who are associated for some purpose usually employees. Individual insurance policytailor-made for you, reflects age and health, after medical exam.

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Government-Sponsored Health Care Plans

State Plansprovide for work-related accidents and illness Workers Compensation Federal PlansMedicare, Medicaid

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Medicare
Medicare Part AHospital Insurance

Medicare Part BSupplemental Medical Insurance

Medicare Part CMedicare Advantage Plans Medicare Part DMedicare Prescription Drug Coverage Medigap Plans

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Table 9.7 Medicare Benefits and Services

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Medicaid
Government medical insurance plan for needy familiesas 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 Coverageor Opting Out

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Table 9.7 Medicare Benefits and Services (cont.)

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Finding the Perfect Plan

Important Provisions in Health Insurance Policies: Whos 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 those against the financial costs of Alzheimers, strokes, or chronic diseases. Requires that insured cannot perform activities of daily living (ADLs)

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Table 9.9 Long-Term Health Care Provisions

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Long-Term Care Insurance

Type of Carenursing home, adult day care, or hospice care for terminally ill Benefit Periodcan range from 1 year to lifetime

Waiting Period0 days 1 year

Inflation Adjustmentprotected from inflation Waiver of Premiuminsurance 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 insuranceterm 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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Figure 9.1 The Rising Cost of Yearly Renewable Term InsuranceAnnual Premiums for $100,000 Coverage on a 35-Year-Old Nonsmoking Male

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Table 9.5 Major Provisions of the Affordable Care Acta

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Table 9.5 Major Provisions of the Affordable Care Acta (cont.)

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Table 9.5 Major Provisions of the Affordable Care Acta (cont.)

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Table 9.6 Appealing Health Insurance Claim Decisions

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Table 9.8 A Sampling of What Flexible Spending Accounts Can and Cannot Be Used For

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Figure 9.3 Worksheet for Estimating How Much Disability Insurance Coverage You Need

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