GoodheartWillcox Co Inc 10 Insurance GoodheartWillcox Co Inc

© Goodheart-Willcox Co. , Inc.

10 Insurance © Goodheart-Willcox Co. , Inc.

Chapter Objectives • Explain how insurance protects individuals from financial risk. • Outline the different types of private health insurance coverage. • Describe types of government-sponsored health insurance programs. • Explain the purpose of disability insurance. © Goodheart-Willcox Co. , Inc. continued

Chapter Objectives • Distinguish among the various types of life insurance. • Outline the key factors to consider when buying home insurance. • Select auto insurance coverage to meet individual needs. © Goodheart-Willcox Co. , Inc.

Managing Risk • Life involves risk; some events can limit your ability to work or wipe out your assets • Financial security depends on risk management • Four strategies for dealing with risk – avoidance – reduction – retention – transfer © Goodheart-Willcox Co. , Inc.

Insurance Protection © Goodheart-Willcox Co. , Inc. continued

Insurance Protection • Type and amount of insurance needed depends on – risks being covered – amount available to pay for losses – financial obligations of insured persons • Protection needs increase with each new dependent and with increased assets © Goodheart-Willcox Co. , Inc. continued

Insurance Protection • When you buy insurance, you become a policyholder • You pay a premium to the insurance company on a regular basis • Premiums paid by you and others are invested by the insurance company • Premiums and earnings from investments pay insurance claims © Goodheart-Willcox Co. , Inc.

Private Health Insurance • Offers protection by covering specific medical expenses created by illness, injury, and disability • Group plans are sponsored by employers, unions, and other organizations • Individual plans cost more and provide less coverage than group plans © Goodheart-Willcox Co. , Inc.

Fee-for-Service Plans • Fee-for-service plans – pay for covered medical services after treatment is provided – usually allow policyholders to go to any licensed health care provider or accredited hospital of their choice • Policyholders pay deductible and coinsurance © Goodheart-Willcox Co. , Inc. continued

In Your Opinion • Would you pay more for a health insurance plan that allowed you to choose your own doctor, hospital, and other health care providers? © Goodheart-Willcox Co. , Inc.

Fee-for-Service Plans • Basic coverage: prescriptions, hospital stays, inpatient tests, some doctor’s visits and outpatient procedures • Major medical coverage: costs of serious illnesses and high-cost procedures and injuries • Comprehensive plans combine basic and major medical protection in one policy © Goodheart-Willcox Co. , Inc.

Managed Care Plans • Managed care plans contract with health care providers to deliver medical services to members at reduced cost • Choice of service providers is limited to those who participate in the plan © Goodheart-Willcox Co. , Inc. continued

Managed Care Plans • Policyholders pay deductibles, coinsurance, or co-payments • Three forms of managed care – Health maintenance organizations (HMOs) – Preferred provider organizations (PPOs) – Point-of-service (POS) plans © Goodheart-Willcox Co. , Inc.

Health Maintenance Organizations • A primary care doctor is chosen from a list of participating doctors • Doctor provides coordination of care • Providers in the plan cover treatment © Goodheart-Willcox Co. , Inc.

Preferred Provider Organizations • Provides more choice than an HMO • You receive services at lower cost by seeing participating caregivers • You may go outside the plan if you pay the extra cost; non-participating providers are covered at lower rates © Goodheart-Willcox Co. , Inc.

Point-of-Service • Combines features of HMOs and PPOs • A primary care doctor supervises your care and makes referrals • If you see a doctor in the plan, there is no deductible and a limited co-pay • If you see a provider outside the plan, you pay a deductible and higher co-pay © Goodheart-Willcox Co. , Inc.

Health Savings Accounts • You may contribute pre-tax dollars into a health savings account (HSA), whose funds accumulate tax-free • Use the HSA savings to pay for health care costs • Used by people enrolled in qualified High Deductible Health Plans © Goodheart-Willcox Co. , Inc.

In Your Opinion • Can you estimate how much money your family spent on health care last year? Would an HSA help your family save money? © Goodheart-Willcox Co. , Inc.

COBRA • COBRA is Consolidated Omnibus Budget Reconciliation Act • A qualified worker who leaves a job can continue coverage by his or her former employer’s group health plan for a limited time • Worker must pay premium, which often is expensive © Goodheart-Willcox Co. , Inc.

Individual Plans • People who must purchase health insurance on their own include – the self-employed – those between jobs – people not eligible for COBRA • Consumers can apply for an individual plan from health insurance companies © Goodheart-Willcox Co. , Inc. continued

Individual Plans • Problems with individual plans: – High premiums – Applicants are often rejected due to past injuries and illnesses, chronic physical or mental health problems – Many exclusions for preexisting conditions, pregnancy, dental care © Goodheart-Willcox Co. , Inc.

Coverage for Young Adults • After a certain age, young adults are no longer eligible for coverage under their parents’ plans • Some young people receive coverage through their employers group plan or by purchasing an individual plan • Many health insurance plans have extended coverage under certain conditions, such as college © Goodheart-Willcox Co. , Inc. continued

Coverage for Young Adults • Young adults often go uninsured • With no insurance, a serious illness or injury can wipe out assets and create debt © Goodheart-Willcox Co. , Inc.

Long-Term Care • Long-term care insurance covers certain costs of care – in a nursing home – in an assisted living facility – at home with assistance • Older consumers are primary purchasers of this insurance © Goodheart-Willcox Co. , Inc.

Choosing a Plan • Employees often have a choice of employer plans • Carefully review materials provided © Goodheart-Willcox Co. , Inc.

Services • What services are most important to you? To what extent are they covered? • What are maximum benefits? • Does the plan require preauthorization and utilization reviews for certain services? © Goodheart-Willcox Co. , Inc.

Choice • Can you choose your own providers or continue with those you already have? • Which providers participate in the plan? Where are they located? • What are the provisions for seeing a specialist? • Can you change doctors if you are dissatisfied? © Goodheart-Willcox Co. , Inc.

Cost • What premiums must you pay? • If there is a deductible, how much is it and which services are subject to it? • What are costs of using nonparticipating providers and facilities? • What are the exclusions, service limitations, and restrictions? © Goodheart-Willcox Co. , Inc. continued

Cost • What • Are co-payments portion of higher if you receive charges must treatment outside your you co-pay? plan? What services are subject to copay? © Goodheart-Willcox Co. , Inc.

Government-Sponsored Health Insurance • Medicare covers specific health care expenses for – eligible citizens age 65 and older – those under 65 with certain illnesses and disabilities • Payroll taxes fund Medicare; employers and workers pay premiums • Medicare has four parts © Goodheart-Willcox Co. , Inc.

Part A—Hospital Insurance • Pays for – inpatient care in hospitals and skilled nursing facilities – some health care – some hospice care for people with terminal illnesses • A deductible must be met • Only covers a specified number of days © Goodheart-Willcox Co. , Inc.

Part B—Medical Insurance • Pays for services including – doctors’ fees – outpatient hospital services – home health services – certain tests • A voluntary program; enrollees pay a monthly premium, deductibles, and coinsurance for certain services © Goodheart-Willcox Co. , Inc.

Part C—Medicare Advantage • Combines Parts A and B • Provided by private insurance companies • Can simplify payment and may cover drugs © Goodheart-Willcox Co. , Inc.

Part D—Prescription Drug • Helps lower prescription drug prices • Private insurance companies provide a number of plans • Subscribers choose the one that best meets their needs © Goodheart-Willcox Co. , Inc.

Medigap Insurance • Provided by private insurance companies • Available to people who have both Medicare Parts A and B • Helps pay for health care costs not covered by Medicare • The broader the coverage, the higher the premium © Goodheart-Willcox Co. , Inc.

Medicaid • A health insurance program for eligible low-income persons and those with certain disabilities • A state-administered program financed by federal and state taxes • Services provided vary from state to state © Goodheart-Willcox Co. , Inc.

Children’s Health Insurance Program (CHIP) • Governmentprovided health insurance coverage for children • Funded by taxes on tobacco products © Goodheart-Willcox Co. , Inc.

Disability Insurance • Many people suffer illnesses and injuries that prevent them from working for a prolonged period • Being without income can result in serious financial setbacks • Disability insurance pays a portion of the income a worker would receive if healthy and working © Goodheart-Willcox Co. , Inc. continued

Disability Insurance • Two types: – short-term coverage that provides benefits for up to two years – long-term coverage that provides benefits for a number of years up to life • Many people are covered by disability insurance paid by their employers © Goodheart-Willcox Co. , Inc. continued

Disability Insurance • Important questions – What benefits are promised? – What is the waiting period? – How long are benefits available? © Goodheart-Willcox Co. , Inc. – Can the policy be canceled by the insurer?

Workers’ Compensation • Employer-provided insurance for those with work-related illnesses or injuries • Benefits include – payments of a portion of lost wages that continue for life if disability is permanent – medical care and rehabilitation – payments to worker’s survivors if worker’s injury or illness is fatal © Goodheart-Willcox Co. , Inc.

Life Insurance • Protects dependents from loss of income and other expenses after an insured person’s death • Especially important if you have a spouse, children, or elderly parents who depend on your income • At death, the face value of the policy is paid to the beneficiary © Goodheart-Willcox Co. , Inc.

In Your Opinion • Which type of insurance coverage do you think is the most important for young adults: life or disability? Why? © Goodheart-Willcox Co. , Inc.

Term Life • Term life insurance provides protection for a limited or specific period of time • Advantage: costs less than other policies • Disadvantage: coverage ends after the specified term (you may be able to renew at a higher rate) © Goodheart-Willcox Co. , Inc.

Whole Life • Whole life insurance provides lifetime protection while premiums are paid • Advantages: builds cash value; you may be able to borrow against the cash value at low interest rate or cash in the policy; premiums are fixed • Disadvantage: higher premiums © Goodheart-Willcox Co. , Inc.

Limited Payment Policies • Offer lifetime protection although premiums are only paid for a certain number of years or until a certain age • Advantage: although premium payments stop, coverage continues • Disadvantage: premiums are higher than whole life policy © Goodheart-Willcox Co. , Inc.

Variable Life • Part of premiums are invested in a fund of your choosing • Advantages: policy’s face value and investment rise when fund does well; you are guaranteed a minimum face value • Disadvantage: may not offer the best of insurance or investment opportunities © Goodheart-Willcox Co. , Inc.

Adjustable Life • Premiums, face value, and payment period can be adjusted • Advantage: flexibility • Disadvantage: need to monitor © Goodheart-Willcox Co. , Inc.

Universal Life • Type of adjustable insurance • Part of premium is put into savings and earns interest • Advantages: policyholder can make changes during policy’s life; earnings keep pace with current market rates; may lower taxes • Disadvantage: earnings drop with interest rates © Goodheart-Willcox Co. , Inc.

Endowment Insurance • Endowment insurance pays out the cash value of the policy after a certain number of years to either the purchaser or beneficiaries • Advantage: part of premium builds a cash value fund • Disadvantages: high premiums and possible tax consequences © Goodheart-Willcox Co. , Inc.

Selecting the Protection You Need • Each person’s life insurance needs are unique • The amount and type of life insurance protection needed depend on – present and future earnings – financial responsibilities and obligations © Goodheart-Willcox Co. , Inc.

Amount of Protection • Factors indicating how much insurance to get: – Ages and financial needs of those depending on policyholder’s income © Goodheart-Willcox Co. , Inc. continued

Amount of Protection – Amount of money needed to maintain dependents’ standard of living without policyholder’s income – Other sources of income available for dependents – Costs of burial and unpaid debts © Goodheart-Willcox Co. , Inc.

Types of Protection • Group coverage costs less than an individual policy for the same coverage amount • Employers often provide life insurance as a fringe benefit; pay all or part of premiums • Unions and other groups sometimes provide group coverage © Goodheart-Willcox Co. , Inc. continued

Types of Protection • Features to consider: – Guaranteed renewability – Double indemnity or accidental death benefit – Disability benefit – Convertible provision – If insurance is a form of savings, earnings should match or exceed other forms of savings and investments © Goodheart-Willcox Co. , Inc.

Choosing a Company, Agent, and Policy • Do some research and meet with representatives of the companies you are considering © Goodheart-Willcox Co. , Inc. continued

Choosing a Company, Agent, and Policy • Check whether the company – has a good reputation – is licensed to operate in your state • Compare premiums charged by different companies for similar coverage © Goodheart-Willcox Co. , Inc. continued

Choosing a Company, Agent, and Policy • A good agent – clearly explains coverage and benefits – can help you evaluate your coverage as your needs and finances change – handles claims and revisions promptly • Talk honestly with the agent • Review the policy carefully • Inform your beneficiaries of the policy © Goodheart-Willcox Co. , Inc.

Home Insurance • Property coverage – insures against damage to or loss of dwelling and personal property – may also pay additional living expenses if you need to move out © Goodheart-Willcox Co. , Inc. continued

Home Insurance • Liability coverage – protects you if others are injured on your property – offers protection if you or your family, pets, or property accidentally damage the property of others – covers higher loss amounts with an umbrella policy © Goodheart-Willcox Co. , Inc.

Amount of Coverage • Find out how much it would cost to rebuild your home if it were destroyed – get an appraisal • Increase insurance for home improvements and inflation • Check policy for coverage provided for personal possessions © Goodheart-Willcox Co. , Inc. continued

Amount of Coverage • Make a complete inventory of your belongings • Compare the coverage limits with the total value of your possessions © Goodheart-Willcox Co. , Inc. continued

Amount of Coverage • Actual cash value is the replacement cost minus depreciation • Replacement value covers the cost of replacing what you lose without deducting depreciation © Goodheart-Willcox Co. , Inc.

Cost of Home Insurance • Type and amount of coverage • Size of deductible • Risk factors where you live • The insurance company • Opportunity for discounts © Goodheart-Willcox Co. , Inc.

Renter’s Insurance • Covers losses due to damage or loss of personal property and possessions • Liability insurance covers expenses incurred by a renter if a guest is harmed • Floater insurance covers specific items wherever you take them • Endorsement is attachment to a policy that covers items taken out of the home © Goodheart-Willcox Co. , Inc.

Auto Insurance • Financial responsibility laws—drivers must show proof they can pay minimum damage amounts • Compulsory auto insurance laws—car owners must buy some bodily injury and property damage liability insurance © Goodheart-Willcox Co. , Inc.

Types of Auto Insurance • Bodily injury liability protects you when you cause an auto accident resulting in injury or death of other parties • Property damage liability protects you when you cause an auto accident in which the property of others is damaged © Goodheart-Willcox Co. , Inc. continued

Types of Auto Insurance • Personal injury protection covers medical expenses from an accident regardless of who is at fault © Goodheart-Willcox Co. , Inc. continued

Types of Auto Insurance • Collision insurance pays for car damage due to – an auto accident – collision with another car or object • Comprehensive physical damage insurance pays for loss or damage due to most other causes © Goodheart-Willcox Co. , Inc. continued

Types of Auto Insurance • Uninsured and underinsured motorist insurance – pays insured person for injuries caused by uninsured or hit-and-run driver – covers insured person when driving, riding, or walking – covers passengers in the insured person’s car © Goodheart-Willcox Co. , Inc.

Auto Insurance Costs • Depend on driver classification: – age – gender – marital status – driving record – habits © Goodheart-Willcox Co. , Inc.

Premium Discount Eligibility • • Safe driving record Good grades Nonsmoking Antitheft devices and air bags Age Two or more cars on a policy Positive credit report © Goodheart-Willcox Co. , Inc.

Insured Car’s Year, Make, and Model • Premiums are highest for – cars costly to repair – frequently stolen cars – luxury, sports cars – newer cars © Goodheart-Willcox Co. , Inc.

Deductible Amount • The higher the deductible, the lower the premium • You can save money on premium for collision and comprehensive damage coverage by increasing the deductible amount © Goodheart-Willcox Co. , Inc.

No-Fault Auto Insurance • With no-fault auto insurance, each party makes a claim to his or her own insurance company • Insurance company pays regardless of who is at fault – Simplifies and speeds payments to victims – Lowers insurance rates – Reduces legal costs © Goodheart-Willcox Co. , Inc. continued

No-Fault Auto Insurance • Pays for claims up to a set amount called a threshold • Liability insurance pays for damages over the threshold amount • In most states, people can sue for additional damages when an accident involves severe injuries, death, or major medical bills © Goodheart-Willcox Co. , Inc.

In Your Opinion • Laws require car owners to carry auto insurance. Do you think this is a good idea? Why or why not? © Goodheart-Willcox Co. , Inc.

High-Risk Drivers • People with poor driving records may be denied coverage • High-risk drivers may obtain coverage through a state-supervised assigned risk plan • Insurance companies must provide coverage, but premiums are very high © Goodheart-Willcox Co. , Inc.

Central Ideas of the Chapter • Risk management is an important component in financial planning. • Insurance is a tool that protects against certain financial losses. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • appraisal. An estimate of the current value of property. • beneficiary. Person named by the policyholder to receive the death benefit of an insurance policy. • bodily injury liability. Coverage that protects insured persons when they are liable for an auto accident that injured or killed others. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • coinsurance. A percentage the policyholder must pay for certain services. • co-payment. A flat fee the policyholder must pay for certain services. • deductible. The amount you will be required to pay before insurance pays for any services. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • dependent. An individual who relies on someone else for financial support. • depreciation. A decrease in the value of property as a result of age or wear and tear. • endowment insurance. Insurance that pays the face value of the policy to beneficiaries if the insured dies before the endowment period ends. It also pays the face amount to the insured if he or she lives beyond the endowment period. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • exclusions. The services that are not covered in an insurance plan. • fee-for-service. A health insurance plan that pays for covered medical services after treatment is provided. • health savings account (HSA). A taxadvantaged savings account available to people enrolled in qualified High Deductible Health Plans (HDHPs). © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • inpatient. A person whose care requires a stay in the hospital. • managed care plan. A health care plan that contracts with specific doctors and other health care providers, hospitals, and clinics to provide a range of medical services and preventive care to members of the plan at reduced cost. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • no-fault auto insurance. Coverage that eliminates the faultfinding process in settling claims by having each policyholder make a claim after an accident. • policyholder. A person who owns an insurance policy. • preexisting condition. An illness or injury a person has before signing up for a health care plan. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • premium. Amount of money paid to an insurance company for a policy on a regular basis. • property damage liability. Coverage that protects insured persons when they are liable for an auto accident where the property of others is damaged. • risk. A measure of the likelihood that something will be lost. © Goodheart-Willcox Co. , Inc.

Glossary of Key Terms Back • risk management. The process of measuring risk and finding ways to minimize or manage loss. • term life insurance. Insurance that covers the policyholder for a specific period of time— 5, 10, or 20 years or until a specified age. • whole life insurance. Insurance that provides the policyholder with basic lifetime protection so long as premiums are paid. © Goodheart-Willcox Co. , Inc.