Risk Management Presented by Overview Risk Management Principles
Risk Management Presented by
Overview Risk Management Principles n Types of Insurance n Shopping for Insurance n
Basic Risk Management Principles n Risk management involves having a plan in place to handle losses n Risks can be large or small n Indemnification n Insurable Risk
Risk Management Strategies n Retention n Avoidance n Reduction n Transfer
Risk Retention By doing nothing about risk you have employed the risk management technique of risk retention n With risk retention you will have to cover all losses yourself n Example of risk retention n Deductible n Co-payments n Co-insurance n
Risk Avoidance n n The second basic risk management technique is risk avoidance – not doing something in order to avoid the risk By not doing something, you can lower the amount of risk to which you are exposed
Risk Reduction n Another risk management technique is risk reduction – taking precautions to reduce the likelihood, or the severity, of a loss occurring
Risk Transfer n Transferring risk to a third party is the last risk management technique Insurance is one method of transferring risk to a third party n Another is risk pooling – a cooperative of individuals who form a group to share risk among themselves n n Thus insurance is only one part of risk management
Insurance n Insurance is not meant to cover losses that are small or do not happen very often n n Need large numbers in order to keep the percentage of people filing claims low Using risk retention for small claims keeps premiums lower as fewer claims will be filed
Risk Management Step 1 What sources of risk do you face? a) b) c) d) e) f) Loss or damage to property you own – auto, home, collectibles, jewelry Health problems Liability – damage to other people or their possessions Getting hurt and not being able to work Die while still responsible for the welfare of your spouse and/or children Paying for long-term care expenses
Risk Management Step 2 What are the potential losses? a) How often will different losses occur a) How much is at stake
Risk Management Step 3 n Choose one or a combination of risk management techniques to control the risk n Example: Automobile n n Risk reduction – always wearing a seat belt and keeping the automobile in good mechanical condition Risk avoidance – don’t drink and drive Risk retention – deductible Risk transfer – automobile insurance
Risk Management Steps 4 and 5 n n Step 4 is to implement the plan Step 5 is to monitor and adjust when necessary
Types of Insurance Auto covers damages resulting from vehicular accidents and theft n Health insurance covers you when you are sick n Homeowner’s covers your home and possessions whether you own or rent n Disability covers loss of income if you can’t work due to a disability or illness n Life covers lost income if you die n Long-Term Care covers expenses such as nursing home stays and home health care n
Automobile Liability Insurance Limits: Automobile liability insurance limits may be quoted as three figures: 250/500/100 $250, 000 --Per-person bodily injury limit $500, 000 --Per-accident bodily injury limit $100, 000 --Per-accident property damage liability limit
Other Types of Coverage in an Auto Policy: Medical Payments n Uninsured Motorist n Underinsured Motorist n Collision n Comprehensive n
Types of Health Insurance Private Care Plans n Managed Care Plans n Preferred Provider Organizations n Provider Sponsored Networks n Health Maintenance Organization n n Government Health Care Plan Medicare n Medicaid n
Health Insurance: Policy Provisions Deductible n Co-insurance and co-payment provisions n Stop-loss feature n Policy limits n Policy exclusions n Pre-existing condition limitations n
Health Insurance: Policy Provisions n Coordination of benefits n Continuation provisions n Grace period n Convertibility and portability
Homeowner’s Insurance: Property Insurance Property insurance--provides protection from various types of property damage/losses to: 1. Dwelling 2. Other structures on the property 3. Personal property 4. Loss of use of the dwelling
Perils Covered 1. Fire, lightning 2. Windstorm 3. Explosion 4. Riots 5. Damage by aircraft 6. Damage by vehicles owned/operated by people not covered by the homeowner’s policy 7. Damage from smoke 8. Vandalism, malicious mischief 9. Theft 10. Glass breakage 11. Volcanic eruption
Perils Covered 12. Falling objects (external sources) 13. Weight of ice, snow, sleet 14. Collapse of building or any part of building (specified perils only) 15. Leakage or overflow of water or steam from a plumbing, heating or airconditioning system 16. Bursting, cracking, burning, or bulging of a steam or hot water heating system 17. Freezing of plumbing, heating, and air-conditioning systems and home appliances 18. Injury to electrical appliances and devices (excluding tubes, transistors, and similar electronic components) from short circuits or other accidentally generated currents
Types of Homeowner’s Insurance Six types of homeowner’s insurance policies: HO-1 Basic--Perils 1 -11 HO-2 Broad--Perils 1 -18 HO-3 Special (Comprehensive)--All perils except those specially excluded for building; perils 1 -18 on personal property (does not include glass breakage) HO-4 Renter’s Contents Broad--Perils 1 -9, 11 -18 HO-6 Condominium--Perils 1 -18 HO-8 Older Home--Perils 1 -11
Homeowner’s Insurance-- Determining the coverage needed on your dwelling: 1. Determine the dwelling’s replacement value 2. Home must be insured for 80 (or perhaps 100) percent of replacement value 3. Consider a clause to cover inflationary increases
Homeowner’s Insurance-- Determining the coverage needed for your personal property: 1. Make an inventory, with values, of all contents of your home 2. Take an inventory of each room, basement, garage, shed and yard possessions 3. Obtain appraisals for jewelry, guns, antiques, and any collections
Disability Income Insurance Likelihood of Disability… n n n Eight out of 10 people between the ages of 25 and 65 will become disabled for 90 days or more sometime during their lives. Your chance of becoming disabled in one year -1 in 8! If you are between ages 35 and 65 the risk of disability before retirement is even higher: odds are 1 in 2 --twice your chances of dying.
Options When You Become Disabled Savings n Social Security Disability n Sell your home (farm) n Borrow n Live on spouse’s income n Or buy Disability Insurance n
Sources of Disability Income Insurance n Government n n Social Security disability income insurance Employer n Sick pay benefits Other group n Individual n n Disability Income Insurance
Disability Income Insurance n Generally replaces 60%-80% of the insured’s after-tax earnings n Elimination period n Benefit period
Determining Disability Income Insurance Needs n n Months until disability insurance is needed: n Paid sick leave 3 months n Expenses savings could cover 3 months Waiting period 6 months
Disability Insurance Graphic Onset of disability Elimination period Maximum benefit period Benefit Period
Disability Policy Features n Degree of disability Own-occupation policy n Any-occupation policy n Residual n Split definition n Integration of benefits n Monthly benefits n
Other Disability Policy Features Cost of living adjustments n Social Security rider n Exclusions n Premium n Renewability n Insurer strength n
Life Insurance n Who needs life insurance? Wage earners with dependents n Parents, guardians, and caregivers of young or disabled children n People with debt that would be left as a responsibility to a spouse or others n
How Much to Buy? n Multiple Earnings Approach n Needs Based Approach
Financial Factors Affecting Life Insurance Needs 1. 2. 3. 4. 5. 6. Income replacement needs Final expense needs Readjustment-period needs Debt-repayment needs College-expense needs Other special needs
Other resources to meet these needs Government benefits, i. e. , Social Security benefits n Employer benefits--death benefits from employment, such as group life insurance n Personal resources: savings accounts, investments and other liquid assets n Proceeds from life insurance policies already owned n Business interest, home equity and other nonliquid assets, if available to meet post death needs n
Basic Types n Term n Permanent n Whole-life n n n Fixed Variable Universal
Term Life Insurance Policies Features: n n n “Pure protection”--pays benefits only if the insured person dies within the time period (term) of the policy Face amount--fixed or declining during term of policy; changeable at renewal Premiums--increase at renewal No cash-value accumulation Premium covers the cost of the death benefit, management expenses, and commissions
Fixed Whole Life Insurance Policies Features: n n n Face amount--fixed Premiums--high and fixed Cash-value accumulation—fixed rate of accumulation n In a good economy, the company keeps any investment returns over the fixed rate n In a poor economy, the company must pay the fixed rate, even if their investments did not earn that much Rate of return paid on cash accumulations--fixed Includes the cost of the underlying term insurance, management fees, and commissions n Management fees for all whole life policies are higher than those for term polices since they include investment management of the cash-value accumulated funds You can collect either the face amount or the cash value, but not both
Variable Rate Whole Life Insurance Policies Features: n n n Face amount--fixed Premiums--high and fixed Cash-value accumulation--variable accumulation as interest rates vary Rate of return paid on cash accumulations--variable with interest rates in the economy or as specified by company Costs include the cost of the insurance coverage, the management fees, and commissions
Universal Life Insurance Policies Provides both the protection of term insurance and cash value build up n Unlike whole life, some policies allow you to change the amount of insurance coverage as you move through the lifecycle stages n Some policies also allow you to collect both the insurance face amount and the cash value n
Long-Term Care Insurance is a way to help cover expenses such as home health care or nursing home stays n Not typically covered by Medicare n n n However, Medicaid will pay benefits for those with few to no assets Policies may differ due to several factors: n Underwriting, Premiums, Age, Amount of Coverage, Waiting Period, Duration, Inflation Protection
Long-Term Care Insurance: Questions n n What types of things are not typically covered? n Mental and nervous disorders n Policies must cover Alzheimer’s disease and other biologically related brain conditions and serious mental illnesses When will the Long-Term Care policy pay benefits? n Requires an assessment before benefits will be paid n Must typically meet one of these 2 requirements: n Unable to perform 2 of the 7 “activities of daily living” for at least 90 days due to loss of functional capacity. These activities include eating, walking, moving from a bed to a chair, dressing, bathing, using a toilet, bladder and bowel control issues n Substantial services are required to protect the individual from threats to health and safety due to substantial cognitive impairment
Long-Term Care Insurance: Partnerships & Programs n Virginia Long-Term Care Partnership n n n If you qualify for Medicaid you can keep more of your assets than the current $2, 000 You will usually be able to keep a dollar-for-dollar match based on what the policy pays Community Living Assistance Services and Support n n Will pay you a lifetime cash benefit if you have contributed into the program for at least 5 years while working Starting in 2012 or 2013, all working adults will be automatically enrolled in the insurance program through payroll deduction, unless they or their employers choose to opt out
Insurance Policies to Avoid Life insurance for children n Cancer insurance n Comprehensive & collision insurance for an older, low value car n Flight insurance n
Shopping for Insurance Comparison shop at least three insurance companies n Check out the insurance company n Is the insurance company licensed? n What is the insurance company’s rating? n Check with the Bureau of Insurance for information concerning the company you are researching n
Insurance Summary Determine your insurance needs n Select the type of insurance that meets your needs n Shop and compare prices n Review your policies and make changes as your family situation changes n
Questions?
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