© goodheart-willcox co., inc. 10 insurance. © goodheart-willcox co., inc. chapter objectives...

© Goodheart-Willcox Co., Inc.

10Insurance


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.

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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.


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


Insurance Protection

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• 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

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• 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


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


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

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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?


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


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

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Managed Care Plans

• Policyholders pay deductibles, coinsurance, or co-payments

• Three forms of managed care are – Health maintenance organizations

(HMOs)– Preferred provider organizations

(PPOs)– Point-of-service (POS) plans


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


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


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


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

• You must use all money put into that account by the end of the year.


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?


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


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

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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


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

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Coverage for Young Adults

• Young adults often go uninsured

• With no insurance, a serious illness or injury can wipe out assets and create debt


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


Choosing a Plan

• Employees often have a choice of employer plans

• Carefully review materials provided


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?


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?


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 non-participating providers and facilities?

• What are the exclusions, service limitations, and restrictions?

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Cost

• What portion of charges must you co-pay? What services are subject to co-pay?

• Are co-payments higher if you receive treatment outside your plan?


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

A. Hospital Insurance

B. Medical Insurance

C. Medicare Advantage (combines Hospital and Medical)

D. Prescription Drug


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


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


Children’s Health Insurance Program (CHIP)

• Government-provided health insurance coverage for children

• Funded by taxes on tobacco products


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

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• 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

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• Important questions– What benefits

are promised?– What is the

waiting period?– How long are

benefits available?

– 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


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


Life Insurance• There are several different types of

Life Insurance Policies, each policy is different and fits the needs of different individuals.– Term Life (most common)– Whole Life – Limited Payment Policies– Variable Life– Adjustable Life– Universal Life


In Your Opinion

• Which type of insurance coverage do you think is the most important for young adults: life or disability? Why?


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


Amount of Protection

• Factors indicating how much insurance to get:– Ages and

financial needs of those depending on policyholder’s income

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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


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

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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


Choosing a Company, Agent, and Policy

• Do some research and meet with representatives of the companies you are considering

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• Check whether the company – has a good reputation– is licensed to operate in your state

• Compare premiums charged by different companies for similar coverage

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• 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


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

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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


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

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Amount of Coverage

• Make a complete inventory of your belongings

• Compare the coverage limits with the total value of your possessions

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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


Cost of Home Insurance

• Type and amount of coverage

• Size of deductible

• Risk factors where you live

• The insurance company

• Opportunity for discounts


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


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


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

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• Personal injury protection covers medical expenses from an accident regardless of who is at fault

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• 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

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• 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


Auto Insurance Costs

• Depend on driver classification:– age– gender– marital status– driving record– habits


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


Insured Car’s Year, Make, and Model

• Premiums are highest for– cars costly to repair– frequently stolen cars– luxury, sports cars– newer cars


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


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

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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


In Your Opinion

• Laws require car owners to carry auto insurance. Do you think this is a good idea? Why or why not?


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


Central Ideas of the Chapter

• Risk management is an important component in financial planning.

• Insurance is a tool that protects against certain financial losses.


Glossary of Key Terms

• 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.

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• 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.

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• 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.

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• 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 tax-advantaged savings account available to people enrolled in qualified High Deductible Health Plans (HDHPs).

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• 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.

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• 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.

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• 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.

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• 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.

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© goodheart-willcox co., inc. 10 insurance. © goodheart-willcox co., inc. chapter objectives...

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