Life and Health Insurance

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 policy - amount of insurance provided at death. Policy owner or policyholder. Beneficiary designated to receive the proceeds. Life insurance doesnt make sense without a spouse or dependents
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Table 9.1

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How Much Life Insurance Do You Need?

Priorities and goals
Crunch the numbersnetworth, 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

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

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Table 9.3

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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

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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 Incontestabilty 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

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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 cash-

value 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 care offered 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 9.5

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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 9.6

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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 thoseagainst the financial costs of Alzheimers, strokes, or chronic diseases.

Requires that insured cannot perform activities of daily living (ADLs)

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Table 9.7

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Long-Term Care Insurance

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 0 days 1 year.

Inflation Adjustment protected from inflation. Waiver of Premium insurance 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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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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