Professor Payne Finance 4100 Learning Objectives Understand the importance of insurance Determine your life insurance needs and design a life insurance program Describe the major types of coverage available and the typical provisions that are included ID: 641904
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Chapter 9
Life and Health Insurance
Professor Payne, Finance 4100Slide2
Learning Objectives
Understand the importance of insurance.
Determine your life insurance needs and design a life insurance program.
Describe the major types of coverage available and the typical provisions that are included.
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Learning Objectives
Design a health-care insurance program and understand what provisions are important to you.
Describe disability insurance and the choices available to you.
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 deaths—most of us do not seek out a life insurance policy.
When you consider your need for insurance, need to keep in mind its purpose.4Slide5
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. 5Slide6
The Importance of Insurance
Health care is expensive because:
No incentive to economize.
Medical care is extremely sophisticated.High malpractice insurance costs.6Slide7
What About Those With No Insurance?
Patient Protection and Affordable Care Act
—intended to provide health insurance to those who are currently uninsured
As medical costs rise, so does your risk of having your financial roof cave in due to health-related issues7Slide8
Do You Need Life Insurance?
Risk pooling—through insurance, sharing financial consequences of risk
Premium
ActuariesFace amount or face of policy—amount of insurance provided at deathPolicy owner or policyholderBeneficiary—designated to receive the proceedsLife insurance doesn’t make sense without a spouse/partner or dependents
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How Much Life Insurance
Do You Need?
Priorities and goals
Crunch the numbers—net worth, inflation and future earningsEarnings Multiple ApproachNeeds 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 (usually between 5 and 15)Earnings multiple depends on number of years you need the lost income and rate of return
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Determine the needs of a family after the death of the breadwinner
Determine the needs of a family after the death of the breadwinner
Immediate needs at time of death
Debt elimination fundsImmediate transitional fundsDependency expensesSpousal life incomeEducational 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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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 insuranceCredit and mortgage group life insuranceConvertible 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.
Permanent—pay the premiums and eventually you will get paid.3 basic types:Whole LifeUniversal LifeVariable 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-value—policyholder’s savingsNonforfeiture Right—gives the policyholder the right to choose the policy’s 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
Flexible—premiums can varyMortality charge or term insurance, cash value or savings, administrative expensesMay not end up with the anticipated amount of savings
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Term Versus Cash-Value
Life Insurance
For most individuals, term insurance is the better alternative:
Low costHigh cash-value premiums can lead to less coverage than you actually needCash-value insurance has tax advantages.Growth of the cash-value is tax-deferredLife 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 PeriodLoan ClauseNonforfeiture 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 IndemnityGuaranteed Insurability RiderCost-of-Living Adjustment (COLA) RiderLiving 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 SettlementInstallment-Payments SettlementLife Annuity SettlementStraight Life AnnuityCertain Period AnnuityRefund 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 commissionsBe aware of agent’s professional designationList of prospects from good companiesInterview the agents and get a quote
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Buying Life Insurance
Comparing Costs
Traditional Net Cost (TNC) method—sums 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 money29Slide30
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 agentMore complicated to compare cash-value policies—different features and assumptionsStill get quotes on the Web for different cash-value policies
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Health Insurance
Patient Protection and Affordable Care Act of 2010 ensures most Americans have health insurance
Employer-sponsored health care coverage
Your choices are limited to what employer offersAdditional coverage available for additional paymentsCan make changes on an annual basisHealth insurance exchange
Contain range of private plans to choose from
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Health-Care Reform
Signed into law in 2010 by President Obama—commonly referred to as the Affordable Care Act
Provides new consumer protections
Improves quality and lowers costsIncreases access to affordable careHolds insurance companies accountable32Slide33
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Basic Health Insurance
Most health insurance contains a combination of hospital, surgical, and physician expense insurance
Major medical expense insurance covers expenses not covered by basic health insurance
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Dental and Eye Insurance
Used for minor and regular dental, eye examinations, glasses, and contact lenses
Don’t buy if employer doesn’t provide it
Regular expenses that can be planned35Slide36
Basic Health Care Choices
Traditional fee-for-service or indemnity plans—reimbursed for medical expenditures and choice of doctor
Managed health care or prepaid care plans—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 provisionCo-payment or deductibleManaged health care—offered by health management organization (HMO)Receive all health care at one locationVisit fee or co-payment
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Private Health Care Plans
Managed Health Care: HMOs
Individual practice association plan (IPA)
Group practice planPoint-of-service planHMOs are cost efficientService can be too quick, waits long
Lack of choice can be too restricting
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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 HMODoctors and hospitals agree to pricing systemAllows for health at a discount
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Private Health Care Plans
Group Versus Individual Health Insurance
Group health insurance—sold with no medical exam required to a specific group of individuals who are associated for some purpose– usually employees
Individual insurance policy—tailor-made for you, reflects age and health, after medical exam41Slide42
Essential Benefits
The Affordable Care Act requires that certain essential benefits be covered:
Ambulatory patient services
Emergency servicesHospitalizationMaternity and newborn careMental health and substance abuse disorder servicesPrescription drugsLaboratory servicesPreventative and wellness services
Pediatric services
Rehabilitative and
habilitative
services and devices
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Government-Sponsored
Health Care Plans
State Plans—provide for work-related accidents and illness
Worker’s CompensationFederal Plans—Medicare, Medicaid44Slide45
Medicare
Medicare Part A—Hospital Insurance
Medicare Part B—Supplemental Medical Insurance
Medicare Part C—Medicare Advantage PlansMedicare Part D—Medicare Prescription Drug CoverageMedigap Plans
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Medicaid
Government medical insurance plan for needy families—as well as aged, blind, and disabled
Joint federal and state program
Some covered by Medicaid also covered by MedicareLimited in scope
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Controlling Health Care Costs
Flexible Spending Accounts
Allows pre-tax dollars to be used for qualified health-care and child care expenses
Health Savings Accounts (HSAs)Pay for health care expenses tax-freeCOBRA and Changing JobsContinuation of health coverage
Choosing No Coverage—or “Opting Out”
Will be penalized
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What to Look for in a Health Insurance Plan
Who’s Covered?
Terms of Payment
Exclusions49Slide50
Choosing an Insurance Plan
Health Insurance Marketplace categorizes plans into 5 categories:
Bronze: Your plan pays 60%. You pay 40%.
Silver: Your plan pays 70%. You pay 30%.Gold: Your plan pays 80%. You pay 20%Platinum: Your plan pays 90%. You pay 10%.Catastrophic: Coverage option if you are under 30 or have very low income.
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Disability Insurance
Health insurance that provides payments to the insured in the event that income is interrupted by illness, sickness, or accident
Anyone who relies on income from a job needs disability insurance
A 30-year-old has a 47% chance of incurring a disability that would cause 90 or more missed work daysExpensive
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Sources of Disability Insurance
Employer
Social Security
Worker’s compensationIndividual policy52Slide53
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Disability Features That Make Sense
Definition of Disability
Residual or Partial Payments
Benefit DurationWaiting (or Elimination) PeriodWaiver of PremiumNoncancellableRehabilitation 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 Alzheimer’s, strokes, or chronic diseases
Requires that insured cannot perform “activities of daily living” (ADLs)55Slide56
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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 to 1 yearInflation Adjustment—protected from inflationWaiver of Premium—insurance stays in force while receiving benefits58Slide59
Summary
Life insurance controls the financial effect on your family when you die.
There are two types of life insurance—term and cash-value.
Basic health insurance provides combination of hospital, surgical, and physician expense insurance. 59Slide60
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.60Slide61
End of Chapter 9 Slides
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