1. 1 Chapter 9 - Insurance Purpose – protect against catastrophes Risk pooling and diversification Policy – a contract with an insurance company –Losses covered, policy cost, beneficiaries –Charge is called the premium and based on probability of loss –Face amount – maximum amount paid for loss

2. 2 Life Insurance Purpose – provide for dependents, replace lost income, pay other expenses How much? Needs and priorities. –Start with net worth – the higher, the less insurance needed –Earnings multiple-how many times salary? –Needs approach – to maintain lifestyle

3. 3 Should You Buy Life Insurance Not necessary if –Single with no dependents –Double income couple, no children –Retired Consider if –Have children –Married, single-income –If you own your own business

4. 4 Insurance Terminology Insurer- assumes responsibility for losses Policy – contract policyholder/ insurer Premium – fee to insurer to accept risk Policy owner – grants privileges to holder Beneficiary – receives cash from life ins Insured – life or actions covered by policy Face amount/indemnity – max amount

5. 5 Life Insurance Premiums Based on mortality assumption (when average policyholder in a group will die and what company earns on premiums before losses paid out). –Calculated by actuaries, statisticians specializing in probabilities –Review health history and lifestyle

6. 6 Types of Life Insurance Term insurance "Pure insurance" – based on probability that you will die based on age, health, occupation. Covers only a specified period Cash Value Insurance –Adds a savings feature to term insurance –Accumulated savings added to face amount

7. 7 Term Insurance Primary advantage – low cost Disadvantage – costs rise if policy extended –Contract covers 1, 5, 10, 20 or 30 years Variations –May be renewable regardless of health, decreasing term, credit life, convertible term

8. 8 Cash-Value Insurance Provides death benefit plus cash-value (money the policyholder receives if policy is terminated). –Whole life insurance – premiums fixed but you usually pay for the rest of your life –Cash-value may be used to buy paid-up insurance; can be borrowed without terminating coverage or added to indemnity

9. 9 Cash-Value Versus Term Term insurance is cheaper –More affordable when you need insurance most Cash-value – permanent insurance with savings feature –Grows on tax-deferred basis

10. 10 Contract Clauses Beneficiary and contingent beneficiaries Grace period Loan clause Nonforfeiture Suicide clause Incontestability

11. 11 Buying Life Insurance Most sold on a commission basis –Determine coverage based on needs, not the sales pitch; use Internet for term quotes No federal guarantees but some states offer Ratings – A. M. Best is best known Select agent you feel comfortable with

12. 12 Health Coverage Types Basic – combination of hospital, surgical and physician expense Major medical – covers catastrophic costs beyond basic coverage Most policies through employers –If leave, COBRA protects for 18 months –You pay premium but less than private policy

13. 13 Basic Choices Fee-for-service – traditional indemnity plan –Requires deductible, co-insurance up to limit –More expensive but provides choices of doctors Managed care – provides needed care but only from specified sources –Health Maintenance Organizations (HMO's) Various types; use "gatekeepers" to control expenses –Preferred Provider Organization (PPO) Insurer/employer negotiate cost of services

14. 14

15. 15 Government Plans Medicare ( you are not responsible for details) Workers' Compensation – payment for work-related injuries Medical reimbursement – use pre-tax earnings to pay medical expenses COBRA – continues coverage for a period Opting out – cash payment if not needed

16. 16

17. 17 Finding the Right Plan Need to know –Who is covered? –Terms of payment – deductible, coinsurance –Pre-existing illness –Guaranteed renewability –Exclusions – what's not covered? Key point: find insurance when healthy

18. 18 Disability Insurance Provides income if unable to work –Occupation affects premium –Usually through employer but self- employed? Issues: –Disability definition– what if return to work? –Benefit duration – short or long-term, waiting period and retraining coverage

19. 19 Long-Term Care Long-term nursing home care –Life expectancy increasing –Can't live on own (stroke, Alzheimer's) Unable to perform "activities of daily living" (ADL) Benefit period and waiting period Inflation adjustment – extremely important but major cost impact