1. Foundations of Personal Finance Ch. 10

2. Foundations of Personal Finance Ch. 10
Insurance 2

3. 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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4. 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.

5. 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

6. Foundations of Personal Finance Ch. 10
Insurance Protection
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7. Insurance Protection 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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8. Insurance Protection 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

9. 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

10. 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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11. Foundations of Personal Finance Ch. 10
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?

12. 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

13. 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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14. 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

15. Health Maintenance Organizations
Foundations of Personal Finance Ch. 10
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

16. 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

17. 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

18. 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

19. 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?

20. Foundations of Personal Finance Ch. 10
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

21. 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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22. 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

23. 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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24. Coverage for Young Adults
Foundations of Personal Finance Ch. 10
Coverage for Young Adults
Young adults often go uninsured
With no insurance, a serious illness or injury can wipe out assets and create debt

25. 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

26. Foundations of Personal Finance Ch. 10
Choosing a Plan
Employees often have a choice of employer plans
Carefully review materials provided

27. 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?

28. 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?

29. 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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30. 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?

31. 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

32. Part A—Hospital Insurance
Pays for
inpatient care in hospitals and skilled nursing facilities
some home health care
some hospice care for people with terminal illnesses
A deductible must be met
Only covers a specified number of days

33. Part B—Medical Insurance
Pays for services including
doctors’ fees
outpatient hospital services
home health services
certain tests
A voluntary program; enrollees pay a monthly premium, deductibles, and coinsurance for certain services

34. Part C—Medicare Advantage
Foundations of Personal Finance Ch. 10
Part C—Medicare Advantage
Combines Parts A and B
Provided by private insurance companies
Can simplify payment and may cover drugs

35. Part D—Prescription Drug
Helps lower prescription drug prices
Private insurance companies provide a number of plans
Subscribers choose the one that best meets their needs

36. 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

37. 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

38. Children’s Health Insurance Program (CHIP)
Foundations of Personal Finance Ch. 10
Children’s Health Insurance Program (CHIP)
Government-provided health insurance coverage for children
Funded by taxes on tobacco products

39. 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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40. Disability Insurance 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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41. Foundations of Personal Finance Ch. 10
Disability Insurance
Important questions
What benefits are promised?
What is the waiting period?
How long are benefits available?
Can the policy be canceled by the insurer?

42. Workers’ Compensation
Foundations of Personal Finance Ch. 10
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

43. 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

44. Foundations of Personal Finance Ch. 10
In Your Opinion
Which type of insurance coverage do you think is the most important for young adults: life or disability? Why?

45. Term Life
Term life insurance provides protection for a limited or specific period of time
Advantage: costs less than other policies
Disadvantage: coverage ends after the specified term (you may be able to renew at a higher rate)

46. Whole Life
Whole life insurance provides lifetime protection while premiums are paid
Advantages: builds cash value; you may be able to borrow against the cash value at low interest rate or cash in the policy; premiums are fixed
Disadvantage: higher premiums

47. Limited Payment Policies
Offer lifetime protection although premiums are only paid for a certain number of years or until a certain age
Advantage: although premium payments stop, coverage continues
Disadvantage: premiums are higher than whole life policy

48. Variable Life Part of premiums are invested in a fund of your choosing
Advantages: policy’s face value and investment rise when fund does well; you are guaranteed a minimum face value
Disadvantage: may not offer the best of insurance or investment opportunities

49. Foundations of Personal Finance Ch. 10
Adjustable Life
Premiums, face value, and payment period can be adjusted
Advantage: flexibility
Disadvantage: need to monitor

50. Universal Life Type of adjustable insurance
Part of premium is put into savings and earns interest
Advantages: policyholder can make changes during policy’s life; earnings keep pace with current market rates; may lower taxes
Disadvantage: earnings drop with interest rates

51. Endowment Insurance
Endowment insurance pays out the cash value of the policy after a certain number of years to either the purchaser or beneficiaries
Advantage: part of premium builds a cash value fund
Disadvantages: high premiums and possible tax consequences

52. 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

53. Foundations of Personal Finance Ch. 10
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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54. 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

55. 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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56. 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

57. Choosing a Company, Agent, and Policy
Foundations of Personal Finance Ch. 10
Choosing a Company, Agent, and Policy
Do some research and meet with representatives of the companies you are considering
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58. Choosing a Company, Agent, and Policy
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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59. Choosing a Company, Agent, and Policy
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

60. Foundations of Personal Finance Ch. 10
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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61. 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

62. 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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63. 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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64. 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

65. Cost of Home Insurance Type and amount of coverage Size of deductible
Risk factors where you live
The insurance company
Opportunity for discounts

66. 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

67. 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

68. 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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69. Types of Auto Insurance
Foundations of Personal Finance Ch. 10
Types of Auto Insurance
Personal injury protection covers medical expenses from an accident regardless of who is at fault
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70. Types of Auto Insurance
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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71. Types of Auto Insurance
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

72. Foundations of Personal Finance Ch. 10
Auto Insurance Costs
Depend on driver classification:
age
gender
marital status
driving record
habits

73. 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

74. Insured Car’s Year, Make, and Model
Foundations of Personal Finance Ch. 10
Insured Car’s Year, Make, and Model
Premiums are highest for
cars costly to repair
frequently stolen cars
luxury, sports cars
newer cars

75. 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

76. 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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77. 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

78. Foundations of Personal Finance Ch. 10
In Your Opinion
Laws require car owners to carry auto insurance. Do you think this is a good idea? Why or why not?

79. 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

80. Central Ideas of the Chapter
Risk management is an important component in financial planning.
Insurance is a tool that protects against certain financial losses.

81. Glossary of Key Terms
Back
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.

82. Glossary of Key Terms
Back
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.

83. Glossary of Key Terms
Back
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.

84. Glossary of Key Terms
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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).

85. Glossary of Key Terms
Back
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.

86. Glossary of Key Terms
Back
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.

87. Glossary of Key Terms
Back
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.

88. Glossary of Key Terms
Back
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.