chapter 5 health, homeowner's, automobile, and liability insurance: structure, concepts, and...

CHAPTER 5

Health, Homeowner's, Automobile, and Liability

Insurance:

Structure, Concepts,

and Planning

Chapter 5: Non-life Insurances

1

INTRODUCTION

In buying property and casualty insurance:

Insure against significant risks and bear small risks

Compare rates before making a commitment

Reduce risks through preventive measures

Review coverage periodically


2

GENERAL PRINCIPLES

INDEMNITY AND LOSS SHARING

Insurer indemnifies insured for actual loss, not for a profit

Policyholder shares in the loss with the insurer

INSURANCE AGAINST SIGNIFICANT RISKS

Avoid wasting valuable resources by insuring against small losses

Manipulate insurance deductibles to reduce insurance cost


3

GENERAL PRINCIPLES

SHOPPING FOR INSURANCE

Select a policy that provides all desired coverages at a reasonable price

LOSS CONTROL THROUGH PREVENTIVE MEASURES

Lower insurance costs by reducing potential hazards

ORGANIZATION OF PERSONAL RECORDS


4

Difficulties in P&C

Special skills required to determine the amount of protection needed

Money is diverted from other needs and savings so not buying the correct amount is very possible

Challenge is to not get emotional Shopping around can be beneficial


5

Health Insurance

Who is covered? Government covers 33% Employers cover 43% Self-insurers comprise 7%

20% of the population are uninsured


6

HEALTH INSURANCE INTRODUCTION

NEED FOR HEALTH INSURANCE

SOURCES OF HEALTHCARE

BLUE CROSS and BLUE SHIELD MANAGED CARE ORGANIZATIONS

Health Maintenance Organizations (HMOs) Preferred Provider Organizations (PPOs) Exclusive Provider Organizations (EPOs) Point of Service (POS) Plans

SELF-FUNDED EMPLOYEE HEALTH BENEFITS COMMERCIAL INSURANCE COMPANIES GOVERNMENT HEALTHCARE INSURANCE


7

TYPES OF HEALTH INSURANCE

TYPES OF HEALTH INSURANCE Hospital Insurance

Hospitalization Insurance Expense reimbursement – INS pays a flat rate Service contracts – pay actual costs

Hospital Indemnity Insurance $XX maximum paid each day to policyholder; they make up the

difference

Hospital-service-incurred Plans Pays directly to hospital – Blue Cross type plans

Surgical Insurance Pays $XX for certain procedures

Medical Expense Insurance Doctors ETC.


8

TYPES OF HEALTH INSURANCE

TYPES OF HEALTH INSURANCE Major Medical Expense Insurance

Pays charges that other policies may not

Maximum of 1 – 2 million payout per lifetime

Comprehensive Health Insurance Combines all into one package

Not as popular as it used to be

Supplemental Health Insurance Dental Expense Insurance Vision Insurance Prescription Drug Insurance


9

HEALTH INSURANCE CONTRACT

Covered benefits Excluded conditions and pre-

existing conditions No longer legal

Loss sharing Deductible and fixed co-pay Coinsurance Stop loss Lifetime cap

Chapter 4: Life Insurance

10

HEALTH INSURANCE CONTRACT

Contract provisions Grace period and reinstatement period Notice of claims Change of occupation and illegal

occupation Intoxicants and narcotics Coordination of benefits

Chapter 4: Life Insurance

11

Summary of Health Insurance Deductibles and Coinsurance


12

Bill = $20,000, $500 deductible, 80-20 coinsurance, loss limit $5,000

20,000

- 500

19,500

X 20%

3,900 patient

15,600 insurance

Summary of Health Insurance Deductibles and Coinsurance


13

Bill = $80,000, $500 deductible, 80-20 coinsurance, loss limit $5,000

80,000

- 500

79,500

X 20%

15,900

5,000 patient

74,500 insurance

GROUP HEALTH INSURANCE Overview

Generally cheaper than individual policy

Usually more comprehensive

Major Disadvantage: Change of employment means loss of group coverage

New laws have reduced some of this pain

“portable”

Important Developments Cobra – remain under former employer’s plan until new plan takes

effect Very expensive

Only person with pre-existing illness really interested

HIPAA – protects insurability If insured over past 24 months the new company’s policy cannot refuse or

impose pre-existing illness restrictions

NMHPA – new born and mother protection act

WHCRA – women's healthcare and cancer act Covers reconstruction treatment after mastectomy


14 of 37

CHARACTERISTICS OF GROUP HEALTHCARE POLICIES

NO PHYSICAL EXAM NECESSARY

GROUP RATES GENERALLY CHEAPER THAN INDIVIDUAL POLICY

GENERALLY BROAD COVERAGE

Major Disadvantage: Change of employment means loss of group coverage


15

Government Health Care Insurance

Federal Health Insurance Programs: For People Age 65 or Older

Medicare and Medicaid

Medicare’s Hospital Benefits (Part A):

Financed by SS Payroll Taxes

Medicare’s Medical Benefits (Part B) Optional:

Financed by General Tax Revenue & Paid Premiums

Medicare Advantage (Part C)

Prescription Drugs Coverage (Part D)

Gaps in Medicare Significant gaps exist in Medicare’s coverage

Medicare Act Creates Health Savings Accounts Prescription Drug Benefits (Medicare Act of 2003)

Medigap or Medicare Supplement Policies


16

Medicare and Gaps

Table 5-2 Medicare and the Gaps


17

MediGap Coverages

Table 5-3 Medicare and Medical Supplemental Insurance


18

TAXATION OF HEALTH BENEFITS

BENEFITS ARE GENERALLY TAX FREE

INDIVIDUAL PREMIUM PAYMENTS ARE TAX DEDUCTIBLE (subject to AGI floor)

EMPLOYER HEALTH BENEFITS ARE TAX FREE TO EMPLOYEE

EMPLOYER PREMIUM PAYMENT IS A DEDUCTIBLE BUSINESS EXPENSE


19

IDEAL HEALTH INSURANCE COMPANY

Maintains high loss ratio

Enjoys one of two highest ratings from Best's Insurance Report

Offers efficient, fair, and courteous claim services

Prohibits cancellation of policy

Maintains a policy of not raising premiums based on claims


20

IDEAL HEALTH INSURANCE PLAN

Step 1. Select Appropriate Plan Step 2. Analyze Coverage Step 3. Examine Costs Step 4. Check Quality of Plans Step 5. Convenience Factor


21

DISABILITY INCOME INSURANCE

Basic Needs For some the chance of becoming disabled is greater then the

chance of death Long-term inability to earn a wage

Only 30% of SS disability claims are approved Workers comp only covers from on the job accidents

Types of Disability Insurance Short-term Long-term

Waiting Period Time a person must wait until payments begin Like a deductible concept

Short-term usually 0 – 30 days

Long-term 1, 3, 6 months (3 months most popular


22

DISABILITY INCOME INSURANCE

Definition of Disability Buyer beware

Categories

Payment if cannot perform ANY occupation

Payment if cannot perform the occupation you were trained for

Partial disability – usually if you earn over 55% of previous income

Residual disability – can make up the difference of lost income

Useful to have guaranteed insurability to buy additional coverage later w/o proof of insurability

Premiums not deductible from income but the benefits are not taxable

Integration with Social Security Pays a certain limit less whatever SS pays

Be careful because of difficulties with getting SS benefits


23

TAXATION OF DISABILITY BENEFITS

INDIVIDUAL POLICY Benefits are tax free to the person, if he or she

paid the premiums Premium payments for disability insurance is not

a deductible item on an individual tax return

GROUP POLICY Benefits are taxable to the employee, unless the

premium was paid with after-tax employee dollars

Employer premium payments are considered a gross income item to the employee

The employer can write off premium payments as a business expense


24

Features of Good Disability Policy

Table 5-4 Features of a Good Disability Policy


25

Disability Insurance Need

Table 5-5 Disability Insurance Need


26

LONG-TERM CARE INSURANCE Overview

Covers expenses of care should a person be unable to take care of themselves

Normally nursing home care Not necessarily elderly

Best policies cover in home care

NEED FOR LONG-TERM CARE INSURANCE

COST OF CARE

LOSS SHARING

Elimination or waiting period

Daily benefit amount

BENEFIT PERIOD


27

DISABILITY INSURANCE CONTRACT AND RIDERS

COVERED SERVICES BENEFIT TRIGGER

Unable to perform 2 of 6 ADLs or cognitive impairment Physician certifies condition Condition expected to last ≥ 90 days

Riders Shared cost Inflation protection Waiver of elimination period for home care Waiver of premium Guaranteed renewability


28

LONG-TERM CARE SERVICES VARIETY OF CARE AVAILABLE

Skilled nursing care Intermediate nursing care Custodial care Home care Assisted living Life care facilities Adult day care Pre-hospitalization Alzheimer’s coverage Etc.


29

TAXATION OF LONG-TERM CARE BENEFITS

“QUALIFIED” POLICY BENEFITS ARE TAX FREE UP TO DAILY BENEFIT LIMIT

INDIVIDUAL PREMIUM PAYMENTS ARE TAX DEDUCTIBLE (subject to AGI floor)

EMPLOYER HEALTH BENEFITS ARE TAX FREE TO EMPLOYEE

EMPLOYER PREMIUM PAYMENT IS A DEDUCTIBLE BUSINESS EXPENSE


30

HOMEOWNER'S POLICY

INTRODUCTION Elements of homeowner's (HO) policy coverage

are:

On the house

For personal property

Against homeowner's liability

For medical payments for bodily injury or property damage caused to other people or property

Standard HO policy is a package deal


31

LOSS SHARING

Coinsurance Rule of 80

Deductibles Step 1 – calculate required coverage

subject to “Rule of 80”

Step 2 – calculate the recovery percentage

Step 3 – calculate the loss recovery (loss x recovery percentage less the deductible)

Amount of Insurance on Home


32

Forms of Homeowner’s Policy

HO Policy comes in: Broad Form

Fire and lightening

Wharves Windstorms, hail, riot , vehicles, smoke

Falling objects

Weight of ice and snow

volcanoes

Special Form Earthquakes

Floods


33

Forms of Homeowner’s Policy

Types of HO policies:

HO-2, Broad Form

HO-3, Special Form

HO-4, Contents Broad Form

HO-5, Comprehensive Form

HO-6, Coverage for Condo Owners

HO-8, For Older Homes


34

Types of Homeowner Coverages

Policies differ due to varying coverages:

Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use Coverage E: Personal Liability Coverage F: Medical Payments to

Others


35

Forms of Homeowner’s Policies

Table 5-7 Forms of Homeowner’s Policies


36

Forms of Homeowner’s Policies (contd.)

Table 5-7 Forms of Homeowner’s Policies


37

Homeowner Coverages


38

POLICY PROVISIONS

Home Definition of insured Insured locations

Unscheduled Personal Property

Market value Actual value versus

replacement cost


39

POLICY ENDORSEMENTS

Inflation guard Personal property replacement cost Scheduled personal property floater Additional living expense coverage Backup sewers and drains Identity restoration Home business coverage Business ordinance


40

SPECIALTY FORMS OF INSURANCE

Special Insurance Flood insurance Earthquake insurance Hurricane insurance Private mortgage insurance Home office protection Insurance on watercraft Title insurance Crime insurance High valued dwelling


41

Form A: Fire


42

Form B: Homeowner’s Policy Status


43

AUTOMOBILE INSURANCE

INTRODUCTION

Damages resulting from auto accident:

Property Damage (Including Damage to Automobile) Bodily Injury (Including Death)

Major Components of Personal Auto Policy:

Liability Coverage Medical Payments Uninsured Motorists Coverage for Damage to Insured's Auto Duties after Accident or Loss General Provisions


44

Summary of Basic Automobile Coverage

Table 5-10 Summary of Basic Automobile Coverage


45

BASIC COVERAGES OF PERSONAL AUTO POLICY Liability Coverage (Part A)

Bodily Injury Liability

Property Damage Liability

Medical Payments (Part B) Uninsured Motorists (Part C) Coverage for Damage to Insured's Auto (Part D)

Comprehensive Physical Damage

Collision/Overturn

Duties after Accident or Loss (Part E) General Provisions (Part F) Factors Affecting Premiums Miscellaneous Considerations

Cost of Auto Insurance

Loopholes in Auto Insurance


46

NO-FAULT INSURANCE

Elements of Basic No-fault Plan:

Accident victims’ losses should be covered by their insurance company

Right to sue for additional compensation is significantly limited

No-fault insurance is mandatory Insurance companies must provide safeguards

against cancellation or non-renewal

Some states have adopted add-on no-fault insurance

Summary: Types of Insurance


47

Types of Insurances


48

Types of Insurance Items/Events Covered

Liability Injuries to others and damage to their property

Medical Payments Medical and/or funeral expenses incurredbecause of an auto accident, regardless ofwho is at fault

Uninsured andUnderinsuredMotorist

Expenses (liability and/or physical damage)incurred when the insured is the victim of an accident involving an uninsured vehicle,or a vehicle that has insufficient coverage

Physical Damage Damage to the insured vehicle from anaccident (collision) or causes such as theft, fire, or vandalism (comprehensive)

UMBRELLA LIABILITY INSURANCE

INTRODUCTION

NEED FOR LIABILITY INSURANCE

GENERAL CHARACTERISTICS

Stacks on top of underlying liability coverage (auto and homeowners)

INSURANCE COVERS Cost of legal defense Liability judgments


49

MISCELLANEOUS LIABILITYINSURANCE COVERAGE

DIRECTOR'S LIABILITY INSURANCE

PROFESSIONAL LIABILITY INSURANCE

MALPRACTICE INSURANCE


50

chapter 5 health, homeowner's, automobile, and liability insurance: structure, concepts, and...

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casualty insurance

insurance costchapter

liability insurance

insurance deductibles

actual loss

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loss sharinginsurer

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