insurance basics for financial educators
TRANSCRIPT
Barbara O’Neill, Ph.D., CFP® Rutgers Cooperative Extension
Insurance is a complex topic: lots of types and terminology and personal decisions (e.g., amount of coverage, deductible, etc.)
Insurance (along with saving/investing)is a topic that many personal finance teachers feel least confident teaching: http://afcpe.org/assets/pdf/vol20_2way_holden.pdf
Basic insurance terms
Auto insurance
Homeowners and renters insurance
Umbrella insurance
Life insurance
Health insurance
Disability insurance
Long-term care insurance
Damage to car in accident
Loss of home and/or possessions
Loss of income due to disability
Loss of a household earner’s income
Loss of a homemaker’s services
Large medical bills for disease or injury
A court judgment of liability for damages
Do nothing and hope for the best
Risk avoidance
Risk reduction
Risk acceptance
Risk transfer (insurance)
Risk Avoidance
Risk Shifting
Risk Assumption
Risk Reduction Ways to
Manage Risk
Don’t stop at a convenience store in a bad part of town after midnight
Wear seatbelts
Install an alarm system
Buy Insurance
Self Insurance
Personal Risks Loss of income or life Illness and disability
Property Risks Losses to property Caused by perils such as fire or theft
Liability Risks Losses caused by negligence Resulting in injury or property damage to others
Insurance Policy – Contract between a person buying insurance (the insured) and an insurance company (the insurer).
Insurance consists of two basic elements:
Reduction of risk
Sharing of losses
Law of Large Numbers – As the number of members in a group increases, predictions about the group’s behavior become increasingly more accurate
Insurable Interest – When a person or organization stands to suffer a financial loss from a specific risk.
Example #1: The person that lives in an house that is insured
Example #2: The spouse of person who is covered by life insurance
Protect against risk by paying a premium
“Large Loss Principle” (size of loss matters)
Major “large-loss” risks:
Loss of income due to disability
Loss of a household earner’s income
Destruction of one’s home (fire, flood, etc.)
Liability losses due to a court judgment
Large medical expenses (e.g., cancer treatment)
Not following the “large loss principle”
Unfamiliarity with employer-provided (and public) insurance benefits
Lack of disability insurance
Lack of adequate liability insurance
Not checking credit rating of insurance companies
Declarations page
Insuring Agreements
Exclusions
Endorsements and Riders
Benefit coordination clauses
Deductible
Elimination period
Co-payment
Co-insurance
Policy limit
Credit insurance (life, disability, unemployment)
Life insurance for children
Cancer insurance
“Double Indemnity” insurance riders
Hospital indemnity policies
Flight insurance
Car rental collision-damage waivers
Potential property losses
Home, automobiles, furniture, clothing, personal belongings
Risk #1: Physical damage caused by perils (e.g., fire)
Risk #2: Loss or damage caused by criminal behavior
Liability = legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable)
Liability due to negligence
Failure to take ordinary and reasonable care
Vicarious Liability
You are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window
Vehicle Type Year, make, model, and theft rate
Rating Territory Accident, auto theft, and vandalism rates in the area where you live
Driver Classification Age, sex, marital status, credit history, driving record, driving habits
Assigned risk pool for those unable to obtain insurance
Reducing Automobile Insurance Premiums Compare Companies Premium Discounts
Establish and maintain a good driving record
Install security devices such as a car alarm
Multiple policies with the same company
Larger deductibles
Medical Payments Coverage Covers the cost of health care for persons injured in your automobile, including yourself Also covers you or family members injured while riding in or hit by another vehicle
Uninsured Motorist’s Protection Protection against the risk of getting into an accident with
someone with no insurance
Underinsured Motorist’s Coverage Pays costs if your car is hit by a person who doesn’t have
enough insurance to cover the damage they did to you and your car
Source: Personal Finance by Garman and Forgue, Houghton-Mifflin
Property Damage Liability
Covers damage to the other person’s car when you are at fault.
Includes damage to such things as street signs, telephone poles, and buildings
Example: During a snow storm you accidentally slide your vehicle into a neighbor’s mailbox. This coverage would pay for repair or replacement of the mailbox
Pays for damage to your automobile, regardless of who is at fault.
If you are not at fault, your insurer will try to collect
from the other driver’s property damage liability first. Coverage limited to the retail value of your vehicle
Covers damage to your vehicle not caused by a collision, such as: Fire, theft, or vandalism
Glass breakage
Hail, sand, or wind storm
Falling objects or hitting an animal
Damage or destruction of the building in which you live, and other structures on the property Garage, tool shed, trees, and shrubs
Additional Living Expenses May be limited to 20-30% of property value
May be limited to 6-9 months
Personal Property Furniture, appliances and clothing
Household inventory advisable
Usually 55%, 70%, or 75% of property value
Limits on certain items such as jewelry
Personal Liability and Related Coverage Covers injuries to others on property (e.g., fall on ice)
Specialized Coverage Earthquake endorsement
Flood coverage
Location of Home (e.g., rural vs. urban)
Type of Structure (e.g., brick vs. wood)
Coverage Amount and Policy type
Home Insurance Discounts Alarm system
Smoke detectors
If you insure car with the same company
Company Differences Compare costs and coverage
Source: Personal Finance by Garman and Forgue, Houghton-Mifflin
Mortality Tables-provide odds on your dying, based on your age and sex.
Premium is based on life expectancy and
projections for payouts for persons who die (called actuarial tables) Older people pay more because they will die sooner
Face Amount- the dollar value of protection listed in the policy and amount used to calculate the premium (e.g., $100,000)
Group Term Insurance- issued to people as
members of a group rather than as individuals
Do you have people you need to protect financially?
Will your death cause them financial hardship?
Example: Parents who co-signed private student
loans
Are you single and have a lot of debt?
Do you have parents, relatives, or a charity that
you want to support?
Income-Replacement Needs – The financial losses resulting from premature death are lost income and employee benefits
Major Expenses- Two examples are a mortgage and children’s college expenses
Final Expenses – One-time medical and funeral
expenses occurring just prior to or after a death. Readjustment-Period Needs – Allows surviving
spouse/family members to pay ongoing expenses
https://www.youtube.com/watch?v=ZKHftmGWoEM
The Easy Method 70% of your salary for seven years while your family adjusts Assumes typical family
The DINK Method Dual income, no kids Assumes spouse earnings will continue Cover funeral + ½ debts
The “Family Need” Method More thorough than the first three methods Considers employer provided insurance, Social Security
benefits, income and assets
Research insurance company ratings by major rating firms:
A. M. Best
Standard and Poor’s
Duff & Phelps
Moody’s
Weiss Research
Talk to friends, colleagues, or advisors
Online premium quote services
2 Types of Life Insurance Companies
Type of Company Owned by
Stock life Insurance Shareholders
Mutual life insurance Policyholders
Term Life
Protection for a specified period of time
At the end of term (or if you stop paying premiums), coverage stops
Types:
Renewable Term- can renew; higher premium charged
Multiyear Level Term- same premium for set period
Conversion Term- allows change to permanent policy
Decreasing Term- face value decreases over time
Straight-Life or Whole-Life Insurance Pay the premium as long as you live Accumulates a cash value you can borrow against Look carefully at the rate of return on your money
Types: Limited Payment Policy You pay premiums for a stipulated period Policy then “paid up” and you are insured for life
Variable Life Policy- Fixed premiums; investment accounts
Adjustable Life Policy- Can change coverage with needs
Universal Life- Can change premium, time period, benefit
Source: Personal Finance by Garman and Forgue, Houghton-Mifflin
Health Care Plan- generic name for any program that pays or provides reimbursement for health care expenses
Group Health Care Plan – health coverage sold collectively to an entire group of persons rather than to individuals
Open Enrollment Period – during this time, you can begin or make changes in coverage or switch among alternative plans Requirements are generally waived for family
changes (e.g., birth of a child, adoption, marriage)
Employers
Private Market (Individual/Family Policy)
Government-Facilitated Exchanges
Government Programs
Group Plans:
Covers most individuals
Usually employer sponsored (also unions, trade groups)
Employer pays part or most of cost
Coordination of Benefits: combine benefits from >1 plan Benefits received from all sources limited to 100%
of allowable medical expenses
Married couples/partners need to consider
Group Health Insurance
Do You Understand Health Insurance?
Which of the following describes an (in-network) Out-of-Pocket Maximum? Assume that all the responses refer to in-network expenses.
After meeting the out-of-pocket maximum, all medical expenses are covered 100%
After meeting the in-network out-of-pocket maximum, copays must still be paid, but all other medical expenses are covered 100%
After meeting the out-of-pocket maximum, you must pay 100% of your medical expenses
Which of the following best describes Coinsurance?
A specified dollar amount you pay for a specific service
The total amount you are required to pay until you reach your deductible
The percent of the cost of medical services that the insurer pays
The amount the employer contributes to paying for your health premium
Which of the following best describes a Copayment (Copay)?
A specific dollar amount you pay for a specific service
A specific dollar amount your insurer pays for a specific service
A fixed percent of the cost of a procedure that you have to pay (insurer pays the remainder)
The amount your employer contributes to paying for your health premium
Which best describes a Deductible?
An amount deducted from your paycheck to pay for your insurance premium
The amount deducted (covered) out of your total yearly medical expenses
The amount you pay before your insurance company pays benefits
The amount you pay before your health expenses are covered in full
Qualified Health Plans in the Marketplace must cover:
Ambulatory patient services Maternity and newborn care
Emergency services Prescription drugs
Mental health and substance use disorder services
Laboratory services
Rehabilitative and habilitative services and devices
Chronic disease management
Preventive and wellness services Pediatric services, including oral and vision care
• 4 Levels of Coverage – “The Metals”: Bronze, Silver, Gold, and Platinum • Each has a different value for level of coverage • Bronze: 60%. Silver: 70%. Gold: 80%. Platinum: 90% (Refers
to adequacy values: how much plan vs. insured pays) • Any costs not covered by the plan are paid by individuals
through deductibles, co-pays, co-insurance (not including monthly premium)
• Each plan level must cover the same set of minimum essential health benefits • What differs is amount of cost-sharing required • Example: The bronze plan will have the least generous
coverage (60%) with more out-of-pocket costs
http://www.healthcare.gov for more information
Employer- based insurance is deemed affordable if
the annual premium for a self-only plan (not a family
plan) costs less than 9.5% of a person’s annual
household gross income.
Example: < $3,325 with a $35,000 gross income
Insurance is deemed adequate if it is a 60/40 plan.
No more than 40% of total health care costs in a year
would be expected to be paid by the average person
insured in this type of plan.
Example: No > $4,000 paid by an insured person
with $10,000 of total health care expenses
Benefits Premier Plan Standard Plan
In Network Deductible $500 / $1,000 $1,000 / $2,000
Out of Network Deductible $1,000 / $2,000 $1,500 / $3,000
In – Network Co-Pay per Office Visit Co-insurance
$20 PCP/ $40 Specialist 90% after deductible
$30 PCP /$50 Specialist 80% after deductible
Out of Network Co-insurance 70% after deductible 60% after deductible
47
Tier 1
Tier 2
Tier 3
RETAIL
$10 Co-pay 30 Day Supply
$30 Co-pay 30 Day Supply
$50 Co-pay 30 Day Supply
MAIL ORDER
$20 Co-pay 90 Day Supply
$60 Co-pay 90 Day Supply
$100 Co-pay 90 Day Supply
https://www.extension.umd.edu/sites/default/files/_images/programs/insure/My%20Smart%20Choice%20Health%20Insurance%20Guide%204-3-13.pdf
Uses “Rule of Three” approach (3 options)
Designed to protect against loss of income; protects your “earning power”
Most overlooked type of insurance
Young, healthy people don’t consider the risks related to their future earning potential
Provides regular cash income lost by employees as the result of an accident or illness
Workman’s Compensation Disability from on-the-job accident or illness
Employer Plans Short or long-term group disability policy
Social Security Covers total disability lasting > 12 months Starts in the 6th month Strict definition of disability to qualify
Private Income Insurance Programs Supplements other disability income sources Normally provides 40-60% of income (up to 75%)
Policy’s definition of disability
Own Occupation- can no longer perform previous job
Any Occupation- can’t work at any job
Waiting or elimination Period
Duration of benefits
Amount of benefits
Accident and sickness coverage (want payment for both; accidents are not the only cause of disability!)
Cost-of-Living Adjustments (adjusts benefit for inflation)
Partial benefits (pays benefit if person can only work part-time)
Covers care needed to perform essential activities of daily living (ADLs)
Certain “triggers” needed to qualify for benefits
Key features:
Waiting or elimination Period
Duration of benefits
Amount of benefits
Cost-of-Living Adjustments (adjusts benefit for inflation)
Insure for major losses
Choose a highly rated insurance company
Select the highest deductible you can afford
Pay premiums annually or semi-annually
Avoid duplicating coverage
Ask about available discounts
Follow “The Rule of Three”