Ch 9 Risk Management: The Role of Insurance

Sarah earns $80000 per year as a professional tuba player in a local symphony. If she is in good health, how much disability insurance should she purchase?

$52000.

modified-own occupation disability coverage

A modified-own occupation insurance plan pays a benefit if you are unable to perform the material and substantial duties of your own occupation and cannot find another position in which you are suited by education, experience, or training. If you do find another position, your disability coverage will be reduced by the amount you earn in the new job.

managed care

A system that combines the financing and the delivery of appropriate, cost-effective health care services to its members.

any occupation

Above (disability) is considered an any occupation disability definition

residual disability rider

Allows you to receive a benefit if you return to work full-time but your income is not fully restored. For example, if you are a police officer and you return to work full-time as a security guard, the residual benefit will pay the difference between your prior salary and your new salary.

partial disability rider

Allows you to return to work part-time and receive partial benefits if you cannot work on a full-time basis as a result of your disability.

waiver of premium provision

Allows you to stop paying premiums if you are disabled longer than a specific period of time, usually 90 days.

high deductible health plan (HDHP).

An HDHP has a relatively high minimum annual deductible: $1,350 in 2018 for an individual and $2,700 in 2018 for a family. The annual out-of-pocket amount (including deductibles and copayments) cannot exceed $6,650 (individually) or $13,300 (family) in 2018.

health maintenance organization (HMO)

An HMO provides medical care through a network of physicians and hospitals located in a specified geographic area. Rather than charge a large upfront deductible and ongoing coinsurance, services are charged using relatively small copayments per visit. The intent of an HMO is to coordinate healthcare services in a way that prevents rather than treats illness.

The best strategy for dealing with health risks is:

Avoiding and managing health risks.

What type of coverage pays for things like broken glass and vandalism to your car?

Comprehensive coverage.

COBRA

Consolidated Omnibus Budget Reconciliation Act. COBRA is available to anyone who works for an employer with 20 or more employees. COBRA can even be used in cases when you have a reduction in hours worked or if a death, divorce, or other life event occurs in your family. Here is how COBRA works. If you elect to continue coverage, you may be required to pay the entire premium for coverage up to 102% of the cost to the plan. Coverage is typically only good for 18 months, but in some cases, you may continue on the plan for 36 months.

What helps explain why few adult Americans currently have a disability policy?

Disability policies require people to envision themselves becoming injured.

avoidance

Don't do the thing that could increase your risk i.e. texting and driving

The reason you need health insurance is because risks to your health may be:

Financially catastrophic

Point of Service (POS) plan

If you have this type of plan, you will have lower out-of-pocket expenses if you use the services of network providers. To go outside the network, you must first receive a referral from a network provider to receive coverage.

endorsements

In addition, three policy provisions, or endorsements, are worth adding to your policy. Remember, however, that adding these endorsements will increase the annual premium. (mentioned below)

indemnity

Insurance companies are also on the lookout to make sure that people do not profit from a claim. Insurance is designed to compensate individuals (the policy owners) only up to the value of their loss.

Which of the following statements is true?

It is difficult to qualify for Social Security disability benefits.

Personal Automobile Policy (PAP)

PAP coverage is extremely important when viewed from the context of your lifetime financial journey. You want to be able to cover any unexpected damages that might occur in the event of an accident. The less you must pay out of pocket for accidents, the more you can save for other goals and obligations.

Life insurance provides a tax-free lump-sum payoff that can be used to:

Pay burial costs, final debts, and final expenses.

return of premium

Requires the insurance company to return all or a portion of your premiums if no claims are made for a specific period of time stated in the policy.

Out-of-pocket expense

Specific amount of money that you pay when insurance only covers a portion of costs include her deductible, coinsurance, and copayment.

For someone with a limited budget, which type of policy makes most sense?

Term life policy.

Which of the following statements regarding term-life insurance is INCORRECT?

Term-life insurance is intended to provide lifetime insurance protection.

split limit PAP

The term split limit refers to the functions of the policy: paying for medical and physical damage when you are at fault in an accident.

An individual can be exempt from fines proscribed by the Affordable Care Act for which of the following reasons?

Their income is too low

Contingent Beneficiary

These individuals will receive the death benefit if the primary beneficiary dies before the policy owner. For example, a husband might own a policy and be the insured individual, with his wife as the beneficiary and his children as the contingent beneficiaries.

Patient Protection and Affordable Care Act

This Act of Congress attempted to reform the healthcare system by providing more Americans with quality health insurance coverage

uninsured/underinsured motorist coverage

This additional coverage will pay your medical and property damage expenses above what someone else's policy pays. If someone drives without automobile insurance and causes you to be in an accident, you will then be responsible for paying your own expenses. Although it is true that you can take someone to court, and likely win a judgement, uninsured/underinsured motorists typically don't have the means to pay a verdict. It can also be very expensive and difficult to take someone to court.

liabilities

You are really buying insurance to pay any expenses (liabilities) to others in case you cause an accident.

The copayment an individual needs to pay is:

a flat fee

convertibility provision

allows you to convert to a cash-value policy (which we will describe later) in the future without having to provide proof of insurability. You might want to do this if your health worsens or you want to add a savings component to your insurance.

flexible spending account (FSA)

allows you to put money aside on a pretax basis each year.

health savings account

allows you to save money on a pretax basis that can then be used to pay for qualified medical expenses, such as your deductible and other out-of-pocket expenses (see Helpful Hint). We discuss HSAs in more detail later in this topic.

Lamar is faced with a high frequency high severity risk. According to the risk matrix, Lamar should:

avoid the risk.

The amount you must pay before your insurance company makes a payment on a claim is called the:

deductible

own occupation

definition means that you will be considered disabled if you are unable to perform the material and substantial duties of your own occupation (and do not make money doing something else).

Human Capital

encompasses your ability and willingness to work, learn, earn, and make wise decisions about how to save and invest money.

disability premium waiver

ensures that your policy premiums will be paid if you were to become disabled.

For cash-value policies, the death benefit:

grows as premiums are paid.

health-insurance marketplace plans

health insurance purchased through the government website

whole life insurance

in which you earn a fixed guaranteed rate of return.

Health Insurance

is a financial tool that allows individuals to manage the unpredictable and potentially excessive costs associated with health care.

Copayment (or copay)

is a flat fee (usually around $20 to $30 for a doctor's visit) that the insured individual must pay to receive any healthcare service.

preferred provider organization (PPO)

is a popular fee-for-service option. A PPO offers reduced deductibles, copayment, and coinsurance when someone visits a medical provider who belongs to an insurance network. If services are obtained outside the network, reimbursement amounts decrease.

consumer-driven plan

is a type of coverage designed to reduce yearly premiums by providing an incentive to the insured to pay more upfront medical expenses out of pocket. Although premiums are much lower than fee-for-service plans, out-of-pocket expenses will always be much higher.

cafeteria plan

is an IRS-approved plan maintained by your employer that provides employees with several tax benefits. If you have access to a cafeteria plan, you must be given access to at least one taxable benefit (such as cash) and one qualified benefit (such as an FSA)

comprehensive insurance

is an optional coverage that helps pay for damage to your vehicle caused by a nonaccident event. Typical events that trigger comprehensive claims are: Hail storms. Broken windshields. Vandalism.

Gap Coverage

is another option that you may want to include in your policy

exclusive provider organization (EPO)

is another type of managed care plan. EPO coverage typically only includes the use of doctors, specialists, clinics, and hospitals in the plan's network. Although there are a few exceptions for emergencies, EPOs tend to be restrictive.

Medicare

is available to those who are age 65 or older, those who are younger but have a disability, and those with end-stage renal disease. Most often, Medicare is used by retirees who no longer have access to employer-provided health insurance plans. Premiums for Medicare are based on the coverage selected.

disability

is characterized by the following three requirements: You cannot do the work you did before an accident or illness. You cannot readjust your skills because of your medical condition. Your disability has or is expected to last for at least one year or until death.

liability insurance

is intended to pay for medical costs, funeral expenses, lost wages, punitive damages, car rentals, repairs, and compensation for pain and suffering for people in the other car involved in an accident.

Decision Matrix

is often used to classify risks and develop appropriate strategies to best manage those risks.

cash-value life insurance policy

is one that blends pure term insurance with a savings option. Why might you prefer a cash-value policy? Well, the cash value grows on a tax-deferred basis. Also, you may borrow from the account without a credit check and, like all life insurance, benefits paid to your beneficiary are received on a tax-free basis.

Medicaid

is state-administered health insurance designed to provide coverage for individuals and families with low incomes and limited financial assets. Eligibility and benefits vary considerably from state to state, but generally, a family must be living below or near the poverty threshold to qualify for Medicaid.

Deductible

is the amount that the insured individual (Jane) must pay before the health insurance company will contribute any funds to pay medical bills.

fee-for-service plan

is the most flexible, and costly, type of coverage available. Fee-for-service coverage allows the insured to use the services of different hospitals, clinics, and doctors without prior permission.

beneficiary

is the person or entity that receives the policy death benefit when the insured dies.

insured

is the person that must die for the policy to pay off for life insurance

policy owner

is the person who makes premium payments. Recall that a premium represents the cost of insurance.

Insurance

is the primary way people transfer risk of a loss to another party, like an insurance company

Coinsurance

is the sharing of costs between the insured individual (Jane) and the health insurance company.

Over the past weekend, Javier injured himself waterskiing. While he did not go to the emergency room, he was in so much pain that he could hardly work. On Monday, he made it to work but collapsed on the job. His job foreman rushed him to the hospital where he was diagnosed with severe internal injuries. The doctor indicated that Javier would be out of work for at least 9 months. Given this scenario, Javier can:

make a claim against his personal short-term own occupation disability policy.

insurable interest

means that if the insured individual were to die unexpectedly, the policy owner would suffer a financial loss. Family members, business partners, and employers typically can show an insurable interest.

face value

of the policy, which is the initial dollar amount of insurance that you select (as the policy owner) to be paid to the beneficiary upon the insured's (most likely you) death. For example, you might buy a policy with a face value of $25,000, $100,000, or even $1,000,000 or more.

The type of disability policy that provides benefits when you are unable to perform the material and substantial duties of your job is called:

own occupation.

guaranteed renewability provision

permits you to extend your policy without having to take a medical exam. Of course, your premium will increase if you do renew, but at least you will have coverage.

level term

policy is purchased for periods ranging from 5 to 30 or more years.

annual renewable term

policy needs to be purchased yearly

Workers Compensation

provides benefits when you are injured or become ill as the result of work. Every state requires employers to pay into state-managed insurance pools to help pay claims made by injured employees

State Children's Health Insurance Program (SCHIP)

provides free or low-cost insurance for the children of working families with low to moderate incomes.

Term-life insurance (also known as pure term insurance)

provides only a death benefit if the insured individual dies before reaching a predetermined age

Some of the outcomes associated with obesity include all of the following, except:

reduction in human capital due to reduced social interactions.

The cost of insurance increases as the:

severity and frequency of a loss increases.

All of the following are considered good health habits, except:

staying focused by working long stress-filled hours.

elimination period

the amount of time between the disability occurring and the insurance company paying the claim

Risk Matrix

to help manage your health situation, as well as any other decision that entails personal or household risk.

out-of-pocket maximum

to protect individuals from potential catastrophic financial outcomes, the total amount of deductibles and coinsurance that an individual must pay is typically capped.

For tax reasons, it is generally best to have _____ of the three parties involved in a life insurance policy be the same people.

two

The cost of health insurance is:

usually a monthly premium

Long-term disability policy

usually kicks in after you cannot work for 6 to 12 months. Most policies extend from a few years up until age 65 (at age 65 you can then enroll in Medicare). Higher premiums are associated with increased incomes and duration of coverage.

variable life insurance

which allows you to invest in mutual funds with your savings.

variable universal life insurance

which combines the best of variable and universal policies. This coverage allows you to invest in more risky investment products and retain the ability to skip future premium payments if the cash balance in the account is sufficiently large enough.

Cost-of-living adjustment (COLA)

which increases your disability benefits over time based on the Consumer Price Index.

Minimum Essential Coverage

which is a comprehensive list of medical services and conditions that health insurance plans must cover

copay

which is a cost-sharing amount with the insurance company

Advanced Premium Tax Credit,

which is a subsidy from the federal government that helps lower the cost of health insurance.

Human Life Value Approach

which is essentially a time value of money calculation

income multiplier estimation

which is simply your current income multiplied by 10 and decreased by any current insurance you may currently have. For example, if you earn $35,000, you need about $350,000 in coverage. If you already have $150,000 in coverage from your employer-provided life insurance, you need an additional $200,000 life insurance policy. It is that simple!

deductible

which is the amount that you must pay on a claim before insurance comes into play.

premium

which is the cost of the insurance

guaranteed renewability provision (or non-cancellable clause)

which means the policy cannot be canceled by the insurance company, except for nonpayment of premiums. You also have the right to renew the policy in the future with the same benefits.

Underinsured

which means their PAP is not enough to pay a claim if they damage someone else's property.

universal life insurance

which pays a higher return than whole life insurance on the cash-value portion of your policy. You also get the ability to skip premiums in the future and to adjust the face value of the policy

complex needs analyses

which require calculating present values of future cash flows and adding together all current debts, bills, and liabilities. These calculations are the most accurate estimates of life insurance needs and are based on unique individual and family circumstances

collision insurance

will pay for your car's repairs (your personal health insurance will cover any medical expenses). Collision coverage: Insures you, your family, passengers, and others who drive your car with permission. Requires that you pay the policy deductible when you make a claim. If claimed, pays you for the actual cash value of the repair or value of the car, minus the deductible.

Short-term disability policy

will replace a portion of your salary for 3, 6, or 12 months. The longer the coverage period and the more income replaced, the higher the premium

Human capital refers to your ability to:

work and/or learn