Module (156-160)

Module 147

Health care costs are high and getting higher. People in the United States pay more per person for medical care than any other country in the world.1 High health care costs are why people need health insurance. Health Care Costs in the United States In 2010, Americans spent an estimated $2 trillion on health care. That is nearly 20% of the gross national product.2 Why U.S. Health Care Costs Are High and Continually Rising There are a variety of reasons for increasing health care costs in the United States. Not all of them are bad. Here are some positive reasons: More people in the United States are living longer, healthier lives. Advanced but costly medical technology is now available to most doctors. Many people have access to doctors and medical care. Doctors and certain health care professionals earn relatively high salaries. Nevertheless, there are negative reasons contributing to high health care costs in the United States. Some of those reasons are: A large segment of the U.S. population is growing older and are suffering from chronic diseases that are very expensive to treat. Doctors are ordering too many, often unnecessary, tests as a means of avoiding patient lawsuits or in response to consumer demand for testing. Those who are uninsured and do not have access to regular doctors increase the cost of premiums and deductibles for insured people, often because of the costs associated with hospital emergency room services. Having health insurance is one of the few ways people can cope with increasing medical costs. But, health insurance is not cheap. In fact, the annual cost of health insurance premiums—the price paid for insurance—has increased dramatically since the late 1990s at a rate far outstripping the pace of workers' earnings. As a result, nearly 50 million people go without health insurance, or about one-sixth of the U.S. population.1 Many of the uninsured are between 18 and 34 years old and are working at full-time jobs.2 Not all of them are simply counting on good luck and good health, nor are all of them being stingy. They simply cannot afford health insurance in addition to their other monthly expenses. Many children are also among the uninsured. According to the Centers for Disease Control and Prevention, more than 8% of children under age 18 were uninsured in 2009.3 They often do not get vaccinated or get regular medical checkups. This means they could get very sick and possibly end up in the emergency room. Plus, as you learned in Module 156, the costs of uninsured patients' care are passed along to other patients through higher premiums. Even after high school, you will probably still be eligible for coverage for a few years under your parents' health insurance plan—if they have one. At some point, you might need to shop for your own health plan. What Is Covered? Types of Health Insurance Coverage As you learned in Module 156, when you purchase an insurance policy, the insurer agrees to give you coverage. Your insurance policy is a legal document that spells out exactly what health care procedures the insurer will cover or help pay for. There are lots of different kinds of medical coverage. Before selecting a policy, it is important to consider your personal insurance needs—based on your current health and medical history—and to choose the policy that covers you the best. Listed below are several common types of medical insurance. *Basic Health Insurance* What It Covers: Basic health insurance covers some medical expenses—hospital care, surgery, and physicians' care, including annual physicals, up to a certain point. What Is Not Covered: For major health emergencies, such as a long-term illness or serious injury, additional coverage is needed. Eye care and dental visits are not typically covered by basic health insurance. Who Needs It: Pretty much everybody needs basic health insurance. It helps cover the costs of regular doctor visits and routine tests as well as some surgery and short hospital stays. What It Covers: Major medical insurance covers hospital expenses and costs that are not covered by basic health insurance. This insurance covers major hospital expenses and costs above a certain deductible—the amount of money you have to pay out of pocket before your insurer pays any expenses. Some basic health insurance covers the costs of major medical deductibles. Major medical insurance could require the policyholder to pay up to a certain amount—often up to $6,000. What Is Not Covered: Major medical insurance does not cover visits to the doctor, prescriptions, or routine tests. Dental and vision care are also not covered. Who Needs It: Also called catastrophic care, major medical insurance is for people who can handle the costs of day-to-day health care—annual checkups, prescriptions, and so on but want to be covered in the event of a major medical problem. Young people, self-employed workers, and senior citizens often purchase major medical insurance instead of, or in addition to, basic health insurance because they want to protect themselves from the excessive costs of a major illness or a serious injury. Dental and Vision Care Insurance What It Covers: Dental and vision care insurance policies are generally sold separately from basic insurance and major medical expense insurance. Dental insurance covers typical dental procedures, such as annual exams, cleanings, X-rays, fillings, oral surgery, and orthodontics. Vision care insurance covers examinations, eyeglasses, contact lenses, and eye surgery. What Is Not Covered: It does not cover visits to your regular doctor or major surgical and hospital expenses. Who Needs It: People who regularly visit the dentist or eye doctor need these insurance policies. Dental and vision care insurance policies are about maintaining good health. By covering regular checkups, these policies help people take care of their teeth and eyes. Regular checkups, in turn, can help prevent other health problems later. People with vision problems definitely benefit from having vision care insurance. It is good to have dental insurance even if you are young and even if you brush and floss your teeth every day. What It Covers: Also known as disability income insurance, this insurance provides income for people who cannot work because they have been injured in an accident or have become seriously ill. How It Works: Disability insurance is a policy you hope you never to have to use. With disability insurance, the insurer pays you benefits after you have claimed a disability but only for a certain amount of time. Also, you must wait an agreed-upon time period (up to six months) before the insurer will begin making payments. Unlike health insurance, the terms of your policy are based on your income. When you purchase your policy, you calculate how much money you would likely need to support yourself and your family if you became disabled. This amount is usually about 70% of your gross pay. Who Needs It: Disability insurance is a good idea for anyone whose entire livelihood comes from working at a job. In the event you could not work at any job because of injury or illness, you would need the income provided by disability insurance. People who support families or elderly parents often carry disability insurance just to be on the safe side. How do you know which insurance you really need? Most experts agree that if you can afford it, you should have basic health insurance for your everyday needs and major medical insurance for unexpected catastrophes. If you regularly visit the dentist and eye doctor, dental and vision care insurance are important. Disability insurance is a good idea if you work and have limited backup income. Sometimes, this is more important in certain lines of work, such as construction. Again, it is always a good idea to talk to an insurance agent or financial planner about your insurance needs. He or she will help you find the right policies and make sure you are not underinsured or overinsured. Eligibility - This refers to those who are qualified to be covered under a medical or health care policy. Examples could include adults over 18, spouses, or dependents. Copayment (or "Copay" or Coinsurance): The flat fee the patient pays at the time medical services are provided. Benefit Limits: This refers to the maximum amount of benefits a policy will allow. As an example, some policies pay up to $250,000 or cover a maximum hospital stay of 120 days. Guaranteed Renewability: This guarantees that the insurer will not cancel the policy without reason or will not raise rates only on certain policyholders. Assigned Benefits: This refers to the person or entity that receives benefits from the insurer. Examples could include your doctor, the hospital, or you. Exclusions and Limitations: This refers to the medical conditions that the insurer will not cover or provide benefits for. Cancellation and Termination: These are circumstances under which the insurer can terminate or cancel your policy. Deductible: This is the amount of money you have to pay out of pocket before the company insuring you will pay any expenses. You should read the provisions in each policy carefully. Do not sign up for a policy if you will not or cannot meet its provisions. For example, if you do not want to pay a $25 copayment every time you visit your doctor, you should choose a policy that does not require one. Also, read the exclusions and limitations carefully. Often, an insurer will exclude, or refuse to cover, a preexisting medical condition (for example, childhood asthma or a heart defect). This means that if you have a recurring medical issue, the insurer will not cover expenses related to it. Yet, preexisting conditions are often the reason that people need health care and health insurance in the first place! You know you need health insurance. The next question is, "Where do I find insurance?" If you want private insurance, you can get group insurance through an employer or purchase individual health insurance on your own. If you are eligible, another option is government insurance, such as Medicare and Medicaid. Medicaid is available only to people with limited income. You must meet certain requirements to be eligible for Medicaid. The program does not pay money to you; instead, it sends payments directly to your health care providers. Medicare is available to people 65 and older or to people who are disabled and cannot work. Group insurance through an employer is a pretty good deal if you can get it. If your employer offers health insurance as a workplace benefit, you can simply sign up for it. The employer often pays some portion of the premium. If you have to pay a premium, it is simply deducted from your paycheck. But, an employer-provided insurance could contain restrictive provisions. For example, it might require you to go to a certain doctor, or it might not provide all the coverage you need, such as vision care. One cannot assume that group insurance will meet all your needs. There are many sources of health insurance, so you might want to ask an insurance agent to help you find the right one for you. Let's take a look at the most popular options. Private insurance companies sell health insurance policies to individuals. You will need to do some research to find a company with an excellent reputation and good rates. Keep in mind that most private insurance companies sell more than just health insurance. You might feel more comfortable with a company that specializes in health insurance. Blue Cross and Blue Shield are statewide insurance companies in the Commonwealth of Virginia. Blue Cross and Blue Shield are nonprofit organizations that provide only health insurance. Blue Cross provides hospital care benefits, while Blue Shield provides surgical and medical benefits. A combination of Blue Cross and Blue Shield policies can provide a basic health insurance package. Health Maintenance Organizations (HMOs) provide its members with comprehensive health care benefits. HMOs hire doctors to provide health care to member patients. This arrangement means that doctors do not have to wait for patients' private insurance companies to pay them. HMOs emphasize preventive care, such as regular checkups and tests, in hopes that patients will be healthier if they have access to regular and inexpensive medical care. HMO premiums are usually affordable, and there are no deductibles to pay. HMOs do, however, require that patients receive care only from doctors and facilities under their contract, and they must pay copayments at the time a medical service is provided. Preferred Provider Organizations (PPOs) are networks created by doctors and hospitals. They make deals with insurers, such as agreeing to charge their members lower rates in exchange for insurers providing coverage—if they approve the rates. This deal works for the doctors and the insurers. Doctors get their claims paid on time and have access to many patients. Insurers can offer their policyholders discounted rates while collecting higher premiums. PPO premiums are higher than those of HMOs, but PPOs do not require patients to go to doctors or facilities in the network. Patients who go outside the network, though, might have to pay higher fees. There are so many choices! It might help you to consider the pros and cons of managed care. What Is Managed Care? Managed care refers to health care plans, like HMOs and PPOs, that try to reduce costs by setting up rules for doctors and patients to follow. Managed-care organizations reduce costs by paying doctors specific fees per patient or per procedure, requiring doctors to charge set rates, and dictating what procedures or doctors a patient can have. There are benefits to managed care. Doctors know how much they will get paid and that they will get paid on time. Patients, in turn, have access to comprehensive health care. As long as patients feel they are getting good care, everyone is happy. But, there are also drawbacks to managed care. One main criticism is that by focusing too much on lowering costs, the organizations might not have their patients' best interests at heart. Managed-care organizations value efficiency and keeping costs down. By paying doctors a flat fee per patient or procedure, they encourage doctors to see more patients than they can handle. Patients, as a result, get less attention from their physicians. Managed-care organizations can tell doctors to prescribe less-expensive medications, and they can place limits on the range of treatments or tests a patient can receive or the number of specialists a patient can visit. As a result, some experts worry that managed care interferes with the relationship between patients and their doctors and ultimately results in less-effective care. According to the Bureau of Labor Statistics, more than 40% of people working in the insurance industry serve in administrative positions.1 Some process your insurance claims. Here is what typically happens when you go to the doctor. At the time of the visit, you give the doctor's staff your most up-to-date health insurance information. Depending on your type of insurance, you probably have to pay a copayment. After your visit, the doctor's office sends your health insurance information and details about the services you received to your insurance company. Someone at the insurance company then receives the claim and checks it against the terms of your policy. A few weeks later, you will usually get a letter explaining exactly which services and procedures were covered by insurance. If not all services were covered 100%, you will get a bill from your doctor's office for the amount not covered. Even healthy people sometimes need to go to the doctor or the dentist. Current health costs are high and increasing each year. For these reasons, it is really important to have health insurance. There are many options for health insurance policies, including basic health, major medical, dental and vision care, and disability. Each of these policies has a different focus, such as major medical expenses or routine care. Most people need a combination of policies. All policies come with provisions or conditions about the benefits or coverage patients can receive. It is important to consider the provisions carefully before signing up for a health insurance policy. Some employers provide group insurance to their workers. Many people, however, choose to purchase individual policies from private insurance companies, statewide nonprofits, Health Maintenance Organizations (HMOs), or Preferred Provider Organizations (PPOs). HMOs and PPOs are sometimes run as managed-care organizations. Managed care reduces health care costs by paying doctors a set fee per patient or per procedure and by limiting which doctors a patient can see and what procedures or treatments a patient can have. Government insurance plans, such as Medicare and Medicaid, are available to those who are eligible. Medicare serves people 65 and older and people who are disabled. Medicaid is offered to people with limited incomes.

Module 159

In previous modules, you learned about the basic types of insurance and some of the specifics of health and life insurance. Health insurance helps protect people from financial losses resulting from medical bills and increasing health care costs. Everyone needs health insurance, but not everyone has it. Life insurance helps an insured person's family or beneficiaries by providing them with money after his or her death. Only people with dependents and debt need life insurance. Most states require drivers to carry automobile insurance. Like other insurance policies, an automobile insurance policy is a contract between the policyholder and the insurer. The policyholder pays a premium so that the insurer assumes risk on his or her behalf. In the event of an auto accident, the insurer pays benefits that help cover the medical, legal, and repair costs of the policyholder and any injured parties. In this module, you will learn why people need automobile insurance, what it covers, how to get the right coverage, and when to submit an insurance claim. Cars are such an important part of most people's daily lives that we rarely think of them as dangerous machines. Yet, each year, millions of people must face the financial, medical, and legal consequences of car accidents. According to the National Highway Traffic Safety Administration, six million car crashes occurred in the United States in 2007, and about one-third of them involved injuries to the driver or others.1 Driving is an enormous responsibility because even a minor accident can have serious consequences. As a result, most states require drivers to carry automobile insurance. Auto insurance, like other forms of insurance, is a risk-management strategy. It helps drivers protect themselves from financial losses that can result from car wrecks, including medical treatments, car repairs, or lawsuits. The most important reason to have auto insurance is that it protects you against liability in case of an accident. This module explains what auto insurance covers and how to make sure you are properly insured when you drive. When you get behind the wheel of a car, you are not just going for a ride. You also assume some serious legal responsibilities, or liabilities. If all goes well—and it usually does—nothing unexpected will happen on the way. But, accidents can happen. You might skid on a patch of ice or miss a stop sign. That is why having automobile insurance is essential. No matter what happens in the split second it takes for an accident to happen, auto insurance protects you financially with two kinds of liability coverage. Bodily Injury Liability: If you cause an accident, bodily injury liability insurance protects you from paying the full legal or medical expenses of someone who is injured. Sometimes, a person who has been injured in a car accident cannot work for a period of time, and bodily injury liability can help cover any wages the injured person would have made. Keep in mind that bodily injury liability protects you against claims that an injured person—who was not in your vehicle—could make against you in court. Property Damage Liability: Property damage liability protects you from financial losses in case you damage another person's property with your car. The damaged property might be another vehicle, buildings, street signs or streetlights, a fire hydrant, or even a tree. Again, the point of this liability insurance is to protect you from claims that others could make against you in court. These forms of liability coverage are usually the first things you see when looking at an auto insurance policy. Most policies express them in terms of split limits. The term split limits is insurance shorthand that refers to a quantity of liability coverage. It is expressed in a series of numbers that represent the upper limits in thousands of dollars. The first two numbers represent bodily injury liability coverage. The "50" represents the maximum $50,000 that the insurer will pay for bodily injury per accident. The "25" means that the insurer will pay up to $25,000 to each person in an accident you caused. The "10" reflects your property damage liability—in this case, a maximum $10,000 your insurer will pay for the damage to someone else's property during an accident. The numbers will vary depending on the coverage you get with your auto insurance policy. It is important to remember that your auto insurance provides two kinds of liability insurance—bodily injury and property damage. Both will also protect you financially if you cause an auto accident. No-Fault Insurance: It often takes two cars to create a car accident. Typically, when an accident is clearly caused by one person, that person's insurer will pay the medical and other expenses for all the parties involved. This is why many states now allow insurers to provide what is called no-fault insurance. With no-fault insurance, instead of spending time and effort trying to get the insurer of the at-fault driver to pay your bills, you can ask your own insurer to pay. This no-fault system saves everyone time and money and keeps lawsuits out of the courts. Now let's look at other forms of coverage that many auto insurance policies provide. Medical Payments Coverage: This pays the medical bills you and your passengers incur after a car accident. Your own policy's coverage for medical payments also applies to you even if you are riding in another person's car. Uninsured or Underinsured Motorist Protection: What happens if an uninsured or an underinsured driver injures you in a car accident? You cannot ask that driver's insurance to pay your bills. Instead, with uninsured or underinsured motorist protection, you can ask your own insurer to pay. Keep in mind that this protection covers only injuries, not property damage. Collision: Collision insurance covers the costs of getting your car repaired. With collision insurance, it does not matter who caused the accident. Your insurance will cover the costs even if another driver caused the damage. It is up to the insurance company to get reimbursed from the other driver's insurer. (The other driver's property damage liability should cover it.) Collision coverage involves a deductible—an agreed-upon amount of money you must pay before the insurer will pick up the rest of the cost. Comprehensive Physical Damage: As you know, accidents involving other cars are not the only source of damage to a car. Weather, fire, theft, vandalism, and falling objects, such as tree limbs or rocks, can damage windshields or the structure of the car. With comprehensive physical damage coverage, your insurer pays the repair costs without considering whether someone was at fault. This insurance covers damage not caused by a collision. (Things inside the car, such as stereos, are usually not covered. You will learn how to insure personal property in Module 160.) Like collision coverage, comprehensive physical damage coverage also involves a deductible. It will be clearly spelled out in the auto insurance policy. Other Coverages: Many auto insurance policies offer other forms of coverage, such as towing and emergency road service. This coverage allows you to submit claims to cover the costs of towing or unexpected repairs while you are on the road. Another form of coverage is for car rentals in case you need to rent a car while yours is in the shop. Renting a car can be expensive, so this coverage can really be a big help. In some states, you can even get wage-loss coverage in case you lose income due to an accident-related injury. As with other forms of insurance, you need to figure out how much coverage you will need so you are not overinsured or underinsured. As you also know, most states require drivers to carry auto insurance, which includes a minimum amount of liability coverage. Your insurance agent will know the minimum; although, he or she will most likely recommend you carry more coverage. For example, in 2009, the state of Virginia required minimum liability coverage of 25/50/20, but an insurance agent there would probably recommend higher coverage—up to 100/300/50. Why? The higher coverage gives you more protection against potential lawsuits in case you cause an accident that results in serious damages or injuries. A premium is the fee you pay regularly for your insurance policy. Auto insurance premiums are rarely one size fits all. A lot of factors come into play in figuring the cost of your premium. You can help keep your premium low by considering the following factors. Your Car: The car you drive—its year, make, and model—has a big effect on your premium. Some cars are considered much safer than others. For example, a minivan is considered safer than a sports car. In addition, some cars are more expensive to repair, while some cars are more likely to be stolen or to have parts stolen. Older cars might be less valuable and cheaper to repair but also less safe on the road. Check with your insurance agent before you choose a car to drive. If you drive a car that insurance companies rate high for safety and for ease of repair, you can help keep your premiums low. Your Address: Where you live can also affect your auto insurance premium. Insurance companies call it your rating territory. It is simply cheaper and safer to own a car in some places. Small towns, for example, have fewer accidents or thefts than major cities do. In cities, some neighborhoods are less safe than others. If you live in a rating territory where a lot of drivers submit auto claims, then your premiums are likely to be higher. Few people choose where they live based on how it affects their auto insurance, but it is a factor to consider. Your Life Situation: This factor is pretty much beyond your control. Insurance companies look at your sex, age, marital status, and driving record when determining your premium. They call this your driver classification. In other words, the insurance company looks at these factors and considers how others of your same age, sex, and marital status tend to drive. For example, young male drivers tend to have more accidents than middle-aged female drivers do. So, if you are a teenage boy, insurance companies will charge you a higher premium based on their expectations that you will eventually bang up your car and submit a claim. Here Is the Good News: Your driving record is within your control, and insurance companies weigh it very carefully. If you have a clean record, your premiums will come down and stay relatively low. Teens, of course, are at a disadvantage because they do not have driving records when they first start driving and get insured. But, you can help yourself out by taking a driver's education class. Getting good grades helps, too. Many insurance companies offer lower premiums to honor roll students and those who take driving seriously enough to attend a class. Your best strategy is to be a good driver. Wear your seat belt, respect the speed limits, and always obey the rules of the road. If you reach age 26 with an excellent driving record and no or few claims, your premiums will likely drop dramatically. Warning: Drivers with bad driving records and many insurance claims could end up in the assigned risk pool. Bad drivers are categorized in the assigned risk pool when they lose their auto insurance coverage and cannot get new policies with other insurers. Each state assigns these bad drivers to risk pools insured by a randomly selected insurer. Insurers charge premiums that are about three times higher than normal rates. After a certain period of time, drivers in the assigned risk pool can apply for insurance at regular rates, provided their driving records have remained clean. Avoid the assigned risk pool at all costs! You also can do some other things to reduce your premium, including installing a car alarm, driving a car with air bags, quitting smoking, or getting your college degree. Buying a house or getting married can also puts you in a lower risk group and lowers your premium. Each company has its own calculations, so it is good to ask your insurance agent questions. In addition, it is a good idea to shop around for auto insurance. As with any insurance policy, you want the best coverage for a reasonable price. Check your budget. Insurance is important, but you have to stay within your budget. Remember, agreeing to a higher deductible will lower your premium, but you might have to pay more money for repairs. So, do not go beyond what you can afford. You can compare insurance policies online with different companies. Also, find a trusted insurance agent to help answer any questions you might have. Car accidents can happen in the blink of an eye. If you are lucky, the damage will be just to the car and not to you, your passengers, or the other driver. After having an accident, you need to determine whether you should submit a claim to your insurance company to get the car repaired. Here is a list of questions to ask yourself: Does your insurance company require all damages to be reported? If yes, you must submit a claim. If you do not know the answer to that question, call your agent. Was another person involved in the incident? If yes, it is an excellent idea to submit a claim. The other person might not realize that he or she was injured until later. Submitting a claim right after the accident can protect you financially. Always submit a claim if the other driver or anyone involved appears injured at the scene. Remember, your auto insurance protects you from liability for that person's medical, legal, and repair bills. You could lose your insurance completely if you fail to submit a claim when someone was injured at the scene. How much is the deductible on your policy? If no one was injured in the accident, think about your deductible. Remember, the deductible is how much you must pay out of pocket before your insurance benefits kick in. If the damage is likely to be less than your deductible, skip the claim and fix the damage without involving the insurance company. You should never submit a claim to your insurer before you understand its long-term impact on your premium. Here is the catch with auto insurance. It is there to help you cover costs, but if you submit too many claims, your premium will go up and stay up for years. If you submit a claim and pay your deductible, you might learn later that your premium costs have gone up so much that it would have been cheaper just to pay for the repairs on your own. Call your insurance agent first before submitting any claims, and understand your options and consequences. How many claims have you submitted recently? As you have learned, auto insurance is there to help you pay for repairs, but if you submit too many claims within a certain amount of time, your premium will surely go up. If you are in doubt, call your insurance agent. Ask if it is too soon to submit another claim. Review your deductible and the likelihood of your premium increasing. It might make more sense to skip the claim and repair the car with your own money. If you file a claim, an insurance adjuster will look at the car to determine the extent of the damage and to estimate the required repairs. If the repairs would amount to more than the car is worth—minus any salvage value—the car is considered totaled. Before determining if a car is totaled, insurers consider its preaccident value, the cost to repair it, and how much money a scrapyard would pay for the damaged car. Depending on these factors, it is often cheaper to total out the car rather than to pay to have it repaired. In this module, you learned why drivers need auto insurance. Auto insurance provides you with financial protection against full liability, or responsibility, for the medical, legal, and repair bills incurred if you cause an accident. Good auto insurance policies should provide you with the option of getting bodily injury liability and property damage liability insurance; these are usually described as split limits, or a series of numbers, such as 25/50/25. In addition, you can get medical payments coverage, uninsured and underinsured motorist protection, collision, and comprehensive physical damage coverage. Some states allow no-fault insurance policies, allowing drivers to submit claims to their own insurers rather than to the insurer of the person at fault in an accident. The premium you pay for auto insurance depends on many factors, including your driving record, your rating territory (where you live), and your driver classification (your age, sex, and marital status). It is important to maintain a good driving record, or you might end up in an assigned risk pool, which means you could pay triple the rates for your car insurance. It is important to consider the consequences and benefits when submitting an auto insurance claim. You should always submit a claim if you are in an auto accident and someone gets injured. In other cases, however, it makes sense to check with an agent and see if a claim will cause an increase in your premiums.

Module 156

Insurance is an important tool in your financial-planning toolbox. Its purpose is to protect against financial losses caused by calamities—flooding, serious physical illness, fire, a car accident, theft, death, and so on. Insurance does not prevent these events from taking place, but if you have insured your valuables (this includes insuring yourself, too), insurance can help cover the costs of replacing lost or damaged assets and paying medical bills. Insurance helps protect people against financial losses caused by unexpected bad events, such as car accidents, theft, fire, medical problems, lawsuits, and so on. There are many different types of insurance. Most people carry several different kinds of insurance policies. Insurance helps protect against financial losses caused by unexpected events. These events could be relatively big, such as the loss of one's home to a tornado, fire, or flood; or, they could be relatively small, such as having one's computer stolen or having one's car windshield cracked. Insurance helps people pay to rebuild or replace lost or damaged valuables. It also helps them pay medical bills and other expenses. Knowing that insurance will protect your finances during a time of uncertainty helps give you peace of mind. Insurance is not free, however. It is a regular and often lifelong expense, so you want to make sure you get exactly the right kind of protection and pay the best price for it. Insurance is a form of risk management. Risk is the possibility of danger or the chance of loss. Life is inherently risky. You might think you are in control, but you never really know what is going to happen next: a fire could break out, a car could swerve out of control, or lightning could strike. Risk management is a strategy for protecting against risk of loss. Insurance helps you manage risk by sharing it with an insurance company, or insurer. You can pay an insurance company to assume financial risk on your behalf. But, doing so does not remove risk from your life. That would be impossible! Insurance works because lots of people think it is a good idea to insure their assets against risk of loss. They go to insurers, purchase policies, and become policyholders. Policies are carefully worded and highly detailed legal contracts that outline the terms of the insurance coverage. Coverage is the amount of protection the insurer will provide. Different kinds of insurance provide different kinds of coverage. Most insurance policies are "pay as you go," with payments, called premiums. Premiums are usually paid in regular installments. As long as you continue to pay your premium, you will have coverage, and the insurer will pay for your lost assets. If you stop paying your premium, your coverage will stop, and the insurance company will no longer share your risk. As policyholders pay their premiums, the insurer places all the money into a pool, or reserve. The insurer then draws on this reserve of money to cover its expenses and to pay claims—requests by policyholders for the insurer to pay for a loss. The system generally works well because not every policyholder experiences a loss or submits a claim at the same time. This means there is always enough money in the pool. The money that goes out to policyholders is usually much less than the amount in the pool, which is refilled regularly with premiums. : 1. What must policyholders submit to get their insurer to pay for a loss? Correct Answer: claim Question: 2. What do policyholders pay regularly to the insurer? Correct Answer: premium Question: 3. What is a strategy for protecting yourself and your loved ones against financial losses? Correct Answer: risk management Question: 4. What is the protection that insurers provide? Correct Answer: coverage Question: 5. What is the contract between an insurer and a customer called? Correct Answer: policy Question: 6. Insurance is a form of what financial planning tool? Correct Answer: risk management Question: 7. What will the insurer stop providing if policyholders stop making payments? Correct Answer: coverage Question: 8. What document spells out the legal details of the client's responsibilities and the insurer's responsibilities? Correct Answer: policy Question: 9. Insurers draw on the money in the reserves to pay what? Correct Answer: claim Question: 10. Insurers will not protect customers against losses if the customers fail to pay what? Correct Answer: premium Unfortunately, there is no one-size-fits-all insurance policy. You cannot buy just one insurance policy that covers everything—your house, your car, your belongings, your health, and your family. Every person is in a different life situation and owns different assets. As a result, each individual has to find the right combination of insurance policies that will provide the most comprehensive coverage. This often requires people to carry—and pay for—several different kinds of insurance at the same time. Read the list below to see the most common types of insurance and the coverages they offer. Then, keep reading to learn more details about each type of insurance. Health Insurance helps patients pay medical bills Life Insurance helps survivors pay expenses after a person has died Automobile Insurance covers bills after a car accident Property Insurance helps pay to rebuild or replace lost or damaged property Liability Insurance helps protect against lawsuits Health Insurance: Many doctors and hospitals in the United States will not treat patients who do not have health insurance, unless the patient requires emergency care services. The reason is that the costs of medical care have skyrocketed. Few people can afford to pay the real costs of health care. However, health insurance sometimes will cover most of these medical costs. What does it cover? Coverage varies from different insurance providers. Most basic health insurance policies cover regular trips to the doctor and emergency room visits. Many policies also cover surgical procedures, medications, recovery, home care, and so on. Who needs it? Everybody in the United States needs health insurance, including people who are young and healthy. Because health care is so expensive, even a small mishap, like a sprained ankle, could be costly if you do not have health insurance. Life Insurance: Some people leave behind large expenses and debts after they die. If a person does not have life insurance, family members must pay those expenses, which might include medical bills, funeral costs, and credit card debt. Life insurance helps surviving family members pay those debts. More importantly, if a wage earner dies, the family will be without that person's income. Life insurance also helps the family cover expenses in general. Without that wage earner's income, it will be tough for the family to adjust financially, at least for a while. What does it cover? Coverage and terms vary, but most life insurance policies pay out a specific sum of money to survivors, called beneficiaries, after the policyholder dies. Who needs it? People with dependents—small children, elderly parents, or spouses who cannot work—should have life insurance so their families will have money to pay their bills and plan for the future. Automobile Insurance: In 2009, nearly 11 million automobile accidents occurred in the United States.1 Automobile accidents can result in personal injury and damage to property. Even the smallest fender bender can rack up bills. Automobile insurance helps cover those bills. What does it cover? In the event of an accident, automobile insurance provides money to pay for repairs and medical attention. Who needs it? Most states require drivers to have automobile insurance. Even drivers with excellent driving records need to carry it because accidents happen and because repairs and medical care are expensive. Property Insurance: Property insurance covers assets, such as your house and the possessions you keep in it. Renter's insurance, a kind of property insurance, covers your assets within your rental unit. What does it cover? If an unexpected event, such as a fire, flood, tornado, or theft destroyed your home or ruined your possessions, property insurance would help cover the rebuilding or replacement costs. Who needs it? Those who own homes and valuable possessions, such as jewelry, electronics, fine art, and so on, need property insurance. People who do not own their homes but who want to protect their assets can obtain renter's insurance. You will learn more about property insurance in Module 160. Liability Insurance: Liability refers to your legal responsibility for others' safety. If someone gets hurt while on your property or while in your care, you might be liable. This means you are responsible for paying for the injured person's medical bills. Sometimes, people are sued over liability issues. What does it cover? Liability insurance helps protect policyholders against financial losses caused by liability claims or lawsuits that claim malpractice. The insurance helps cover the costs of paying or fighting liability claims. Who needs it? Most homeowners have liability insurance in case someone gets injured while on their property. Many professionals, such as medical care providers, also carry liability insurance to protect against lawsuits. Your automobile insurance policy usually includes a certain amount of liability insurance as well. Do Not Risk It: How to Get Insured Now, you know what insurance is and who needs it. Most teens do not need to worry about insurance. Their parents or guardians usually carry the necessary health, property, and automobile insurance policies that will protect them. The time is coming, though, when you will need to think about insurance, especially if you plan to drive a car or other motorized vehicle in the near future. Let's consider the steps for getting insurance. Read the following list to see an overview of the steps. Step 1 Think about your life situation, identify your insurance needs, and gather your information. Step 2 Meet with an insurance agent to discuss your insurance options and to choose an appropriate policy. Step 3 Pay your premiums. Step 4 When necessary, submit claims to the insurer to pay bills. Step 5 Periodically, re-evaluate your insurance. Steps one and two are really important. As with any purchase, it is best to be informed before you buy. Read the other modules in this unit for more information about the specific kind of insurance you think you need. Then, look online for information about prices and policies. Ask someone you trust to recommend an insurance agent. Having a trustworthy insurance agent is really important. It is a good idea to find an agent who knows the laws in your state and will be able to compare and who can contrast policies so you get the right coverage at the right price. Pros and Cons of Insurance As you have learned, insurance is a risk management tool. It helps protect your assets when an unexpected bad event happens. There are other good reasons to get insurance. One reason is peace of mind. When you are insured properly, you know that you have taken responsibility for protecting yourself, your family, and your assets. That is pretty mature of you! Plus, by being insured, you actually help out your community. By taking responsibility for protecting yourself and your possessions, you are making sure you will not become a burden to others—your family, your neighbors, or your fellow taxpayers. Here is an example: A person who does not carry health insurance cannot see a regular doctor. When that person gets sick, the person often ends up in an emergency room. Because he or she does not have health insurance, the hospital must pay the bill. The hospital passes along the costs of caring for uninsured patients by raising the fees for patients who do have health insurance. As a result, insured patients and their insurers end up paying higher health care costs. There are also a few downsides to insurance: It is complicated: Insurance documents are full of complicated legal language. This means you have to put your trust in an insurance agent who will guide you and explain what the documents say and mean. This also means it is important to find an agent who is respected and knowledgeable so you do not end up over-insured or under-insured. People who are over-insured have too much insurance. For example, they might have insured their homes for far more than it would actually cost to rebuild them after an unexpected event; as such, they would not receive anything more than the value of the home, no matter how much insurance they had. If you are over-insured, you might be paying too much for your insurance. People who are under-insured have the opposite problem. They underestimate the values of their properties. They might be saving money on their insurance premiums, but they will lose out when it is time to file a claim because they will not get enough to cover their expenses. An honest and knowledgeable agent will prevent this from happening. It is an expense: You have to set aside money every month to pay for insurance, and if you have more than one policy, the expenses add up. In addition to your premium, when you file a claim, you must also pay a deductible. A deductible is the amount of money you pay before the insurer will pay a claim. Each policy states the amount of the deductibles. Your deductible affects the price of your policy. If you agree to a higher deductible, your policy often will cost less. This makes sense if you are a young, healthy person with a good driving record. Chances are you will not need to file a claim or pay a big deductible. But, if something happens, you need to be prepared to pay the cost of the deductible. It is a business: Insurance is a big business. As a result, insurers are careful about who they insure and what claims they pay out. Insurers do not just write checks to cover every claim. They have employees who investigate claims and make sure they are valid. Insurers might even refuse to pay a claim for a number of reasons. Plus, if a policyholder proves to be accident prone and submits a lot of claims, the insurer often will raise his or her premiums. Interested in a job in the insurance industry? Most people work in offices as administrators, but some other insurance-related jobs let workers get out in the field: Insurance investigators are like detectives. They meet with people who are suspected of filing fraudulent claims. They check out the policyholders' stories and look at the evidence. Insurance investigators help the insurer decide if a claim should be paid or not. Claims adjusters come out to see the extent of the property damage after a storm, fire, or accident. Their job is to inspect the property and make estimates on the costs of repairs or rebuilding. To learn more, check out the Bureau of Labor Statistics Web site: www.bls.gov. According to the U.S. Census Bureau, nearly 50 million Americans did not have health insurance in 2010.1 That's nearly one-sixth of the U.S. population! Insurance is a financial planning tool. It helps with risk management by protecting you against financial losses caused by unexpected bad events, such as theft, flood, fire, death, illness, or injury. Because there is no one-size-fits-all insurance, most people have more than one kind of policy. Often, they have a combination of health, life, automobile, property, and liability insurance. Insurers collect premiums from their policyholders. After policyholders pay a deductible, insurers will pay a claim, which allows the policyholder to replace or repair the damaged item or to pay bills resulting from the incident. The first step to acquiring insurance is to evaluate one's needs and life situation. The next step is to work with a professional insurance agent to find the right policy at the right price. Policyholders must pay their premiums regularly and on time for their coverage to continue. There are benefits and drawbacks to having insurance. It provides peace of mind and reduces the chance of your becoming a burden to others, but it is a complicated process and a regular expense.

Module 160

Just as you purchase health and automobile insurance to protect yourself against financial losses due to illness or car accidents, you might need property and professional liability insurance to protect your home and assets. In this module, you will learn what property insurance covers and why people in certain jobs invest in professional liability insurance. In May 2011, a series of tornadoes devastated areas of the Midwest, including the town of Joplin, Missouri. Later, in August, a single hurricane caused more than a billion dollars in damage to homes, businesses, and other property in many East Coast areas. A week later, wildfires destroyed more than a thousand homes outside Austin, Texas. While the fires caused few injuries or deaths, thousands of people were left homeless. Some escaped with only the clothes they were wearing. A house is a major asset. For most people, a house represents a lifetime of saving and investing. What happens when a catastrophe strikes and you lose most of that valuable asset with all your possessions inside? People who carry property insurance can avoid devastating financial losses as they rebuild their homes. Property insurance can provide them with money to begin putting their lives back together. Property insurance helps policyholders cope with major disasters—such as fires, hurricanes, or tornadoes—as well as minor mishaps, like theft or a fallen tree. Like other forms of insurance, it can provide some peace of mind and protect people from serious financial losses. Property insurance covers your home and the possessions inside. Professional liability insurance protects you from lawsuits others can initiate due to your actions at work. What Happened to My Stuff? Property insurance is a lot like auto insurance. It protects you not only from liability but also helps you with the costs of repairing or replacing damaged or lost property. It is also like health insurance. In the event of serious damage to your property, you would submit a claim to the insurer to help pay for its repair or replacement. This is similar to submitting a medical claim after surgery or during physical therapy. Liability Coverage Property insurance protects you against liability for medical and other expenses for people who get injured on your property. It also covers damages you might cause to another person's property. --Accidents happen. If you damage your neighbor's property, or if your neighbor gets injured while on your property, liability coverage will help cover the costs. Property Damage Coverage Property insurance pays out benefits to help rebuild or repair your house if it is damaged by fire or other catastrophic events. Fire damage Fire, water, and wind can all cause serious damage to the structure of your house. Property damage coverage helps pay for repairs or rebuilding. Loss of use refers to the state of your property after an unexpected event. If the property cannot be used normally, you will experience loss of use. Homeless A house destroyed by fire results in loss of use. So does a stolen computer. You cannot use it if it is no longer in your possession. Personal Property Property insurance includes the costs of replacing personal possessions that were stolen or destroyed while in the house. A floater provides extra coverage for specific high-value items, such as jewelry or fine art. Property insurance covers personal property that was damaged or stolen while inside a house. Medical Payments This coverage pays for medical expenses related to injuries that occurred on your property. Broken arm If someone slips on the ice on your sidewalk or trips on a crack in your driveway and needs medical attention, property insurance will help cover the bills. Specialized Coverage Specialized coverage is available for people who live in areas that regularly experience earthquakes or floods. Insurers can provide endorsements, or additional coverage, for these special circumstances. Earthquake in California Specialized coverage is needed in areas that are prone to certain destructive acts of nature, such as floods or earthquakes. If you own a home, you will need a type of property insurance called homeowner's insurance. It covers the physical structure of the house and the contents inside it. Nearby structures, such as sheds and garages, are usually covered, too. With homeowner's insurance, you are covered from liability for accidents that happen to others while they are on your property.1 Your liability coverage extends to damage you cause to a neighbor's property—for example, breaking a neighbor's window while playing baseball in the backyard. If you rent the place where you live, you can get renter's insurance, which covers the costs of your possessions in the event of damage (like from a fire) or loss of use (like from a theft). Renter's insurance is usually inexpensive because it covers only property, not liability. Whether you need homeowner's or renter's insurance, it is always a good idea to compile an inventory of your personal property. Go from room to room and take pictures of your most important possessions—the things that cost a significant amount of money, such as furniture, computers, stereos, televisions, appliances, sports equipment, clothing, jewelry, and fine art. Collectibles, such as coins or stamps, go in a separate category. Documenting your belongings will help prove that you did own these items if there is ever a problem. Be sure to keep receipts of expensive purchases, such as televisions, computers, and gaming systems. If you did not keep receipts in the past, try to remember and write down how much you paid for each item and when you bought it. This will help you determine how much property insurance you need. Actual cash value This means that the policy covers what you paid for the property minus depreciation. For example, let's say you bought a computer two years ago for $900, and it was recently stolen. If it had depreciated $100 per year, the insurer would pay you $700. However, a new computer might cost you $1,000. In this case, you would need to consider the replacement values of your possessions. Keep in mind that actual cash value policies cost less or have lower premiums because insurers have to pay out less over time. Replacement value This means that when you submit a claim, the insurer will pay you the cost of replacing the damaged or lost property. In this method, the depreciation of the value of the property is not part of the equation. You get a check for what it costs today to replace or rebuild the property. This is a good idea, as consumer costs are constantly increasing. Many insurers, however, will put a limit on replacement value. In addition, they will charge higher premiums for replacement value policies. As with all other types of insurance, it is a good idea to shop around for the best policy. You want the best coverage for a reasonable price. You also want to make sure you are not overinsured or underinsured. Look online and visit a reliable insurance agent before deciding on property insurance. Liability: Personal and Professional As you have learned, property insurance provides you with personal liability protection. Once again, personal liability means you are legally responsible for another person's losses or injuries if they occur on your property. Liability is often caused by negligence, which is the failure to take proper actions or precautions. For example, you would be negligent if a neighbor fell over some gardening tools you left on the sidewalk. You would also be negligent if you ignored a dead tree in your yard and it fell on a neighbor's car. Of course, accidents happen, but sometimes, they are caused by negligence. If you do not pay attention to the condition of your property and someone gets hurt, you are personally liable. Some people's professions make them professionally liable, and negligence comes into play here, too. Certain professions are particularly at risk of liability lawsuits. Patients, for example, sometimes sue their doctors due to alleged negligence, such as not providing good care or not making the best decisions for them. Depending on the size of the lawsuit, a doctor or other professionals could lose their homes and other assets. This is why doctors and other professionals, such as lawyers, often invest in professional liability insurance. This insurance helps them financially protect their assets in the event of a lawsuit. Professionals and individuals can further protect themselves from lawsuits by taking out an umbrella policy. Also called a personal catastrophe policy or an extended liability policy, an umbrella policy goes well beyond the personal liability coverage that property insurance policies provide. Most umbrella policies cover you against personal injury claims and attempts to damage your reputation through slander or libel (untrue statements about your character expressed in public or in print, respectively). Many umbrella policies cover an individual for liability up to $1 million or more. People with many valuable assets or a high public profile are more likely to be sued. As a result, they tend to benefit from umbrella policies. In this module, you learned that property insurance provides liability coverage for individuals. Without liability coverage, you would be legally responsible for injuries to others that occur on your property due to your negligence. Property insurance also covers your possessions. If you own a house, homeowner's insurance would cover the physical structure in the event of an unexpected or catastrophic event. It would cover most of the costs of repairing or rebuilding the house and replacing the possessions inside it. Renter's insurance covers only possessions. Property insurance also covers loss of use of or damage to property. Property insurance policies provide either a possession's replacement value or actual cash value. Some people work at jobs in which they are more vulnerable to lawsuits or liability claims against them. Professional liability insurance helps protect their assets in the event of a lawsuit. Professionals and individuals can purchase additional or extended liability coverage in the form of an umbrella policy.

Module 158

Life insurance is a topic that makes people think about the future—specifically, how they can make choices in the present to help their loved ones once they have passed away. It is not a fun topic to think about, but it is important. Life insurance does not protect you. Rather, it helps your family members or beneficiaries after your death by providing them with a sum of money that covers some of their expenses. Life insurance protects your family from financial losses resulting from your death; these could include hospital bills or funeral costs as well as loss of income. In this module, you will learn about life insurance, what it is, and why you might (or might not) need it. You will also learn about different kinds of life insurance policies and how to purchase them. ------- According to this table, babies born in the United States in 2007 can expect to live a long time—75.38 years for males and 80.43 years for females. There is no guarantee, of course, but these numbers reflect trends studied by experts called actuaries. Actuaries are statistical experts who collect and compile data about life expectancy—the average age a person can expect to live—for different population groups. (The word actuary comes from the Latin for bookkeeper.) These experts use the data to make predictions about the population as a whole. Life insurance agents rely on tables like these. The tables help them guide their clients to the right life insurance policies, based on age, sex, and life expectancies. Life insurance helps protect the people who depend on you financially and who would experience financial hardship in the case of your death. As a teenager, you probably do not need life insurance; though, there is an advantage to getting life insurance now since it would provide you with a lower fixed rate than you could get when you are older. As you get older and have dependents, you should probably consider getting life insurance; your dependents could be your spouse, an aging parent, a disabled sibling, or young children. Upon your death, life insurance will pay out a sum of money that your dependents can use to pay off your debts, cover your medical or funeral expenses, fund a college education, or pay estate taxes. Like other forms of insurance, life insurance is a risk-management strategy. The policyholder, or policy owner, purchases a contract from an insurer and pays regular premiums. Unlike with other forms of insurance, the owner is not always the person who is covered. For example, a person might purchase a life insurance policy that covers the life of a spouse. When the person covered by the policy dies, the insurance company pays the beneficiary—the beneficiary is the person who receives the proceeds. This is usually a family member, a trusted friend, or a charitable institution. The amount of money the life insurance policy pays out depends on the terms of the policy. People who do need life insurance typically have a combination of the following: dependents (children, elderly parents, ill or disabled family members, spouses who do not or cannot work) mortgages (house payments) large, outstanding debts (credit cards, loans, medical bills) People who have small children, house payments, or large debt are in great need of life insurance. Their families will need money to cover daily expenses and to pay off any debt left behind. People who do not necessarily need insurance typically have a combination of the following: no dependents (no children or grown children, working spouses, or healthy family members) substantial savings (or other liquid assets) no large, outstanding debts (such as mortgages or credit card bills) As with other types of insurance, you do not want to pay for life insurance unless you need it. Young single people with no outstanding debts are not likely to need life insurance. Young married couples often do not need life insurance if the surviving spouse can continue to work and will not have to pay significant debts after the loss of the other spouse. Single and childless homeowners do not really have to worry about someone paying off their mortgages; the banks will simply foreclose and reclaim the property. However, everything in life constantly changes. Someone who is young and single today could be married with a large mortgage in the near future. While you might not need life insurance today, you might want to consider it to get a lower rate than you would in the future. And, if your situation changes, consider whether you might need life insurance. The 7/70 Method This method assumes that a "typical" family would need roughly 70% of the policyholder's income for a period of seven years after his or her death. So, a policyholder whose gross annual income is $50,000 would need a policy that provided $35,000 (that is $50,000 times 70%, or .70) a year for seven years, or $245,000. As a result, the policyholder would want to carry a life insurance policy worth at least $245,000. The 50% Method This method assumes that you are childless but married to someone who is healthy and who will be able to continue working after your death. That means you need a relatively small policy—just enough to help your spouse out for a time. This method involves determining your half of your debt load (cosigned mortgages, cosigned credit cards, etc.) and adding it to your estimated funeral expenses. This method requires determining half of a person's debt and adding it to the funeral expenses. The Single-Parent Method This method essentially insures the family member who stays at home with the kids. Married couples with children use it to calculate how much money they might need to cover the costs of child care and homemaking in the event that one parent dies. In some cases, the wage-earning parent will die, and the surviving parent must go back to work and also pay for child care. In other cases, the stay-at-home parent will die, and the working parent must either quit to care for the children or pay for child care. Experts recommend that the stay-at-home parent be insured for $10,000 for each year until the youngest child reaches age 18. You also can use other, more complicated calculation methods. They involve taking into account the deceased's Social Security income and the value of his or her liquid assets. The point here is that all people must calculate their life insurance needs based on the projected needs of his or her dependents. You want to make sure you have sufficient life insurance, but you do not want to pay for what you do not need. The insurance should cover 15 years (until the twins are 18 years old) multiplied by $10,000 per year. - - - - - - - - -- - - - - Term life insurance is also called temporary life insurance because you hold the policy for only a short time (1 to 30 years), not for your entire life. For example, you might want to carry life insurance during key periods in your life, such as when your children are young, when you have a mortgage, or when you owe a large debt or loan. Most term life insurance pays benefits only if the person being covered dies during the term of the policy. If the person outlives the policy, the insurer pays nothing unless the policy has a special option called a return of premium. Annual Renewable TermThis policy is renewed annually, but the premiums increase yearly. Fixed-Rate Level Term (or Straight Term)This policy allows the owner to pay a locked-in premium rate for a period of 5 to 30 years. Decreasing Term This policy's coverage decreases each year, but the premiums stay the same. Credit Life This policy pays off loan debts in the event of the policyholder's death. Annual Renewable TermThis policy is renewed annually, but the premiums increase yearly. Fixed-Rate Level Term (or Straight Term)This policy allows the owner to pay a locked-in premium rate for a period of 5 to 30 years. Decreasing Term This policy's coverage decreases each year, but the premiums stay the same. Credit Life This policy pays off loan debts in the event of the policyholder's death. The advantage of term insurance is that you pay it only for a *short time* . Most policies are renewable each year or every five or ten years. This makes them more flexible—has your life changes, you can adjust your policies. -Most insurance experts agree that decreasing term life insurance is a bad deal. Do not waste your money. The coverage goes down each year; in reality, though, as you get older, you actually need more coverage. So, you get less and less coverage but pay the same premium month after month. -Do not spend money on term insurance policies that cannot be converted to permanent life insurance. Why? Policies that cannot be converted could cost you money with no return. To find out why you might want to convert a policy, keep reading. -Consider paying more for a term policy with a return of premium (ROP) provision. If you outlive your policy, the ROP is like a money-back guarantee. Otherwise, you get nothing. Permanent life insurance covers a person's entire life, and when that person dies, the insurer pays out the death benefits to the beneficiary. We will look at three kinds of permanent life insurance—whole life, universal life, and variable life. Whole Life Insurance: This kind of permanent life insurance is also called straight life, ordinary life, or cash value life insurance. Whole life insurance involves a policy where the owner pays a fixed premium. Upon the policyholder's death, the insurer pays benefits to the beneficiary. The amount of the benefits depends on when the policy was started and how long the premiums were paid. The amount is clearly specified in the terms of the policy. Whole life insurance is attractive for two reasons. First, there is little risk involved on the part of the policyholder. He or she pays a fixed rate for the life of the policy. Any increases in costs to the insurer do not get passed on to the policyholder. In addition, this kind of policy acts somewhat like a savings account. The policyholder pays a premium, which is typically higher compared to other forms of life insurance, covering the face value of the policy and a cash value. The cash value represents the savings account portion of the policy. Part of the policyholder's premium is deposited into this account where it accrues interest. At some point, the policyholder can choose to access this money through a loan from the insurance provider or cash out the policy entirely. When the policyholder cashes their policy they receive the value in their account minus any outstanding expenses and fees. This form of life insurance works best for people who want a safe, risk-free, and hands-off way to protect their assets and to set aside money. Universal Life: Universal life policies are different from whole life insurance in a few key ways. First, the policyholders take on most of the risk. As a result, they can face premium hikes that cover the insurer's costs. In addition, the interest rate on the cash value is not fixed. This can be good if interest rates go up but bad if they fall. Insurance experts recommend universal life insurance policies to people who need flexible plans. Universal life policies allow people to adjust their premiums. They can pay as much or as little in premiums as they wish. They can also raise or lower the death benefits. The policies can also serve as tax shelters, where policyholders can stash their money while interest rates are high and not pay taxes on the interest until later. This policy is for people who stay on top of financial news and who want to manage their money and insurance policies actively. Variable Life Insurance: Variable life insurance policies essentially allow policyholders to play the stock market. With variable life policies, part of the policy's cash value can be invested in stocks, money market funds, or bonds. When the stock market is up, a variable life policy can bring big returns, but there is plenty of risk. Policyholders can also suffer losses. There are no guarantees with variable life insurance policies, and the policyholder must account for any losses. For example, if the policyholder's investments perform poorly and the remaining cash value is insufficient to cover the account's expenses, then the policyholder will need to pay a higher premium. If they fail to do so, part or all of their policy may lapse and their coverage could be dropped. The Conversion Option: So, now that you know what permanent life insurance policies involve, let's go back to the question of why you might want to convert a term policy to a permanent one. Permanent life insurance offers a way for policyholders to protect their assets and to build cash value. Plus, the premiums are cheaper. Term insurance is like renting an apartment. When you stop paying the premiums, you have nothing. You do not have any coverage and do not get anything back—there are no death benefits if you do not die, and it has no cash value. As they get older and their lives get more complicated, some people might see a benefit in switching from term to permanent life insurance. This is called a conversion option. This switch allows people to to pay the same premium without submitting to a medical examination or risking qualifying for a permanent policy. *Term or Temporary Life Insurance* -short term -no cash value -low premiums that can increase on renewal -no payments if policyholder outlives a policy without ROP option -not always renewable or convertible to permanent insurance *Permanent Life Insurance* -long term -cash value -high premiums -guaranteed death benefits pay out; cash value can be withdrawn in loans -lifetime policy requires no renewal, unless premiums lapse As with the other kinds of insurance, if you need life insurance, go to a trusted insurance agent. You have seen that there are plenty of options. The agent will help you compare premiums, coverage, and benefits. Permanent insurance, as you have learned, is a lifelong expense, so you want the best choice. In addition, your agent will also make sure you are not under-insured or over-insured. Remember, you do not benefit from your own life insurance policy; your loved ones do. You want to provide them with the financial help they will need and not leave them with debts to pay. To qualify for life insurance, you have to submit to a medical examination. The insurer wants to know the state of your health and your medical history. This information helps the insurer determine your policy benefits and your premium rates. You will need to decide how the benefits will be paid to your beneficiary. Again, think about your loved ones' needs. Will they need a lump sum to pay off lots of debts at once? Or, would they fare better if they received the money in regular installments? Think about how often and how much you can afford to pay insurance premiums. Premiums can be paid monthly, quarterly, biannually, or annually. Consider your budget before you decide. Read your policy carefully. Take time to look over all the terms before you sign. Legally, you have a 10-day examination period after signing the policy to reconsider your purchase. It is called a free-look period. Finally, it is important to consider the opportunity costs of insurance. Remember, the money you have now is worth more than the money you will earn in the future because today's money can earn interest through investments. So, do the math. Calculate how much you will spend on your life insurance policy over the duration of the policy. Then, consider how much you could earn in interest if you invested that same money another way. Make sure the difference between the other investment and the life insurance is not too great. Insurance, even policies with cash value, is an expense. Find a policy you can afford. Buyers Beware! You will get lots of offers for life insurance in the mail or online. The bank that holds your mortgage or your credit card company might send you an offer for life insurance that looks affordable. But, it is usually credit insurance, not permanent life insurance. Experts agree that you should take advantage of these offers only if two things are true: (1) if you are really sick and likely to die very soon and (2) if the insurance requires no medical examination. These special offers tend to have very specific terms and do not carry conversion options. Plus, the rates tend to be high. Worst of all, the beneficiary is often the bank or credit card company, not your family. Likewise, do not rely on group life insurance. Many employers offer it for free. But, keep in mind that this group insurance really is only temporary. Most likely, you will lose it if you leave or lose your job. And, if you can convert, the rates are probably not as good as other permanent policies. While you are at it, ignore life insurance vendors at airports. How likely is the plane to go down while you are on it? Chances are pretty slim. This is just another form of temporary life insurance. Remember, with most temporary life insurance policies, you do not get anything back if you outlive the policy. thinking about probabilities? Actuaries are experts in analyzing statistics about the way people live their lives. They collect and study data and make predictions that help insurance and other types of companies determine how much risk to take on. When insurance actuaries consider a policyholder's personal and medical history, they do not look at him or her in isolation. They consider the probability that this person will develop certain illnesses or experience certain hardships or accidents. Then, they help the insurance agent develop an insurance policy that suits both the company and the policyholder. Actuaries need to have a college education and must take professional exams to be certified. More than half of all actuaries work for insurance companies. To learn more about actuaries, check out www.bls.gov. Life insurance is a risk-management strategy. Life insurance does not protect the policyholder; instead, it protects the policyholder's family or beneficiaries from financial losses resulting from the policyholder's death. The insurer pays the beneficiaries a death benefit. They can use this money to pay off debts, create college or retirement funds, or cover daily expenses. Not everyone needs life insurance. Those who do must calculate how much money their families or loved ones will need. The two main types are term life insurance and permanent life insurance. Term life insurance policies cover anywhere between one and 30 years and do not pay out benefits if the policyholder outlives the policy. Some policies have a conversion option, which allows policyholders to switch over to permanent life insurance. In addition, term life insurance has no cash value. Permanent life insurance, however, covers the policyholder's entire lifetime and guarantees death benefits. It also builds cash value. Cash value is the money a policyholder gets back if he or she cancels the policy. Forms of permanent life insurance include whole life insurance, universal life insurance, and variable life insurance. As with other forms of insurance, it is important to find a trusted insurance agent before purchasing life insurance. Also, it is important to understand the terms of the policy before signing and paying premiums.