Personal Finance Exam #2

Sylvia has a health insurance policy with a $1,000 deductible, 60/40 coinsurance, and a $3,000 out of pocket maximum. She paid a total of $1,400 (out of her own pocket) for a hospital visit in April. In July she visits the doctor and has several tests run. The total bill this time comes to $2,000, which is the negotiated price according to her insurance company. How much of this $2,000 bill must she pay out of pocket?

$2,000 x 0.40 = $800 is what she must pay for the visit. She had already met her deductible because of her visit in April. After the July visit, this brings her total out-of-pocket expenses for the year to $1,400 + $800 = $2,200 = $4,400, which is below her out-of-pocket maximum. [For those who like to go above and beyond what is asked, Sylvia's visit in April must have also involved a total bill of $2,000: she would have paid the first $1,000 herself (to meet her deductible), and then she would have paid ($2,000 - $1,000) × 0.40 = $400 of the remainder, for a total of $1,000 + $400 = $1,400.]

Estimate life insurance needs using the needs analysis method. Bronwyn is planning to buy life insurance on herself to protect her family. She is the only one with an income in her family. She has estimated that if she were to die at this point in time, the family's needs will average out to $30,000 per year for 12 years. After that time, everyone should be self-sufficient. She has investments of $100,000 that would be available for the family to use, and she estimates that Social Security benefits will provide $12,000 per year to the family upon her death. How much life insurance should she buy?

$244,000 - $360,000 = $116,000 (total needed insurance)

Estimate life insurance needs using the multiple-of-earnings method. Xavier earns $45,000 per year. His wife works part time and earns $10,000 per year. He wants to buy life insurance and has decided to use the multiple-of-earnings method to determine the amount to purchase. He thinks a multiple of eight is reasonable. For the moment, he is only going to buy life insurance on himself (his wife is the beneficiary). How much life insurance should he buy?

$45,000 x 8 = $360,00 The amount of his wife's salary is irrelevant for this method.

Estimate life insurance needs using the multiple-of-earnings method. Pierre earns $60,000 per year. His wife works part time and earns $20,000 per year. He wants to buy life insurance and has decided to use the multiple-of-earnings method to determine the amount to purchase. He thinks a multiple of nine is reasonable. For the moment, he is only going to buy life insurance on himself (his wife is the beneficiary). How much life insurance should he buy?

$60,000 x 9 = $540,000

Estimate life insurance needs using the needs analysis method. Delwyn is planning to buy life insurance on herself to protect her family. She is the only one with an income in her family. She has estimated that if she were to die at this point in time, the family's needs will average out to $25,000 per year for 25 years. After that time, everyone should be self-sufficient. She has investments of $50,000 that would be available for the family to use, and she estimates that Social Security benefits will provide $10,000 per year to the family upon her death. How much life insurance should she buy?

$625,000 - $300,000 = $325,000 (total needed insurance)

Part C: Uninsured / underinsured motorists coverage

- 3 requirements: must be an innocent victim, with incurred damage, and other party unable/unwilling (hit-and-run) to pay what they should

Traditional Indemnity Plan

- Patients select their own doctors and hospitals and pay on a fee-for-service basis - They do not need a referral to see a specialist

What are the types of contract/policy features?

- beneficiary clause - exclusions - living benefits - viatical settlement/life settlement

Part D: Physical damage (to one's own vehicle)

- collision, recommend high deductible; required if have a car loan - comprehensive (other than collision) also recommend high deductible

Part A: Liability Coverage

- covers both bodily injury (BI) and property damage (PD) - often quoted with split limits (30/60/25 = legal minimums in Texas)

Renters Insurance

- covers policyholder's personal furnishings and belongings, not the building itself - landlord's property insurance does NOT cover renter's personal property - special type of homeowners policy (Form HO-4)

What are some health policy provisions (terms of payment)?

- deductible - co-insurance (participation) - out-of-pocket maximum - internal limits/concept of usual, customary - coordination of benefits

Other property insurances

- earthquakes - floods -

What are some government health plans?

- medicare - medicaid - workers compensation (state by state) - VA health care (veterans)

Part B: Medical payments / Personal injury protection (PIP)

- persons who are covered

What are the basic provisions of the affordable care act?

- providing more oversight of health insurance premiums and practices - emphasizing prevention, primary care and effective treatments - reducing health care fraud and abuse - reducing uncompensated care to prevent a shift onto insurance premium

Auto Insurance

1. A Liability coverage 2. B Medical payments / personal injury protection 3. C uninsured / underinsured motorists coverage 4. D Physical damage (to one's own vehicle) 5. Factors in auto insurance premiums

Name two government-run health plans and identify the types of people who are typically covered by them.

1. Medicare covers people 65 years of age and older as well as those under age 65 who are receiving disability benefits under Social Security. 2. Medicaid is a state-run program that covers people who qualify to receive assistance because of their inability to afford health coverage. 3. Workers' Compensation Insurance covers workers who are injured or become ill on the job. 4. The Veterans Administration provides health care to veterans who qualify.

What are 2 types of whole life?

1. cash value 2. nonforfeiture right

What are the 2 types of term life?

1. level premium term 2. decreasing term

What are private health insurance plans?

1. managed care plans 2. traditional indemnity plans

What are the 2 methods to determine needed amounts?

1. multiple-of-earnings method 2. needs analysis method

Liability Exposure

A condition that presents the possibility of a legal claim or lawsuit being made against an organization

preexisting condition

A health problem that existed before the date your insurance coverage became effective.

Decreasing Term

A type of life insurance that features a level premium and a death benefit that decreases each year over the duration of the policy.

property loss

Economic loss due to property that is damaged, destroyed or stolen

Mario has a group health policy that includes an annual $1,000 deductible. After that, his insurance company has an 80/20 co-insurance clause, meaning that the company pays 80% of the remaining UCR (usual, customary, and reasonable) costs, leaving him to pay 20% of these costs. Once Mario has paid a total of $3,000 out of pocket, his insurance company pays all remaining UCR costs at 100% (this is a stop loss provision, or out-of-pocket maximum). Mario has an accident and is rushed to the hospital. He had not spent any money under his policy all year until this happened. The hospital, surgical, and physician bills add up to $10,000. His insurance company considers the full amount to be UCR. How much does Mario have to pay toward this $10,000 medical bill?

He pays $1,000 (deductible) + 20% x (10,000 - 1,000)(coinsurance) = $2,800.

Martin has a group health policy that includes an annual $2,000 deductible with 90/10 coinsurance. Once Mario has paid a total of $4,000 out of pocket, his insurance company pays all remaining UCR costs at 100% (this is a stop loss provision, or out-of-pocket maximum). Mario has an accident and is rushed to the hospital. He had not spent any money under his policy all year until this happened. The hospital, surgical, and physician bills add up to $10,000. His insurance company considers the full amount to be UCR. How much does Mario have to pay toward this $10,000 medical bill?

He pays the $2,000 deductible and then 10% of what remains, up to his out of pocket maximum. He pays: $2,000 + 0.1(10,000 - 2,000) = $2,800.

Part D Auto Insurance coverage (Collision and Comprehensive) Provide an example of a situation in which a person should purchase such insurance, and also an example where it does not make sense to do this.

If one has a loan for or is leasing a vehicle, then Part D auto insurance coverage is mandatory. Even if the car is owned outright, it may make sense to buy this insurance if the car's value is great enough that a loss of the vehicle would be seriously detrimental to one's finances. However, if the car is owned outright but its value is relatively low, this insurance should not be purchased since the cost of the insurance may add up to a large percentage of (or more than) the amount of any possible insurance payout from a claim under Part D. (Instead of buying the insurance, add some more money to one's emergency fund in case of a loss.)

long-term care insurance Do we need it? How and when can you buy it?

Provides payment for extended nursing care due to accidents, illness, or old age Between 60-65 years old

disability income insurance Provisions?

Provides regular cash income when an employee is unable to work due to pregnancy, a non-work-related accident, or an illness.

Saresah has a health insurance policy with a $4,000 deductible, 70/30 coinsurance, and a $7,000 out of pocket maximum. She paid a total of $5,400 for a hospital visit in April (and therefore already met her $4,000 deductible). In July she visits the doctor and has several tests run. The total bill comes to $2,000, which is the negotiated price according to her insurance company. How much of this $2,000 bill must she pay out of pocket?

Since she met her deductible already, she must pay the 30% coinsurance until she gets to the $7,000 out of pocket maximum. She pays $2,000 × 0.3 = $600 toward the bill. Then she will have paid $5,400+$600 = $6,000 so far this year, which does not get her to the out of pocket maximum.

Managed care plans (HMO, PPO, etc)

They have contracts with health care providers and medical facilities to provide care for members at reduced costs.

peril

a cause of loss such as fire, lightning, windstorm

Need Analysis Method

a method of determining the amount of life insurance coverage needed by considering a person's financial obligations and available financial resources in addition to life insurance

multiple-of-earnings method

a method of determining the amount of life insurance coverage needed by multiplying gross annual earnings by some selected number

Insurance Policy

a written contract between the insured and an insurance company that promises to pay for all or part of a loss

Ramie has a personal auto policy with Part A coverage of 50/100/50, $5,000 for medical payments (Part B coverage), and a $1,000 deductible for collision insurance (Part D coverage). How much will her insurance cover in each of the following situations? Will she have any out-of-pocket costs? a. Ramie loses control and skids on wet pavement, running into another vehicle and causing $5,000 damage to it and $2,750 damage to her own car. (No one was injured.) b. Ramie runs a stop sign and causes a serious auto accident, badly injuring three people. The injured parties win lawsuits against her for $40,000 each. c. Ramie's 16-year-old son borrows her car. He backs into a telephone pole and causes $850 damage to the car.

a. Insurance pays $5,000 to the person whose car was damaged, without a deductible, and ($2,750 - $1,000) = $1,750 to Ramie for her car's damage. She will have to pay the $1,000 deductible (if she repairs her car). b. The insurance company will pay $100,000 to the injured parties (the per-accident bodily injury limit), leaving Ramie to pay the remaining $20,000 to the injured parties. c. Insurance will not pay, since Ramie has a $1,000 deductible for collision insurance

Raman Patel has a personal auto policy with coverage of $25,000/$50,000 for bodily injury liability, $25,000 for property damage liability (both are Part A coverages), $5,000 for medical payments (Part B coverage), and a $500 deductible for collision insurance (Part D coverage). How much will his insurance cover in each of the following situations? Will he have any out-of-pocket costs? a. Raman loses control and skids on ice, running into a parked car and causing $3,785 damage to the unoccupied vehicle and $2,350 damage to his own car. b. Raman runs a stop sign and causes a serious auto accident, badly injuring two people. The injured parties win lawsuits against him for $30,000 each. c. Raman's 18-year-old son borrows his car. He backs into a telephone pole and causes $450 damage to the car.

a. The damage to Raman's vehicle will be covered under the collision portion of his auto insurance and is subject to the $500 deductible. The full amount of the damage to the other car will be covered under the property damage liability portion of his policy as the damage is less than his $25,000 limit. Total paid by the insurance company: $3,785 + ($2,350 - $500) = $5,635 b. The injuries to the other two people will be covered under the bodily injury liability portion of his auto policy and is subject to the limit of $25,000 per person and $50,000 total. Therefore, he will have to pay the additional $5,000 to each of the two injured persons. c. This would fall under the collision portion, and since the claim is below the $500 deductible, the insurance company pays nothing.

risk assumption

accepting the consequences of risk

personal liability umbrella

additional liability coverage for homeowner and auto insurance

deductibles

amount paid out of pocket on covered losses

Underwriting

an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price

Loss control

any activity that lessens the severity of loss once it occurs

Loss Prevention

any activity that reduces the probability that a loss will occur

internal limits

apply to specific items such as jewelry, watercraft, or securities

inflation protection rider

automatically adjusts for inflation

Risk Avoidance

avoiding an act that would create a risk

liability

damage you cause others, either through actions or negligence

policy limits

examples include internal limits of $200 for loss of cash and $1,000 for loss of jewelry

principle of idemnity (Actual cash value VS replacement cost)

insurance will pay no more than the actual financial loss suffered

Cost containment provisions

limiting responsibility to UCR charges

replacement cost

minimum amount needed to repair, rebuild, or replace an item at today's prices

section 2

perils covered - liability which may arise in connection to property, either through your actions or negligence

section 1

perils rarely covered: floods, earthquake, act of war - property loss conditions under which it will be covered, extent of coverage

Homeowners Insurance

policy states conditions (perils) under which it will pay - stimulate property covered and extent of coverage - HO-3 form is most common

Health policy provisions (terms of coverage)

preexisting conditions

liability insurance

protects against the financial consequences from the insured's responsibility to others

property insurance

protects real and personal property from losses from various perils

Level Premium Term

provides a level death benefit and a level premium during the policy term

Cash value

the amount of money a whole life policyholder would receive if the policy were surrendered before death or maturity

nonforfeiture right

the right of a policyholder to choose to receive the policy's cash value in exchange for the policyholder giving up his or her right to a death benefit

actual value cost AVC

what property is worth today (its depreciated value)