Unit 3, Lesson 4
Insurance
A tool by which the financial risk associated with some kind of loss is transferred from a person to a company, in exchange for payment Basically a collective financial safety net; a pool of funds paid by many individuals to an insurance company allows the company to pay the losses that only some individuals will incur
Factors that Affect Cost of Health Care
Amount of Coverage: The more options you choose, such as dental & vision coverage, the higher your premium will be; some plans allow you to choose levels of coverage (for example, one plan may allow for an annual maximum dental benefit of $2k, while another plan may have no maximum as long as the procedures are necessary & the claims are properly documented); the higher the level of coverage for the component parts of the plan, the higher the premium Deductibles: The deductible associated with health insurance policies is usually annual, not per incident; like all insurance policies, the lower the deductible, the higher the premium Co-Payments: A co-payment (co-pay) is an out-of-pocket fee paid for individual services each time that service is rendered; for example, one health care policy may include a $10 co-pay for each doctor visit, a $20 co-pay for each emergency room visit, & an $8 co-pay for each prescription filled; typically, lower co-pays translate to higher premiums Coninsurance: Another way that individuals & insurance companies share the cost of health care; not all health insurance plans have coinsurance; often, it's specified for a particular component (an example of this would be a 15% coinsurance for hospital stays; this means, whatever the total cost of a hospital visit, the patient is responsible for 15% of the bill, & the insurance company pays the remaining 85%); the lower the percentage of coinsurance, the higher the premium Exclusions: There are some things health insurance policies don't cover at all; an example might be elective surgery or teeth whitening; such medical services would be the full financial responsibility of the policyholder; whatever the exclusions, they're specified in the written policy along with all the other details of coverage
Factors that Affect Cost of Homeowner's Insurance Policy
Assessed Value: The more valuable the insured home, the higher the cost of the policy Deductible: Just like with auto insurance, the higher the deductible, the lower the premium, & vice versa; the homeowner pays the deductible once per claim Riders: The more valuable the items added to the policy, the higher the rates Other Factors: Examples of other factors considered are geographic location (for example, does the homeowner live near water), distance to a fire station or fire hydrant, crime rates in the neighborhood, age of the home, overall condition of the home's construction, & the existence of a sprinkler system
Term Life Insurance
Coverage only for a specified term, or number of years, such as 5, 10, or 25 --> Lower premium than whole --> Often chosen as a way to support children in case of parent's death during children's dependent years --> "Protection policy"
Getting Health Insurance
Health insurance is typically part of an overall benefit package, along with retirement & pension plans; when signing on for a health insurance policy, individuals usually have some choices to make regarding the types & levels of coverage they'll get for themselves & their family members; because there are so many possible configurations of component parts, options are usually presented as packaged "plans" from which to choose; each plan specifies the details of coverage & costs; larger companies are usually able to offer more plan choices & pay for a larger portion of the premium; on average, employers pay about 80% of the health insurance premium, leaving about 20% for the employee
Factors that Affect Cost of Life Insurance
Health of Insured Type of Policy Amount of Coverage
Homeowner's Insurance (HOI)
Insurance for private homes; anyone who owns a home should have homeowner's insurance In fact, most people who buy a home with the help of a bank through a mortgage are required to have HOI, because it protects the bank's investment
Components of an Auto Insurance Policy
Medical Coverage: This type of coverage pays for medical expenses of driver & passengers, regardless of fault Collision: This type of coverage pays for losses to your car when in a collision with another vehicle or object Property Damage Liability: This type of coverage pays for vehicle or property like fence, garage, etc. damaged in an auto accident for which you are at fault or liable; also covers legal defense & court costs Bodily Injury Liability: This type of coverage pays for medical expenses, pain & suffering, & lost wages of another person hurt in an auto accident for which you are at fault or liable; also covers legal defense & court costs GAP Insurance: This type of coverage pays for fees associated with damage to a car when the amount still owed on the car is greater than its value Uninsured/Underinsured Motorist: This type of coverage pays for losses to your car when accident is caused by a driver who has no or insufficient liability insurance Rental Reimbursement: This type of coverage pays for rental car if your vehicle is damaged in an accident
General Formula for Determining Coverage of a Life Insurance Policy
Needs - Resources = Death Benefit
The Way Life Insurance Operates
Operates much like health insurance Individuals pay a premium to an insurance company for their coverage; the insurance company then pays a death benefit, usually a lump sum, to the designated beneficiaries (often a spouse and/or children)
Health Insurance
Paying for the risk of incurring medical expenses Different from automobile or homeowner's insurance because it doesn't just cover the costs of a single unpredictable event, like the medical care for a broken leg (which might include an emergency room visit, X-rays, surgery, medicine, & so on); health insurance also typically covers routine doctor visits, preventive care, & prescription drugs; most insurance plans also include some level of coverage for mental health, chiropractic, dental, & vision care Everyone should have health insurance Most health insurance is through private companies; most people access this insurance through employer-sponsored programs, in which the premiums are taken directly out of paychecks; a small percentage of individuals (fewer than 10%) purchase health plans directly from private insurance companies Some health insurance comes through government-sponsored public programs, such as Medicare & Medicaid; government programs are mainly for elderly people, low-income families, & military veterans Some people have no health insurance at all; there's a variety of reasons for this, including not having enough money, not having a job that provides access to an employer-sponsored program, having a condition for which insurance companies refuse coverage, or making a conscious choice; having no health insurance is very risky & potentially very costly in terms of finances & well-being
Property
Pays for loss of or damage to home, property, and/or belongings in the event of things like fire, a storm, or theft
Liability
Pays for loss or damage caused by accidents that may occur to others while in your home or on your property, such as a dog bite or a fall on a swimming pool deck
Whole Life Insurance
Permanent, remains in effect until death, no matter how many years --> Higher premium than term --> Often chosen as part of a long-term investment strategy, because the policy builds cash value --> "Investment policy"
PIP Coverage
Personal Injury Protection; pays for your medical expenses in the case of an automobile accident, regardless of fault
Recent Efforts at Health Care Reform
There have been many efforts to reduce the complexity & problems with the US health care system For example, effective in 2014, President Barack Obama's Patient Protection & Affordable Care Act mandates that every individual must either have health insurance or pay a fine; this act also makes it illegal to exclude people from health insurance because of health background or preexisting conditions
Factors that Affect Cost of Auto Insurance Policy
Types of coverage: The more coverage you have, the higher your premium will be Personal circumstances: type of car, gender, marital status, location, use of car, driving record Discounts: students with good grades, drivers who have taken a defensive driving course, drivers who have a good credit rating, owners of a car with air bags, antilock brakes, or an antitheft device, families who own more than 1 car on the same policy, drivers who maintain their policy with the same company for a long time, all may get discounts Deductibles: A deductible is a set amount of money of money that the insured must pay out of pocket before the insurance coverage kicks in (for example, suppose you have a $500 deductible and a windstorm causes a branch to fall on your car, resulting in $3.5k in damages; you're responsible for $500 of the loss, & the insurance company pays the remaining $3k); with auto insurance, the deductible is a per-accident cost; in other words, if you had another claim 2 months later, you'd need to pay the $500 deductible again; a higher deductible reduces your monthly insurance premium, & a lower deductible increases your premium Levels of Coverage: You must decide how much coverage you want
insurance policy
a contract stating the terms & conditions of insurance coverage; it includes the following: who's covered, for what loss, for how long, for how much, & with what exceptions
premium
a fee (usually paid monthly) for an insurance policy
What is insurable?
anything whose loss would cause a financial burden to someone
What are the four most commonly insured things?
auto, home, health, & life
It's the responsibility of the insured to
be familiar with their plan & know how to find information regarding coverage; health care plans are complex & can be intimidating & confusing, but there is always assistance available through the customer service department of the insurance carrier; don't be afraid to access that help
exclusions
events or circumstances not covered by a homeowner's insurance policy; for example, a typical HOI doesn't cover damage caused by floods or termites; however, individuals can purchase separate flood insurance or termite insurance; if the home is in an area that's at risk for these things, mitigating that risk by purchasing a policy may be a wise investment
automobile insurance
mitigates (makes less severe or intense) the risk of a financial loss; a minimum amount of coverage is required in nearly all states, but there are many optional components to choose from as well
As of 2011, all drivers licensed in Florida
must have at least $10k in property damage liability coverage & at least $10k in PIP coverage
What are the two main components of a homeowner's insurance policy?
property & liability
insurance agent
someone who's employed by your chosen insurance company who gathers information & helps determine a policy that makes sense for you
riders
special additional items covered by the homeowner's insurance policy, like an antique coin collection or a valuable piece of jewelry
What are the two main types of life insurance?
term and whole
insurer
the company selling insurance & providing coverage for a loss
The higher the death benefit,
the higher the premium
claim
the information filed by the insured in the event of a loss; before paying anything, the insurance company evaluates the claim to make sure the conditions of the event have been presented accurately & that the losses are contractually covered by the policy
insured
the person buying insurance; also known as the policyholder
What is the purpose of life insurance?
to provide financial support to family members (or other beneficiaries) at the time of your death