1 Chapter 27 Health ad Life Isurace 27.1 Health Isurace 27.2 Disability ad Life Isurace Cosider THIS Corrie was t feelig well ad was sure it was strep throat. Because she had it before, she kew the symptoms. I eed a doctor s appoitmet, she told her fried. I m isured uder my mother s policy at work. I have a isurace card that allows me to see the doctor, but I have to pay a $30 copaymet at the time I go to the cliic. The doctor will give me a test called a lab culture to be sure that I have strep. I ll have to pay 20 percet of the cost of that test. The I ll get a prescriptio, ad I have a $20 copaymet for that. Eve with isurace, this illess will cost me $75 plus aother $80 for time lost from work. Health care sure is expesive! Soo I wo t be able to stay o my mom s policy ay loger. That really worries me. 604 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
2 27.1 Health Isurace GOALS Describe group ad idividual health isurace choices. Discuss commo types of health isurace coverage. Discuss commo types of health isurace plas. Explai Medicare ad Medicaid coverage. TERMS health isurace, p. 605 group isurace, p. 605 COBRA, p. 606 coordiatio of beefits, p. 606 Flex 125 Pla, p. 606 basic health coverage, p. 607 major medical coverage, p. 607 stop-loss provisio, p. 608 HSA, p. 609 HMO, p. 609 PPO, p. 610 GROUP AND INDIVIDUAL HEALTH INSURANCE The cost of medical care has escalated dramatically. (I 2008, it was remarked, that if the cost of gasolie had icreased over the last 20 years like the cost of health care, gasolie would be more tha $15 a gallo.) People without health isurace provided through employmet seek idividual policies, but mothly premiums are ofte uaffordable. Tes of millios of Americas do ot receive proper medical care because they have o isurace or because they have iadequate isurace. May states have implemeted health care reform to meet the eeds of vast umbers of uisured people. At the same time, risig premiums have forced employers who provide health isurace for their employees to search for ways to cotrol costs. Most are requirig employees to pay a larger share of the cost. Health isurace is a pla for sharig the risk of high medical costs resultig from ijury or illess. Like other forms of isurace, health isurace reduces idividual risk by spreadig it amog may people. I exchage for regular premiums, the isurer promises to pay medical expeses for the treatmets covered by the policy. GROUP POLICIES The most commo type of health isurace is group isurace, i which all those isured have the same coverage ad pay a set premium. It is most ofte obtaied through employers. Because a group represets a large portio of Baaa Stock/Jupiter Images How has the risig cost of health care affected may Americas? Chapter 27 Health ad Life Isurace 605 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
3 potetial busiess for a isurer, a group ca usually egotiate better coverage ad lower premiums tha idividuals ca get o their ow. Some employers pay the premiums as a beefit to their employees. More commoly, however, the two share the premium costs. Group plas make up over 70 percet of all health isurace issued. The isurer may ot cacel the isurace of ay idividual group member uless the perso leaves the group or the group pla itself is termiated. COBRA The Cosolidated Omibus Budget Recociliatio Act, orcobra, is a law that allows people who leave employmet to cotiue their health isurace uder the compay pla for a limited period of time (usually 18 moths). Durig this period, former employees pay premiums idividually for the same group coverage they had while employed. The purpose of this law is to give former employees time to obtai other isurace, either o their ow or through a ew employer. Pre-Existig Coditios The Health Isurace Portability ad Accoutability Act of 1996 (HIPAA) limits the pre-existig coditios that group plas may exclude. It also makes it illegal for a isurer to dey coverage based o health status, though it does ot limit the amout the isurer may charge for coverage. The purpose of the law is to icrease your ability to obtai isurace whe you start a ew job ad lower your chaces of losig your curret health isurace. Double Coverage If a family has more tha oe group isurace pla, the isurers will share the costs of a claim. Coordiatio of beefits is a group health isurace provisio that specifies how the isurers will share the cost whe more tha oe policy covers a claim. This provisio assures that reimbursemet will ot exceed 100 percet of allowable expeses. For example, if a couple has two policies oe through the husbad s employer ad oe through the wife s employer Pre-existig coditios ca make it difficult for some people to obtai health isurace. Access ad click o the lik for Chapter 27. Browse the article, the aswer: What is the defiitio of pre-existig coditio? Why do health isurace compaies seek to exclude coverig people with pre-existig coditios? Accordig to Health Isurace Portability ad Accoutability Act (HIPAA) guidelies, what is the maximum amout of time that someoe i a group isurace pla must wait i order to get coverage for his/her pre-existig coditio? How ca credible coverage reduce this waitig period? Uit 6 Risk Maagemet the oe policy may pay 80 percet of the medical expeses ad the other the remaiig 20 percet. Flex Plas A Sectio 125 Flex Pla, or Flex 125 Pla, is a employee beefit program that allows employees to set aside moey, pretax, to help pay deductibles, copaymets, ad other health expeses durig the year that are ot covered by isurace. May employers provide the Flex 125 Pla, but it has oe sigificat disadvatage. If you do t use the moey you set aside, you lose it (the employer keeps it). Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
4 INDIVIDUAL POLICIES People ca also buy idividual health isurace policies. The premiums are ofte high, depedig o the type of coverage. Ulike group plas, may idividual policies require a physical exam, ad isurers may refuse to cover idividuals with health problems (uless there are state laws prohibitig this practice). Also, idividuals may have a waitig period of 30 to 90 days before coverage begis. (Members of group plas usually receive immediate coverage.) May states require isurers to make some type of idividual policy available for purchase by idividuals who do ot have group policies. States may also have high-risk health isurace pools whereby people with pre-existig coditios (such as diabetes) ca buy isurace. Ufortuately, the premiums ca be very high, ad placemet o a waitig list ca exclude people from coverage whe they eed it. Sometimes medical costs ca exceed the limits of a stadard health policy. To protect agaist this risk, people ca buy supplemetal health isurace. This secodary policy is desiged to pay high deductibles ad copaymets as well as medical fees that are higher tha the isured s stadard policy allows. For example, a stadard pla may pay up to $450 a day for a hospital room, but the actual charges may come to $500 per day. A supplemetal policy would pay the differece of $50 per day. TYPES OF COVERAGE Health isurace policies typically cover basic health expeses (medical, hospital, ad surgical) ad major medical costs. Some cover detal ad visio eeds for a higher premium. The mai purpose of these kids of coverage is to protect cosumers from doctor ad hospital bills that could rui them fiacially. BASIC HEALTH INSURANCE Basic health coverage icludes medical, hospital, ad surgical costs. Medical coverage helps pay for physicia care that does ot ivolve surgery. This type of coverage pays for office visits ad routie services, such as X-rays ad laboratory tests. Whe the policy covers prescriptios, it ofte requires the use of geeric rather tha ame-brad drugs. Hospital coverage pays hospital bills for room, board, ad medicatio. Surgical coverage pays for part or all of a surgeo s fees for a operatio. Usually, basic health isurace covers oly ecessary (ot cosmetic or elective) surgery ad excludes some types of surgery. MAJOR MEDICAL INSURANCE Major medical coverage provides protectio agaist the catastrophic expeses of a serious ijury or illess. Coverage is beyod basic health isurace ad usually specifies a lifetime maximum, such as $1 millio. For example, whe a patiet is admitted to the hospital for a orga trasplat or some other major surgery, the cost ca easily be $500,000 or more. Comstock Images/Jupiter Images Why is major medical coverage so importat? Chapter 27 Health ad Life Isurace 607 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
5 Major medical coverage ofte has a co-isurace provisio requirig the isured to pay some portio (such as 20 percet) of all bills. For a higher premium, a stop-loss provisio could be icluded. A stop-loss provisio is a isurace clause that caps or sets a maximum that the isured has to pay durig ay caledar year. For example, a $3,000 stop-loss meas the isured would have to pay o more tha $3,000 for copaymets ad deductibles i a year. DENTAL AND VISION INSURANCE Some group plas also provide detal ad visio coverage for a additioal cost. Detal isurace covers basic detal services, such as exams, cleaigs, X-rays, ad filligs. Detal plas usually have low deductibles ad coisurace requiremets of 20 percet or more. They ofte state upper limits, such as $1,500 per year per perso. Isurers typically pay less (such as 50 percet) for some services, such as crows or bridges. I some cases, isurers cover oly certai types of services. For example, the cost of a amalgam fillig (metal) is far less tha a porcelai fillig. Most detal policies will pay oly for amalgams except whe the fillig is i the frot teeth. If you wat a porcelai fillig for a back tooth, you would have to pay the differece i cost. For istace, if your detist charges $180 for a porcelai fillig, ad your isurace allows oly $90, the isurace will pay 80 percet ad you must pay 20 percet of the $90. I additio, you must pay the $90 differece betwee the detist s fee ad the allowable amout. MATH Miute CALCULATING COSTS OF SERVICES NOT FULLY PAID BY INSURANCE Joh eeds to have a root caal. His detal isurace will pay 80 percet of the cost. The policy sets a allowable limit for a root caal at $600. Joh s detist bills his isurer for $800. How much will isurace pay? How much will Bill have to pay? First, compute how much isurace will pay o the root caal: $ ¼ $480 will be paid by isurace The subtract the amout paid by isurace from the total for the root caal: $800 $480 ¼ $320 due from Joh Based o the precedig example, compute the out-of-pocket expeses i the followig situatio. Fra s detal isurace will pay 70 percet of the cost of a porcelai crow. The policy sets a allowable limit for a crow at $800. Fra s detist bills her isurer for $1,000. How much will Fra have to pay? Solutio: $ ¼ $560 will be paid by isurace $1,000 $560 ¼ $440 due from Fra 608 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
6 Visio isurace ofte pays for exams for eye disease as well as for prescriptio adjustmets ad leses. Policies usually cover a eye examiatio o a regular basis oce every year or two ad the purchase of sigle-visio corrective leses ad frames. Some policies offer limited coverage for prescriptio suglasses ad cotact leses. TYPES OF HEALTH PLANS Employee or private health plas are grouped ito two categories: umaaged ad maaged. UNMANAGED CARE Umaaged care (traditioal fee-for-service) plas allow participats to choose ay doctor ad to be reimbursed for a portio of the expeses (usually 80 percet) icurred after a deductible is met. Deductibles ofte rage from $100 to $1,000 per patiet, or $500 or more per family. This pla is ofte the most expesive because cotrol over costs ad services is less strict. A health savigs accout, commoly kow as a HSA, is used i associatio with a medical pla that carries a high deductible ($1,100 or more). The isured basically takes the moey that would have goe toward the premiums for basic health coverage ad has it deposited ito a HSA accout. The accout is the used to pay qualified medical expeses ot covered by isurace, icludig deductibles ad copaymets. Cotributios to the accout are made pretax ad are tax-deductible. If the HSA is sposored through the employer, it may cotribute to the accout as well. Moey withdraw from a HSA to pay qualified medical expeses is tax-free. The remaiig moey i the accout grows o a tax-deferred basis, like a IRA. MANAGED CARE Maaged care plas rely o a etwork of health care providers. To receive maximum reimbursemet, participats i a maaged care pla must select doctors who belog to the etwork. The policy requires participats to obtai preapproval for ay surgery or hospital admissio ad two or three doctors opiios before allowig a major procedure to be performed. The isurer exercises sigificat cotrol over the types of services provided ad the maximum beefits allowed for those services. Health maiteace orgaizatios (HMOs), preferred provider orgaizatios (PPOs), ad poit of service (POS) plas are the most commo types of maaged care plas. Health Maiteace Orgaizatio (HMO) A health maiteace orgaizatio, commoly called a HMO, is a group pla offerig prepaid medical care to its members. A HMO ofte has its ow facilities ad provides a full rage of medical services. Patiets must choose doctors o the HMO staff, icludig oe doctor to be their primary care physicia (PCP), or mai provider. To see a specialist, patiets must get a referral from their PCP first. Otherwise, the isurace will ot cover the visit to the specialist. I this way, the PCP acts as a gatekeeper. A advatage of belogig to a HMO is that prevetive care, such as routie physical exams ad vacciatios, are geerally covered. The idea is to Chapter 27 Health ad Life Isurace 609 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
7 ecourage people to come i for treatmet before a mior ailmet becomes a major (ad expesive) problem. HMO patiets usually make a copaymet of $15 to $30 for a office visit. HMOs that are capitated (meaig per perso ) receive a fixed mothly premium for each patiet, regardless of whether the patiet seeks medical care. Preferred Provider Orgaizatio (PP0) A preferred provider orgaizatio, commoly called a PPO, is a group of health care providers (doctors ad hospitals, for example) who bad together to provide health services for set fees. Patiets ca choose doctors from a approved provider list, but they ca also go outside the pla for care. However, if they choose to do so, they will have to pay a larger percetage of the fee. You are ot required to choose a primary care physicia, ad you do ot eed a referral to see a specialist, but the cost will be higher. There are limits o types of services that ca be provided ad fees that ca be charged. Patiets who stay withi the etwork of providers usually must make a small copaymet, such as $15 per office visit or per prescriptio. Because this type of pla is more flexible tha a HMO, it is more expesive. Poit of Service (POS) Pla Hybrid medical isurace plas are also available today. Poit of service (POS) plas give people more choice ad cotrol over medical services. They combie the features of HMOs ad PPOs. Like a HMO, patiets must choose a primary care physicia, but like a PPO, patiets ca choose to go outside the pla for health care. However, uless referred by the primary care physicia, patiets will pay more for goig outside the pla tha they would with a PPO. Although a POS gives you more flexibility tha a HMO, its cost structure is desiged to ecourage participats to stay withi the pla. MEDICARE AND MEDICAID Medicare is govermet-sposored health isurace for people aged 65 or older. Medicare is ru by the Social Security Admiistratio ad fuded by employee payroll deductios. Like other plas, there are maximum beefits, exclusios, ad other requiremets. Retired people pay a mothly premium for Medicare isurace. For a additioal premium, people ca buy medigap isurace (a supplemetal private isurace policy) to pay the deductibles ad copaymets ot covered by Medicare. These policies are available from traditioal isurace compaies. Medicaid is govermet-sposored health isurace for people with low icomes ad limited resources. This program is desiged to help families who live i poverty ad are uable to afford private health isurace or medical care. Like Medicare, there are limitatios ad exclusios. Also, may states have plas for their citizes who caot afford isurace, are workig but uisured, or have bee tured dow by isurace compaies. As with car isurace (Chapter 26), high-risk pools make it possible for people who are otherwise uisurable to obtai some type of coverage. To fid out what is available i your state, visit your state s web page or make a iquiry by phoe. 610 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
8 ISSUES IN YOUR WORLD UNINSURED AND UNDERINSURED IN AMERICA All people eed adequate health care to maitai a high quality of life. To have access to the quality of health care available i this coutry, health isurace is essetial to help pay the high ad risig costs. Yet Cesus Bureau statistics ad the Natioal Coalitio o Health Care show that betwee 45 ad 47 millio Americas were uisured i Eight i te uisured Americas come from workig families, early 20 percet (8.4 millio) are childre, ad youg adults (age 18 to 24 years) are the least likely of ay age group to have isurace. Every 30 secods, a America files for bakruptcy after havig a health problem. May of these people have health isurace, but it is t eough. Accordig to the Public Broadcastig Service, more tha 25 millio Americas were uderisured i Uderisured people spet more tha 10 percet of their total icome o out-of-pocket medical expeses. This rate has jumped 60 percet i the last four years. Over 6.8 millio Americas sped more tha a third of their total icome o health care. The Uited States speds early $100 billio per year to provide uisured residets with health services, ofte for prevetable diseases that physicias could have treated more efficietly with earlier diagosis. The Uited States speds a greater portio of gross domestic product o health care tha ay other idustrialized coutry, yet it is the oly idustrialized coutry that does ot have a atioal health care pla. Lack of isurace results i poor health ad shorter lives for may Americas. There are costs to society as well, such as: Developmetal deficiecies from isufficiet health care durig ifacy Expeses for chroic health coditios ot treated util they become emergecies Lost icome due to reduced job productivity ad employmet Dimiished overall health i the coutry due to low immuizatio ad lack of access to prevetive health care Health care expeses paid by taxpayers for uisured patiets Higher program costs (such as Social Security, crimial justice, ad Medicare) Social iequality (with lower-icome Americas beig at a defiite health disadvatage) Some say a sigle-payer, govermet-sposored health pla is the aswer. This is the type of system that exists i may other atios, such as Caada ad most wester Europea coutries. Others say we ca reform the system we have so that health isurace becomes portable that is, you ca take it with you from job to job. Whatever the aswer, we as a coutry must fid a way to provide access to affordable health care for all Americas. THINK CRITICALLY 1. Suppose you had o health isurace. How would this fact affect the decisios you make about your health care? 2. Coduct some Iteret research about the problem of uisured Americas. Is the problem gettig better or worse? Explai. Chapter 27 Health ad Life Isurace 611 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
9 27.1 Assessmet KEY TERMS REVIEW Match the terms with the defiitios. Some terms may ot be used. 1. A group pla offerig prepaid medical care to its members 2. Health isurace obtaied through employers i which all isured have the same coverage ad pay a set premium 3. A isurace clause that caps or sets a maximum that the isured has to pay durig ay caledar year 4. A law that allows isurace to cotiue after employmet eds 5. A employee beefit program that allows employees to set aside pretax moey for deductibles ad copaymets 6. A pla for sharig the risk of high medical costs resultig from ijury or illess 7. Coverage agaist catastrophic expeses of a serious ijury or illess 8. Coverage for medical, hospital, ad surgical costs CHECK YOUR UNDERSTANDING 9. Why is group isurace geerally less expesive tha idividual policies? 10. What is the purpose of COBRA? APPLY YOUR KNOWLEDGE 11. Why are more ad more employers (group policies) ad idividuals switchig to maaged care plas? Explai the advatages ad disadvatages of maaged care. THINK CRITICALLY a. basic health coverage b. COBRA c. coordiatio of beefits d. Flex 125 Pla e. group isurace f. health isurace g. HMO h. HSA i. major medical coverage j. PPO k. stop-loss provisio 12. Why are more ad more employers expectig employees to bear a greater portio of their health care costs? 13. Explai why people who are i good health might prefer to have highdeductible medical isurace with a HSA. 14. Explai the cocept of capitatio ad how it may be cotrary to patiets best iterests. 612 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
10 27.2 Disability ad Life Isurace GOALS Discuss differet types of disability isurace. Describe the characteristics of differet life isurace plas. TERMS disability isurace, p. 613 life isurace, p. 615 portability, p. 615 icotestable clause, p. 616 double idemity, p. 616 temporary life isurace, p. 616 term life isurace, p. 616 permaet life isurace, p. 618 cash value, p. 618 DISABILITY INSURANCE Disability isurace is a isurace pla that makes regular paymets (usually mothly) to replace icome lost whe illess or ijury prevets the isured from workig. This type of isurace is frequetly referred to as icome protectio, because coverage compesates workers for loss of icome resultig from serious illess or ijury. Geerally there are two types of disability isurace: short term ad log term. Short-term disability isurace typically provides beefits for up to six moths but ca last as log as two years. Log-term disability isurace usually picks up where short-term disability leaves off ad ca provide coverage up to retiremet. Of all the types of isurace, disability isurace is the most overlooked. People thik othig ca happe to them that will iterrupt their earig power. Ufortuately, recovery from a accidet or a illess ca exted for weeks or eve moths. Yet while you are disabled (uable to perform your job), your regular livig expeses go o. Disability coverage requires a waitig period. Beefits do t begi the day you become disabled. The waitig period may be from 1 to 14 days for short-term disability or from 60 to 180 days for log-term disability. Durig this time, you would likely be o sick leave from work ad would be collectig regular pay. Beefits begi after the waitig period ad ed as soo as you ca retur to work. The maximum duratio of beefits uder most disability policies is util age 65 or early retiremet if you qualify. A few policies pay beefits for life if you become permaetly disabled. I additio, the maximum amout you ca collect is usually 50 to 75 percet of your regular pay. Guarateed reewability of coverage will protect you agaist cacellatio if your health declies. Without this provisio, a isurer could refuse to reew your isurace. The premium for a policy with guarateed reewability is higher, but the coverage may be worth the extra cost. Chapter 27 Health ad Life Isurace 613 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
11 Comstock Images/Jupiter Images Why is disability isurace the most overlooked type of isurace? GROUP DISABILITY INSURANCE Group disability isurace plas are geerally the least expesive optio. I may cases, the employer pays for part or all of the pla. However, the isurace is good oly as log as you work for the employer. If you leave the compay, you lose all policy rights. SOCIAL SECURITY DISABILITY INSURANCE Most workers i the Uited States participate i the Social Security program. As you leared i Chapter 5, Social Security is more tha retiremet icome. Social Security is OASDI (old age, survivors, ad disability isurace) as well as HI (health isurace Medicare). Because you have Social Security taxes deducted from your paycheck, you are etitled to disability paymets from Social Security i the evet you become disabled ad caot work. To qualify, you will have to prove the extet of your disability, fill out forms, ad have medical exams as required by the Social Security Admiistratio. Workers are cosidered disabled if they have a physical or metal coditio that prevets them from doig ay gaiful work ad the coditio is expected to last for at least 12 moths or result i death. Beefits are determied i part by your pay ad i part by the umber of years you have bee covered uder Social Security. The work requiremet may be waived for certai idividuals, icludig the blid, widows or widowers with disabilities, childre with disabilities, ad wouded military service members. WORKERS COMPENSATION INSURANCE You leared i Chapter 5 that workers compesatio is isurace that covers your expeses if your ijury or illess resulted from your job. If you are permaetly disabled partially or totally workers compesatio will pay mothly beefits. This isurace also carries a death beefit. It provides a burial paymet ad a allowace for livig expeses for survivors of people killed o the job. Like Social Security beefits, these beefits are determied by your earigs ad your work history. 614 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
12 LIFE INSURANCE Life isurace provides fuds to the beeficiaries whe the isured dies. Cosider the fiacial eeds that a family will face after the death of a wage earer ad how much icome will be eeded to pay the ogoig expeses of daily livig. The purpose of life isurace, the, is to provide for those who deped o you as a source of icome. Figure 27.1 shows a list of purposes that life isurace ca fulfill. As you ca see, some types of life isurace provide savigs as well as death beefits. Like all types of isurace, life isurace is based o risk sharig ad probability. To predict the probability of death at differet ages, isurers use mortality tables. These tables are based o statistics gathered about life expectacy ad death rates amog various groups of people. Isurers set premiums based o these tables. For example, older people have a higher probability of dyig while the policy is i effect tha do youger people. As a result, isurers geerally charge older people higher premiums. Other factors eter the calculatio as well. For example, smokers ted to die sooer tha osmokers, ad premiums reflect this. Someoe with a serious health problem, such as heart disease, may ot be able to buy a idividual life isurace policy at all. To buy idividual life isurace policies, you will have to supply a detailed medical history. You may be required to have a medical examiatio, especially for large policies. You may be able to buy iexpesive group life isurace through your employer. A group life isurace pla isures a large umber of people uder the terms of a sigle policy without a medical examiatio. Employers ofte provide group life isurace as a employee beefit. Today, recet laws require that these policies be portable. Portability meas that whe you leave your employer, you are able to cotiue payig the premiums ad covert your group policy ito a idividual policy. FIGURE 27.1 Purposes of Life Isurace Why You Should Purchase Life Isurace to provide cash to pay for a fueral to pay off a home mortgage ad other debts at the time of death to provide a lump-sum paymet to childre whe they reach a specified age to provide a educatio or icome for childre to make charitable bequests after death to provide for retiremet icome to accumulate savigs to make estate ad iheritace tax paymets to take care of childre s eeds as they are growig up (icludig child care services i the evet of the death of a paret) to provide cash value that ca be borrowed Chapter 27 Health ad Life Isurace 615 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
13 Why are youger people geerally charged lower life isurace premiums? Image Ideas/Jupiter Images PROVISIONS OF LIFE INSURANCE POLICIES A importat provisio i every life isurace policy is the right to ame your beeficiary. As you previously leared, beeficiaries are the people amed i a isurace policy who will receive the beefits of the policy. The beeficiaries of a life isurace policy will receive the amout specified i the policy upo the death of the isured. Beeficiaries ca be ayoe; if childre are miors, parets may ame a trustee or guardia to hadle the moey o behalf of the childre. A icotestable clause is a provisio of a life (or health) isurace policy statig that oce the policy has bee i effect for a stated period of time (usually two years), the isurer may o loger questio items o the applicatio i order to dey coverage. For example, a applicat may lie about their age or a previous medical coditio. After the specified period, the isurer caot dispute the policy s validity durig the lifetime ad after the death of the isured for ay reaso. A reaso for this provisio is that the beeficiaries should ot be made to suffer because of acts of the isured. A life isurace rider is a small isurace policy that modifies the coverage of the mai policy. A rider usually adds or excludes some types of coverage or alters policy beefits. Isurers offer may riders, ad the costs ca add up. A waiver of premium rider allows you to stop payig premiums ad keep your coverage i force if you become disabled ad caot work. This rider usually does ot kick i util you ve bee disabled at least six moths. Guarateed isurability riders give you the right to reew a policy or buy additioal coverage regardless of chages i health. May isurers also offer accidetal death riders. I the case of accidetal death, some riders provide for double idemity. Double idemity meas that the beeficiary is paid double the face amout of the isurace policy. TYPESOFLIFEINSURANCE There are two mai types of life isurace: temporary ad permaet. Temporary life isurace lasts for a specified period, such as 20 years. After that time, it ceases to exist. Permaet life isurace lasts for life. It has stated premiums over time ad caot be caceled by the isurace compay. Both types of life isurace have advatages ad disadvatages. Temporary Life Isurace The most commo form of temporary life isurace is term isurace. Term life isurace is a life isurace policy that remais i effect for a specified 616 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
14 VIEW Poits A isurace aget s icome is usually based o commissios. Some people believe that isurace agets will sell as much isurace as possible, with little regard to the actual eeds of their customers. They will ecourage people to buy permaet isurace with a high face value as a ivestmet whe, i reality, oly temporary isurace is eeded to meet temporary eeds. These people believe that permaet isurace is a poor savigs ad ivestig pla. Others believe that people should carry large amouts of life isurace as a way to leave a estate for their heirs. They also feel that permaet isurace is a good ivestmet because it forces you to save moey. THINK CRITICALLY With which side do you agree? Why? How much isurace do you thik is eeded by the average perso of your age? period of time. If the isured survives beyod that time, coverage ceases with o remaiig value. Term policies are sometimes called pure life isurace because they have value oly if the covered risk (death) occurs while the policy is i effect. They have o savigs compoet, as permaet life policies do. Parets ofte buy 15- or 20-year term policies to cover the fiacial eeds of their childre i case they should die while the childre are still youg. By the time the term policy eds, the childre will be grow ad out o their ow, so the parets o loger feel a eed to provide for their childre. With decreasig term isurace, the amout of coverage decreases each year while the premium remais the same. A 20-year decreasig term policy decreases i coverage each year util the value reaches zero at the ed of 20 years. If the isured dies durig the first year of the policy, it pays the full beefit (let s say $100,000). If the isured dies durig the secod year, death beefits decrease to, say, $95,000. So, the coverage of the policy decreases by a specified amout each year. I cotrast, the death beefit o level term isurace remais costat from begiig to ed. Although it ca be used for ay purpose, decreasig term isurace is ofte sold for the purpose of payig off a mortgage i the evet of death. The value of decreasig term isurace decreases over time as does the pricipal i a mortgage. Aother type of temporary life isurace is credit life, or some versio of it such as mortgage life isurace. This isurace ca be used oly to repay a specific debt should the borrower die before doig so. You ca obtai this type of coverage through the leder. However, i most cases it would be cheaper to buy term isurace that ca be applied to ay debt. Reewable term isurace gives the policyholder the right to reew each year, without havig to pass a physical exam. Premiums icrease with each reewal because the policyholder is older (ad the risk of death greater), but the death beefits remai the same. Term isurace policies ca have additioal features, such as optioal coversio to a permaet life policy. Additioal features geerally raise premiums, however, ad beyod a certai age, term isurace may ot be reewable. The mai advatage of term isurace is its low cost. Chapter 27 Health ad Life Isurace 617 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
15 Permaet Life Isurace Permaet life isurace remais i effect for the isured s lifetime ad builds a cash value. Cash value is the savigs accumulated i a permaet life isurace policy that you would receive if you caceled your policy. You could also borrow usig your policy s cash value as collateral. If you do ot repay the loa, the policy will repay it out of the death beefit whe you die. Four commo types of permaet life policies are whole life, limitedpay life, uiversal life, ad variable life. Whole life (also kow as straight or ordiary life) is a policy for which you pay fixed What added beefit does permaet life isurace provide? premiums throughout your life, ad the policy pays a stated sum at death to your beeficiary. The amout of your premium depeds primarily o the age at which you purchase the policy. The premiums are high eough to pay for the death beefit plus cotribute to the policy s cash value. Limited-pay life is a policy o which premiums are limited to a specific umber of years (such as 20 years) or util age 65. At the ed of the paymet period, the policy is cosidered paid up. However, you remai isured for life, ad the compay will pay the face value of the policy at your death. Uiversal life combies a savigs pla with a death beefit. However, ulike the others, the premiums ad death beefit o a uiversal life policy are ot fixed. The policyholder ca choose to chage the death beefit ad the amout or timig of premiums durig the life of the policy. Thus, the face value of the policy ca be reduced or raised without rewritig the policy. The iterest rate eared o the cash value varies with short-term rates i the ecoomy. Variable life combies a death beefit with ivestmet optios. The isurer ivests part of the premiums i securities chose by the policyholder. Policyholders desigate what portio of the et premium (the amout left over after payig for the death beefits) is to be ivested i stocks, bods, or short-term moey market istrumets. Both the death beefit ad the cash value rise (or fall) with the ivestmet results. While a miimum death beefit is guarateed, there is o guarateed cash value. With some variable life policies, policyholders pay fixed premiums. With others, the premiums ca fluctuate because the iterest eared o ivestmets may be applied to the premiums, thus reducig the amout the policyholder pays. Digital Visio/Getty Images 618 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
16 Plaig a Career i... Isurace Uderwritig Isurace compaies write policies to protect cosumers from fiacial loss. Uderwriters decide if isurace will be provided to applicats ad uder what terms. They idetify ad calculate risk of loss, establish who receives a policy, determie the right premium, ad write policies to cover the risk. Whe uderwriters uderestimate the risk, the isurace compay pays out excessive claims. Whe they overestimate risk, the isurace compay loses customers. Usig computers, the uderwriters must do a careful aalysis of risk factors to determie the ed decisios. Uderwriters specialize i oe type of isurace: life, health, mortgage, or property. Life ad health uderwriters specialize i group or idividual policies. Ay time a isurace policy is writte, a uderwriter has assessed the risk. Employmet Outlook l Slower tha average employmet growth is expected. Job Titles l l l Isurace uderwriters Property value aalyst Group risk aalyst Needed Skills l l College degree preferred, especially i busiess ad accoutig. Good judgmet ad aalytical ad computer skills are essetial. What's it like to work i... Isurace Uderwritig Stefaie is a experieced group health isurace uderwriter. She kows how to aalyze data for a group of similarly sized employers ad develop a risk assessmet that will be used to set their aual premiums. Stefaie works mostly i her office at the computer. She uses the Iteret to coect to large databases of iformatio that help her aalyze iformatio o applicatios. She also speds time talkig to idustry represetatives, attedig meetigs where the ewest treds i data collectio are discussed, ad workig with groups of other uderwriters who share ad compare techiques ad results of previous aalyses. Stefaie is detailed orieted ad takes the time to do a thorough ad accurate job. She realizes the importace of assessig risk accurately so that premiums reflect a positive profitability ratio for her compay. As a accoutig major i college, Stefaie leared the may ways of preparig ratios ad chartig their statistical probabilities. What About You? Would you like to work with umbers ad large amouts of data over time? Are you aalytical, accurate, ad detail orieted? Would you ejoy workig as a isurace uderwriter where you are able to assess ad predict risk? Chapter 27 Health ad Life Isurace 619 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
17 27.2 Assessmet KEY TERMS REVIEW Match the terms with the defiitios. Some terms may ot be used. 1. The feature that allows a group policy to be coverted ito a idividual policy 2. A life isurace policy that remais i effect for a specified period of time 3. The savigs accumulated i a permaet life isurace policy 4. Isurace that provides fuds to the beeficiaries whe the isured dies 5. Life isurace that remais i effect for the isured s lifetime ad builds a cash value 6. A provisio that prevets deial of coverage after a period of time 7. A isurace pla that makes paymets to replace icome lost whe illess or ijury prevets the isured from workig 8. A rider that allows the beeficiary to be paid double the face amout of the isurace policy i the evet of accidetal death CHECK YOUR UNDERSTANDING 9. Why do isurers use mortality tables? 10. How is uiversal life isurace differet from other permaet life policies? APPLY YOUR KNOWLEDGE 11. Life isurace is desiged to protect those left behid whe you die. How much life isurace do you eed at this poit i your life? How will your isurace eeds chage over your lifetime? THINK CRITICALLY a. cash value b. disability isurace c. double idemity d. icotestable clause e. life isurace f. permaet life isurace g. portability h. temporary life isurace i. term life isurace 12. Why is it a good idea for people to have disability isurace, eve whe it is ot available through their employer? 13. Employers ofte provide group life isurace policies for employees. The policies are ofte portable, ad employees are allowed to buy additioal coverage. Explai why this is a good idea for may workers. 14. Why do fiacial advisers recommed term isurace istead of permaet isurace? 620 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
18 27 Chapter Assessmet SUMMARY 27.1 Group health isurace policies provide broad coverage at lower rates tha do idividual policies. COBRA allows people who leave their jobs to keep their employer-provided health isurace for a limited time. HIPAA limits exclusios for pre-existig coditios ad makes it illegal to dey coverage based o health status. A Flex 125 Pla allows employees to set aside moey, pretax, to help pay deductibles, copaymets, ad other health expeses ot covered by isurace. People without a group pla ca buy idividual health isurace, but they may have to pass a physical exam. Typical health isurace icludes basic medical ad major medical coverage. Some offer detal ad visio coverage for a higher premium. Umaaged care plas allow employees to select their ow providers ad be reimbursed a percetage of expeses after a deductible. A HSA may be used i associatio with a high-deductible medical pla. Maaged care plas cotract with a etwork of health care providers. With a HMO, patiets must choose providers from withi the etwork. A PPO is more flexible ad allows patiets to choose doctors outside the pla. A POS combies features from HMOs ad PPOs Disability isurace replaces your icome if you are ijured or ill ad caot work. Social Security ad workers compesatio isurace provide some disability isurace beefits. Life isurace provides fuds to beeficiaries whe the isured dies. Isurers set life isurace premiums based o life expectacy ad death rates compiled i mortality tables. Temporary life isurace remais i effect for a specified time. If the isured survives beyod that time, coverage ceases with o remaiig value. Term life isurace is the most commo type of temporary life isurace. Permaet life isurace remais i effect for the isured s lifetime ad has a savigs compoet (cash value) as well as a death beefit. Commo types of permaet life policies are whole life, limited-pay life, uiversal life, ad variable life. Chapter 27 Health ad Life Isurace 621 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
19 APPLY WHAT YOU KNOW 1. Iterview a perso who has recetly had surgery or bee i the hospital for several days or loger. Ask this perso about the type of services provided ad the approximate cost per day of those services. Ask him or her how much of the cost was paid by isurace ad how much (percetage or dollar amout) he or she will have to pay. Write a report o your fidigs. 2. Obtai a brochure describig the beefits of a group health isurace pla. If you do t kow someoe who belogs to this type of pla, your local library ad the Iteret will have iformatio about group plas. Write a paper summarizig your fidigs regardig the types of coverage available ad their provisios for deductibles, copaymets, exclusios, ad so o. 3. Search the Iteret for iformatio o Medicare. A good place to start is the govermet site for Medicare at Fid out what types of medical/hospital/surgical ad major medical coverage it provides ad how much of these costs the patiets must pay. The look ito medigap isurace. Based o your fidigs, do you feel that medigap isurace is a good value for a perso o Medicare? 4. Visit the AARP (America Associatio of Retired Persos) web site ad describe the products ad services it offers to its members, icludig supplemetal health isurace. Do you see value to these services for someoe who is 50 or older but ot yet age 65 ad retired? 5. Assumig that you are workig full time, are married, ad have oe child, prepare a aalysis of your disability eeds. Select a career that you would like to have ad use a realistic icome figure for someoe with oe to three years of experiece. 6. Examie the list of life isurace eeds show i Figure Ca you add aythig to this list? Would you delete aythig? Prepare a list of life isurace eeds based o your persoal situatio as you imagie it will be i te years. MAKE ACADEMIC CONNECTIONS 7. Math Compute the out-of-pocket expeses i the followig situatio. Tom s medical isurace will pay 80 percet of the cost of a procedure. The policy sets a allowable limit for the procedure at $1,000. Tom s doctor bills the isurer for $1,300. How much will Tom have to pay? 8. Commuicatio Write a paper about the uisured ad uderisured i this coutry. Coduct Iteret research to get curret statistics. What ca be doe to resolve the problem? How ca we cotrol medical costs ad make medical care affordable to all citizes? 9. Research Choose a permaet life isurace policy that meets your eeds ad decide o the amout of coverage you wat. The, visit a isurer i perso or olie to fid out more about the policy ad its premiums. Write a report summarizig why you selected the policy ad what you leared about it from the isurer. 622 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
20 SOLVE PROBLEMS AND EXPLORE ISSUES 10. Your fried is cosiderig two career opportuities oe i which she would be a idepedet cotractor ad have o beefits provided, ad oe i which she would work as a employee of a compay ad have full health isurace as well as other beefits. Explai to her the importace of havig health isurace ad how her optios for isurace might differ, depedig o which of the two career choices she makes. 11. A youg couple is a dual-icome family. Both have full medical coverage provided through their employers. They believe that this double coverage will pay off if they get ijured or become ill because they ca claim beefits twice. Explai to them the cocept of coordiatio of beefits for group health isurace policies such as theirs. 12. Your cousi is workig but caot afford to buy a idividual health isurace policy. His employer does ot provide a group pla. Explai to him the importace of purchasig major medical coverage. 13. Your fried Devo is workig full time at two jobs i order to make house paymets ad buy a ew car. His wife Cara is workig ights so she ca care for the childre durig the day. Devo ca purchase both shortterm ad log-term disability isurace for a small premium ($10 a moth) through his employer s group isurace pla. Explai to them the importace of disability isurace. 14. As a youg, umarried perso, you are cotemplatig college ext year ad the pursuit of a professioal degree that will take six years or more to complete. A eighbor sells life isurace ad wats you to buy a uiversal life policy with a $100,000 face value. Explai whether or ot you would cosider purchasig this policy. Would you cosider purchasig a differet type of policy? 15. You ad your spouse are i your mid-tweties. You are expectig your first child. Both of you are presetly workig. You hope to buy your first house i the ext few years. Discuss your eed for life isurace ad the type of life isurace you would purchase ow ad five years from ow. EXTEND YOUR LEARNING 16. Legal Issues It is commo practice today for employers to discotiue health isurace coverage whe employees retire. If idividuals are 65 or older, it is t usually a problem they ca go o Medicare. But whe people are forced to retire, or they must retire due to health or other coditios, they may be uable to pay the premiums for a idividual health isurace policy. Thus may older Americas live i fear of icurrig high medical expeses that would drai their savigs. Should employers be required by law to keep retired employees o their group policies util they tur age 65? What are the likely cosequeces of such a law? For related activities ad liks, go to Chapter 27 Health ad Life Isurace 623 Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
21 UNIT 6 CASE Carl Michael Edwards, II Bor August 15, 1979 i Columbia, Missouri, Carl Edwards has a log ad ispirig life i car racig. He grew up i Missouri watchig his father (Carl Sr.) race. Carl Jr. s career bega i 1993 whe he started racig four-cylider mii-sprits at age 13. Durig 1994 ad 1995, he wo 18 races. Carl atteded the Uiversity of Missouri ad completed his educatio degree. He was substitute teachig whe he bega racig i NASCAR. His big break came i 2002 whe he competed i seve NASCAR Craftsma truck series evets. I 2003, he was awarded NASCAR truck series Rookie of the Year. His Rookie of the Year award led to may other races ad wis, followed by hoors ad poits stadigs at the ed of the racig seasos. His wiig racig career cotiues today as a driver i the NASCAR Sprit Cup Series ad Natiowide Series. Edwards leared early the basic priciples of risk maagemet o ad off the track. Although Carl was o his way to a successful car racig career, he realized the importace of a educatio ad completed his degree. A good educatio provides a more secure future. O the track, Carl has leared ways to reduce risk. He is well traied ad practices year roud. His vehicle is checked repeated times to esure it exceeds all safety stadards. As a expert driver, he does ot take uecessary chaces. Because his sport is physically demadig, Carl takes care of his health to reduce his chaces of ijury. Carl is also practicig risk maagemet whe it comes to his future. His career path is o a dual track. He has a ew record label, Back40 Records, a compay he started i high school. His label helps local musical artists realize their dream. Carl is givig back to the commuity while helpig to secure his fiacial future should he someday decide to ed his car racig career. AP Photo/Terry Rea THINK CRITICALLY 1. What risk maagemet strategies is Carl Edwards usig o ad off the track (risk shiftig, risk avoidace, risk reductio, risk assumptio)? 2. For those who have a high-risk career such as Carl Edwards, which types of isurace would you recommed? Explai why. 3. Do you thik it s importat for successful people to give back to the commuity? Why or why ot? 624 Uit 6 Risk Maagemet Copyright 2010 Cegage Learig, Ic. All Rights Reserved. May ot be copied, scaed, or duplicated, i whole or i part.
60 Baltimore Couty Public Schools offers you several ways to begi savig moey through payroll deductios. Defied Beefit Pesio Pla Tax Sheltered Auities ad Custodial Accouts Defied Beefit Pesio Pla Did you
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