Term
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Definition
• Insurance is protection against financial loss
An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk
• People purchase a policy and the firm assumes a risk for a fee called the premium which the insured policyholder pays
periodically |
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Term
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Definition
| Risk is uncertainty or lack of predictability, such as to loss that a person or property faces |
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Term
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Definition
| Peril is the causes of a possible loss, such as fire, windstorms, robbery, disease or death |
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Term
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Definition
| Hazard is something that increases the likelihood of a loss, such as driving drunk, smoking in bed, or defective house wiring |
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Term
| Why Does Health Care Cost So Much? |
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Definition
• High administrative costs
• 26% of health care dollar vs. 1% in Canada
• Use of sophisticated, expensive technologies
• Duplication of tests and technologies
• Increases in the variety and frequency of treatments
• Increasing number and longevity of elderly people
• Regulations that result in cost shifting rather than cost reduction |
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Term
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Definition
| Risk management is a long range, organized, planned strategy to protect your assets and family |
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Term
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Definition
S.A.R.A
• Shifting, Avoidance, Reduction, Assumption |
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Term
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Definition
Speculative Risk
• Chance of loss or gain
• Uninsurable
• Such as starting a small business or gambling |
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Term
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Definition
Types of risks we face
• Disability
• Illness
• Death
• Retirement
• Property loss
• Physical damage
• Loss of use |
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Term
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Definition
Negligence
• Failure to take ordinary and
reasonable care.
• Such as
failure to remove items from a
frequently used staircase |
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Term
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Definition
Vicarious Liability
• When you are held responsible for the actions of another person
• Such as your child throwing a ball through a neighbor’s window |
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Term
| Planning an Insurance Program |
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Definition
Planning an Insurance Program
• Set your insurance goals and prioritize them
• Develop a plan to reach your goals
• Put your plan into action
• Review your results |
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Term
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Definition
Umbrella Policy
• Also called a personal catastrophe policy
• Supplements basic personal liability coverage (home/auto)
• $1,000,000 or more in
liability coverage |
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Term
| Items Covered by Renter’s Insurance |
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Definition
Items Covered by Renter’s Insurance
• Personal property loss or damage
• Personal liability
• Additional living
expenses
• A landlord’s insurance usually won’t cover personal belongings
Only 40% of renters have renter’s Insurance |
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Term
| Factors That Affect Home Insurance Costs |
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Definition
Factors That Affect Home Insurance Costs
• Location of residence
• Type and age of the structure
• Amount of coverage and deductibles
• Discounts - alarm system, smoke detector
• Your claim history |
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Term
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Definition
| Bodily injury liability covers the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsible |
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Term
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Definition
Medical payments covers the cost
of health care for persons injured
in your automobile, including yourself |
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Term
| Property damage liability |
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Definition
Property damage liability covers damage to other person’s car when you are at fault.
• It also includes damage to such things as street signs and buildings
• For example, during a snow storm you might accidentally slide your vehicle into a neighbor’s mailbox or tree |
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Term
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Definition
Collision Coverage
When your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at fault. However, if you are not at fault they will try and collect from the other driver’s property damage liability first |
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Term
| Comprehensive Physical Damage |
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Definition
Comprehensive Physical Damage
Covers damage to your vehicle that is not caused by a collision, such as...
• Fire
• Theft
• Vandalism
• Glass breakage
• Hail, sand, or wind storm
• Your car rolls downhill into a tree |
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Term
| Auto Insurance Premium Factors |
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Definition
Auto Insurance Premium Factors
• Automobile type
○ Year, make and model
• Rating territory
○ Accident, theft, and vandalism rates in the area where you live
• Driver classification
○ Age, sex, marital status, credit history, driving record, and driving habits
• Assigned risk pool for people who are unable to obtain insurance |
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Term
| Health Maintenance Organizations (HMO) |
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Definition
Health Maintenance Organizations (HMO)
-First select a primary care physician (PCP)
-Contract with care providers
-Fixed monthly premium, lowest cost option
-Focus on prevention and wellness |
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Term
| Preferred Provider Organizations (PPO) |
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Definition
Preferred Provider Organizations (PPO)
• Several providers to choose from, and you can use a specialist if you deem necessary
• Costs more than a HMO, but you have more choice and fewer restrictions
• If you go out of network, it costs more |
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Term
| Point of Service Plan (POS) |
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Definition
Point of Service Plan (POS)
• Sometimes called HMO-PPO hybrid
• Referrals must first come from PCP who directs the “point of service”
• Much more expensive out of network
• Somewhat more flexible than an HMO, but not as flexible as a PPO (middle cost plan) |
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Term
| The Health Insurance Portability and Accountability Act (HIPAA) |
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Definition
The Health Insurance Portability and Accountability Act (HIPAA)
• provides federal portability standards, nondiscrimination in health insurance, and guaranteed renewable
Individual insurance is also available |
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Term
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Definition
COBRA
• requires many employers to offer employees and dependents to continue their group coverage for a set period of time following a divorce.
• However, the premiums can be as high as $12,000 a year |
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Term
| Tax Aspects of Healthcare |
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Definition
Tax Aspects of Healthcare
• Health insurance premiums and medical costs are generally deductible
○ Must itemize on Schedule A and,
○ Must exceed 7.5% of AGI |
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Term
| Ways around Healthcare tax limitation |
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Definition
Ways around limitation
• Company plans reflect pre-tax income adjustments for health insurance premiums
○ Could be subject to tax in future
• Flexible spending accounts
• MSA accounts for self employed |
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Term
| Beating the 7.5% Limitation |
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Definition
Beating the 7.5% Limitation
• Flexible Spending Accounts
• Annual decision on amount to save
○ Dollars withheld from paycheck and deposited in your flex account
• Reduces W-2 income
○ Employee files un-reimbursed medical expenses with administrator, who reimburses you with money in your account
• Must use money annually, or forfeit excess |
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Term
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Definition
| Break-even = Amount saved times (1 minus marginal tax rate) |
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Term
| Private insurance companies |
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Definition
• Private insurance companies
○ Individual policy
○ Group policy sold to an employer
○ Coordination of benefits provision |
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Term
| Hospital and medical insurance service plans |
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Definition
• Hospital and medical insurance service plans
○ Blue Cross - hospital care benefits
○ Blue Shield - surgical and medical
services benefits |
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Term
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Definition
Managed care
○ Prepaid health plan
○ Primary care physician |
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Term
| Types of Health Care Coverages 1 |
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Definition
Types of Health Care Coverages
• Comprehensive major medical insurance
○ Low deductible offered without a separate, basic plan
• Hospital indemnity
○ Pays a fixed amount for each day you are in a hospital. Best for people in high risk groups |
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Term
| Types of Health Care Coverages 2 |
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Definition
Types of Health Care Coverages
• Dread disease and cancer insurance policies
○ Focus on unrealistic fears, and only pay out for very specific conditions. Often sold by people working on commission
• Dental expense insurance
○ Group coverage for exams, cleaning,
x-rays, fillings, oral surgery |
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Term
| Types of Health Care Coverages |
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Definition
Types of Health Care Coverages
• Vision care
○ Some group plans include
exams and glasses
• Long term care insurance
○ Virtually unknown 15 years ago, but now is growing faster than any other form of insurance |
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Term
| Affordable Health Care Act 1 |
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Definition
Affordable Health Care Act 1
• Stops insurance companies from limiting care
• Removes barriers between you and your Dr.
• Select any primary care Dr. in network
• See OB-GYN without referral
• Money to states to help review proposed insurance premium increases
• Individual and small group insurers must spend 80-85% on direct medical care
• Children under 26 may stay on parent’s plan |
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Term
| Affordable Health Care Act 2 |
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Definition
Affordable Health Care Act 2
• Provides affordable coverage for Americans without insurance due to pre-existing conditions (PEC) via PEC insurance plan
• Ends in 2014 when ban on insurers refusing to cover adults with PEC goes into effect and individuals will have choices through Exchanges
• Public option to compete with private plans
Subsidies for low income families |
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Term
| Affordable Health Care Act 3 |
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Definition
Affordable Health Care Act 3
• Help for early retirees ($10 billion for temporary reinsurance program ages 55-64)
• New training program to increase number of primary care doctors
Creates new voluntary, public long term care insurance program |
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Term
| Patient’s Bill of Rights Regs |
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Definition
Patient’s Bill of Rights Regs
• No PEC exclusions for children under 19
• No arbitrary rescissions of insurance coverage
• No lifetime limits on coverage
• Increased annual dollar limits on coverage (up to $750,000, increasing to $2 million in 2012)
• Removes barriers to emergency services
• Closes Medicare Part D donut hole |
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Term
| Paying for the Health Care Plan |
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Definition
Paying for the Health Care Plan
• 3.8% investment tax on couples making >$250,000 ($200,000 single) + .9% increase in Medicare tax (1.45% to 2.35%)
• In 2018, 40% excise tax on Cadillac plans worth over $27,500/family ($10,200 individuals)
• 10% tanning tax
• Employers > 50 employees must provide insurance or pay $2,000 fine/worker/year
• Limits flexible spending accts. to $2,500 in 2013
$500 billion in Medicare cuts coming |
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Term
Disability Income Insurance
and Financial Planning |
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Definition
Disability Income Insurance
and Financial Planning
• No matter what your age, you are more likely to become disabled than to die
• Young, healthy people don’t think about risks related to all their future earning potential
• Provides regular cash income lost by employees as the result of an accident, illness or pregnancy
• If you become disabled your income
drops but your expenses go up |
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Term
| Four Sources of Disability Income |
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Definition
Four Sources of Disability Income
• Employer
○ Group disability policy may be short or long term but usually not enough by itself
• Social Security (OASDI)
○ For disabilities that lasts more than one year
• Workman’s Compensation
○ If you are injured at work
• Disability insurance
○ You get it to supplement other income sources to achieve 70-80% of your take home pay |
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Term
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Definition
Medicare - federal program for those age 65 and older, and certain disabled persons
• Part A – compulsory ($96/month)
• Covers hospital costs including doctor
• Part B - voluntary
• Doctor’s office visits & some RX
• Part D – Prescription drug plan for an additional monthly premium |
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Term
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Definition
Medigap
• may pay what Medicare doesn’t
Medicaid
• Low income people of all ages
• State administered with federal guidelines
• Expanded Medicaid benefits under new law |
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Term
| You and Your Parents Need LTC Insurance |
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Definition
You and Your Parents Need LTC Insurance
• After age 65, there is a 50/50 chance of needing a nursing home; > 100 days not covered by Medicare
• Average age of entry 84
• Average nursing home cost = $66,000 (to $100k) |
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Term
| People Who Don’t Need Life Insurance |
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Definition
People Who Don’t Need Life Insurance
• Singles with no dependents
• Working couples, no kids, no mortgage
• Retirees with no financial obligations
• The wealthy
• Kids |
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Term
| People Who Do Need Life Insurance |
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Definition
People Who Do Need Life Insurance
• People with dependent children
• Married with a non-working spouse
• Married with working spouse, but you couldn’t maintain lifestyle if one spouse dies
• You have special needs siblings or children
• You have a large mortgage |
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Term
Estimating Your Life Insurance Requirements:
The Easy Method |
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Definition
Estimating Your Life Insurance Requirements
The Easy Method
• Typically, you will need 70% of your salary for seven years while family adjusts
• Current income X 7 X 70% or 4.9 X income
• A common estimate is 5 times income |
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Term
Estimating Your Life Insurance Requirements
The DINK (dual income, no kids) Method |
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Definition
Estimating Your Life Insurance Requirements
The DINK (dual income, no kids) Method
• Calculate total debts
• Divide by 2
• Add funeral cost
• (Debt/2) + Funeral Cost)
• Essentially pays off your share of debts and incremental costs of your death |
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Term
Estimating Your Life Insurance Requirements:
The “Nonworking” Spouse Method |
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Definition
Estimating Your Life Insurance Requirements
• The “Nonworking” Spouse Method
• Multiply the number of years until the youngest child reaches 18 by $10,000
• Adjust for more than 2 kids, or teenagers |
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Term
Estimating Your Life Insurance Requirements:
The “Family Need” Method |
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Definition
Estimating Your Life Insurance Requirements
• The “Family Need” Method
More thorough than the first three because it also considers employer provided insurance, Social Security benefits, and income and assets |
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Term
| Annuity method (or PV of Perpetuity = Pmt/i) |
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Definition
| Annuity method (or PV of Perpetuity = Pmt/i) |
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Term
Types of Life Insurance Companies:
Stock life insurance companies |
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Definition
Types of Life Insurance Companies
Stock life insurance companies
• are owned by the shareholders
• 95% are of this type
• Sell non-participating whole life policies
• Premium stays the same
• Also sell term life policies |
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Term
Types of Life Insurance Companies:
Mutual life insurance companies |
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Definition
Types of Life Insurance Companies:
Mutual life insurance companies
• Owned by the policyholders
• 5% of policies are from this type of company
• With participating whole life policies the premiums are higher than non-participating policies. However part of the premium is refunded to the policyholders annually. This is called a policy refund
• Also sell term life policies |
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Term
Types of Life Insurance Companies:
Term life insurance |
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Definition
Types of Life Insurance Companies:
Term life insurance
• Protection for a specified period of time
• No cash value build up, pure insurance coverage
• If you don’t pay premiums, coverage stops
• A renewability option means that at the end of the term you can renew the policy without having a physical
• Conversion option allows you to change your policy from term to whole life without a physical
• With decreasing term insurance your premium stays the same, but the amount of coverage decreases as you age |
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Term
| Whole life insurance also called straight life |
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Definition
Whole life insurance also called straight life
• You pay a premium as long as you live
• Amount of premium depends on your age when you start the policy
• Much higher premiums compared to term life
• Provides death benefits and accumulates a cash value (higher premiums are invested on your behalf)
• You can borrow against the cash value or draw it out at retirement
• Look carefully at the rate of return your money earns |
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Term
Whole Life Policy Options:
Limited payment policy |
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Definition
Limited payment policy
• Pay premiums for a stipulated period, usually 20 or 30 years, or until you reach a specified age (65)
• Your policy then becomes “paid up” and you remain insured for life |
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Term
Whole Life Policy Options:
Variable life policy |
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Definition
Variable life policy
• A minimum death benefit guaranteed, but the death benefit can rise above it depending on yield of the dollars invested in a separate stock or bond fund |
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Term
Whole Life Policy Options:
Adjustable |
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Definition
Adjustable
• You can change your policy as your needs change. For example, you can change your premium payments or the period of coverage |
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Term
Whole Life Policy Options:
Universal life |
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Definition
Universal life
• Lets you pay premiums in almost any amount
• Combines term insurance and investment elements of money market type funds |
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Term
Other Types of Insurance Policies :
Group life insurance |
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Definition
Other Types of Insurance Policies
• Group life insurance
○ Term insurance, cheap and reasonable
○ Often provided by an employer
○ No physical is required |
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Term
Other Types of Insurance Policies:
Credit life insurance |
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Definition
Other Types of Insurance Policies
• Credit life insurance
○ Debt is paid off if you die
○ Car, credit card debt, furniture
○ Expensive protection |
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Term
Other Types of Insurance Policies:
Private Mortgage Insurance (PMI) |
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Definition
• Private Mortgage Insurance (PMI)
○ Protects lender against default
○ Get out of PMI as soon as you have 20% equity in your house |
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Term
Other Types of Life Insurance Policies
Accidental death policies/Free Insurance/Special company insurance |
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Definition
Other Types of Life Insurance Policies
Accidental death policies
• Very cheap and effective
Free insurance
• Using credit card for travel
Special company insurance
• Supplements workman’s compensation |
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Term
| Life Insurance Contract Provisions |
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Definition
Life Insurance Contract Provisions
Naming your beneficiary, and contingent beneficiaries
Length of grace period for late payments
Reinstatement of a lapsed policy if it has not been turned in for cash (whole life) |
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Term
| Things to Remember About Whole Life |
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Definition
Things to Remember About Whole Life
• Agent premiums are high, therefore their incentive is to sell whole life
○ Sold as investment & insurance products
○ Fees are front end loaded
○ Surrender charges can also be quite high
• Term is always cheaper
Buy term and invest the rest! |
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Term
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Definition
Buying Life Insurance
• Evaluate cost per $1,000
• Premium/(face/1,000) |
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Term
| Choosing Your Insurance Agent |
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Definition
Choosing Your Insurance Agent
• Ask friends, parents for recommendations
• Find out if the agent belongs to professional groups or is a CLU |
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Term
| Obtaining and Examining a Policy |
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Definition
Obtaining and Examining a Policy
• The first step is to apply
• The second step is to provide medical history
• Read every word of the contract
• After you buy it you have ten days to change your mind
• Give your beneficiaries
and lawyer a photocopy |
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Term
| Choosing Settlement Options 1 |
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Definition
Choosing Settlement Options 1
• Lump-sum payment is most common
• Limited installment plan
○ In equal installments for a specific number of years after your death
• Life income option
○ Payments to the beneficiary for life
• Proceeds left with the company
○ Pays interest to the beneficiary |
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Term
| Choosing Settlement Options 2 |
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Definition
Choosing Settlement Options 2
• Best advice is to take the cash
• Invest safely at first
Don’t make any rash financial decisions for 6 months to a year after the death of a loved one |
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Term
| Financial Planning with Annuities |
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Definition
Financial Planning with Annuities
• An annuity is a financial contract written by an insurance company that provides you with a regular income
• People buy annuities to supplement retirement income and to shelter income from taxes
• Annuities can be tax-deferred investment plans. You pay taxes on the interest when you draw the money out (disadvantaged by new tax law)
• Can be a useful tool if protecting assets from bankruptcy (subject to look back rules) |
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Term
| Tax Issues: Insurance & Annuities |
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Definition
Tax Issues: Insurance & Annuities
• Life insurance proceeds are not subject to federal income tax
○ Proceeds ARE included in the taxable estate, which could be subject to estate tax depending on the size of the estate
• Annuities bought with after tax $ have two parts:
○ IRS calculates a “principal return” portion and an “income” portion
○ Income portion subject to federal income tax at ordinary rates (not good vs. other choices)
• Annuities purchased with 401-K/traditional IRAs are fully taxable |
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Term
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Definition
Reminders
• Properly assess your life insurance needs
• Buy term, invest the difference
• Check beneficiary designations periodically
• Generally avoid whole life, universal life, variable life and most annuities, get out of PMI ASAP
• Take settlements in cash and invest proceeds
• Gradually reduce life insurance as needs reduce
• Remember that life insurance proceeds, while not subject to income tax, are includable in one’s taxable estate – can be excluded with insurance trust |
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