Life Insurance Who needs life insurance? Why do you need life insurance? What is the purpose of all types of insurance? - to reduce risk Where can you get life insurance? -work: traditional plan set by the employer flexible plan allows the employee more choice -group -family -individual plan How much life insurance is necessary? 1. Earnings Multiple Approach - is based on your salary & age 2. Needs Approach - uses insurance to cover shortages Is life insurance expensive? Underwriting - is the process of deciding to insure and setting the rates Major risk classifications? Actuarial Tables - show premiums according to age, gender (females are cheaper because they live linger) & smoking v. non-smoking. If you get life insurance and lie about smoking, die in a car crash, and an autopsy is performed and they find out you were a smoker they may not pay What type of life insurance should you use? 1. Term - purchase insurance for a particular period of time (5, 10 … 20 years). Term insurance buys the most insurance coverage for you money. The policy only pays if death occurs during the specified time frame. -level term has a constant death benefit with possibly increasing annual premiums -decreasing term has a declining death with constant premiums Make sure that your term policy is 1. guaranteed renewable 2. Convertible to a whole life policy 2. Whole Life - permanent life insurance up to 100 years of age. Whole life is more expensive with higher premiums that create a cash value (or forced savings account) with a guaranteed rate of return. -straight life policy: premium is based on your age at inception and remains fixed over the policy life. -limited life policy: make premium payments for either a set number of years or up to a certain age (65). Policy will remain in force until death. Be careful of high commissions/fees 3. Universal Life - is a combination of term and whole life. The cash value grows (hopefully) at a more aggressive money-market rate compare to the regular guaranteed rate. 4. Variable Life - allows the insured to choose from a selection of investments for the cash value. There is no guaranteed rate of return which can alter the cash value and sometimes the death benefit. Beneficiary - are death benefits tax-free? It depends Health Insurance – more important than life insurance Comprehensive major medical offers the most complete coverage. Pre-existing condition - may not be covered for a specified period of time (up to one year) or at all. Deductible - the amount the policyholder pays first before any insurance benefits are received. -calendar year -per occurrence High deductible health care plan - deductibles start at $1100 and go to $5000, resulting in low premiums. Total out-of-pocket costs are $5500 (individual) and $11,000 (family). Health Savings Account allows tax sheltered income to be used to pay expenses. Maximum deposits are $2900 (individual) and $5800 (family). Health Reimbursement Account is where funds are set aside by the employer to reimburse the employee for covered expenses Co-insurance: the insurance company will pay a stated percentage (80 - 90%) of the “typical and reasonable” cost, once you have met your deductible. Co-insurance usually has an upper limit. Ex: Your policy has a $500 deductible with 80% co-insurance on the next $5000. On a vacation, you break your leg and the total bill comes to $6,500. What is your cost? $500 + .2($5000) = $1500 On your next vacation you break an arm and the total cost comes to $4500. How much will you have to pay? $0… once you meet these costs Long-term disability - covers a portion of your take-home pay if you are unable to work. Can basically continue until social security Short-term disability – normally 6 months or less Long-term care - nursing home insurance (a decent one can cost $6,000 a month) after the money is gone the state pays for nursing home care HMO – Health Maintenance Organization - Central facility PPO – Preferred Provider Organization - You can go to any doctor or hospital but costs are cheaper if you use a participating doctor/hospital. - Typically more expensive than an HMO POS – Point of Service is a hybrid between an HMO & PPO Property Insurance Principle of Indemnity (or Indemnification) says that the insured cannot be compensated for more than the actual loss. Insurance should return you to your financial status before the loss (multiple policies?) Co- insurance says that the insured needs to maintain a minimum level of insurance (usually 80%) on the property value. It is estimated that 3 out of every 4 homes are underinsured by an average of 35%. Renter’s Insurance - who needs it? Renters! - Actual Cash Value is replacement cost – depreciation (3 yr old TV – they would try and figure out how much it costs today). - Replacement Value is the current replacement cost (way better). Homeowner’s Insurance - who requires it? The lender/bank -dwelling at replacement -other structures -Personal property - actual cash value or replacement? Choose replacement Personal property floater (floater) How do you keep a record of your inventory? Take pictures, write items down, keep receipts, but you don’t have to have actual proof if something happens to your stuff -loss of use -liability -medical payments to others -Endorsement - an added paragraph that amends your original policy to better fit your needs (earthquake insurance). Automobile Insurance (100/300/50) -bodily injury liability 100,000 per person and 300,000 per accident -property damage liability 50,000 -medical payments to others (in your vehicle) -uninsured/underinsured, so that if someone without insurance or with inadequate insurance hits you then you will still be covered -comprehensive coverage: perils -collision coverage will pay no matter who is at fault Umbrella Policy - an additional level of coverage to protect your assets, it is used after other insurance totals have been exhausted.