Insurance Basics

1. Insurance Basics Adapted from Money Talk: Women’s Financial Education Series

2. Objectives • increase your awareness of the financial cost of various risks in life • discuss key characteristics of different types of insurance policies • help formulate questions to ask insurance professionals • help identify your current insurance strengths and weaknesses

3. Life is Full of Risks…Many Have Financial Consequences • Damage to truck in accident • Fire that destroys home, farm buildings and/or possessions • Loss of income due to disability • Death of an earner/key personnel • Loss of a homemaker’s services • Large medical bills for disease or injury • A court judgment of liability for damages

4. People Manage Risks in Five Ways: • Risk avoidance • Risk reduction • Risk acceptance (Unknowingly accepting risk with no plan is called do nothing and hope for the best) • Risk transfer (insurance) • Self-Insure

5. In The Five Areas of Risk Management Human Resources Production Marketing Financial Legal Insurance Contracts

6. Insurance Basics • Protect against risks by paying premium • “Large Loss Principle” (size of loss matters) • Major “large-loss” risks: • Loss of income due to disability • Death of an earner/key personnel • Destruction of structures (fire, flood, etc.) • Liability losses due to a court judgment • Large medical expenses (e.g., cancer treatment)

7. Generally Unnecessary Insurance • Credit insurance (life, disability, unemployment) • Life insurance for children • Cancer insurance • “Double Indemnity” insurance riders • Hospital indemnity policies • Flight insurance • Car rental collision-damage waivers

8. General Insurance Tips • Check policies for “owner”, “Insured”, & “beneficiaries” • Insure for major losses • Choose a highly rated insurance company • Select the highest deductible you can afford • Pay premiums annually or semi-annually • Avoid duplicating coverage • Ask about available discounts • Follow “The Rule of Three”

9. Parts of an Insurance Contract • Declarations page • Insuring Agreements • Exclusions • Endorsements and Riders

10. Policy Features That Limit Coverage • Benefit coordination clauses • Deductible • Elimination period • Co-payment • Co-insurance • Policy limit

11. Life Insurance • Protects against loss of earner’s/key personnel income • Provides money to replace homemaker’s services • Factors to consider include: • current assets and debts • earning power of surviving spouse • other sources of income • projected expenses

12. Types of Life Insurance • Term Life • Level term • Decreasing term • Permanent Life (cash value) • Whole life • Variable life • Universal life

13. General Life Insurance Tips • Avoid simplistic formulas • Never cancel existing policy until you have new one in hand • Review beneficiary designations • Buy credit life coverage only if you cannot get life insurance elsewhere • Compare policies: interest-adjusted net cost

14. Two Primary Types of Health Insurance • Indemnity or “traditional” • Annual deductible • Co-insurance up to stop-loss limit • Managed care (HMOs, PPOs) • Read “the fine print” for details • Emphasizes preventative care and screenings • Require use of in-network medical providers

15. General Health Insurance Tips • Look for a policy that is “guaranteed renewable”or “noncancellable” • Inquire about post-retirement coverage • Note pre-existing condition clauses • Be cautious about switching policies • Keep good records!

16. Other Health Benefit Programs • SHIP (State Health Insurance Program) • COBRA • Extends group coverage for up to 18 months • Covers employers with 20 or more workers • Ex-worker must pay full cost, plus 2% • Free/low cost screenings & immunizations

17. Disability Insurance • Covers income loss from inability to work • Maximum coverage: 60% -70% gross pay • Particularly important for self-employed • Key factors: • Definition of disability • Own Occupation • Any Occupation • Waiting period

18. Disability Insurance Tips • Base elimination period on • Adequacy of emergency savings • Accrual (if any) of employer sick leave • Buy a noncancellable policy to age 65 • Request that an ex-spouse buy coverage to protect support payments • Try to get benefit of 100% of net income

19. More Disability Insurance Tips • Look for a policy with residual benefits • Consider a cost-of-living rider • Avoid gender-based policies (women pay more) • Purchase a waiver of premium rider • Look for a “recurrent disability” clause

20. Long Term Care Insurance • “LTC” means wide range of services: • Home health care • Nursing home care • Three ways to handle risk of LTC costs: • Retain it (self-insure) • Avoid it (no guarantees) • Transfer it (LTC insurance)

21. Who Should Buy LTC Insurance • If premiums are no > 10% of annual income • If you’re able to handle 20% -30% increase • If > $75,000 of assets per person (excluding house) • If > $30,000 annual income per person • Around age 60 (55-65) • Couples concerned about well spouse

22. Additional LTC Insurance Tips • Understand how to trigger benefits (ADLs) • Buy a “compound” inflation rider • Consider key policy features: • Elimination period • Length of time benefits will be paid • Benefit amount ($ per day)

23. Auto Insurance Basics • Factors that affect coverage • Two parts: • Liability coverage • Single limit (e.g., $300,000) • Split limit (e.g., 100/300/50) • Physical damage (collision & comprehensive) • Liability coverage is most important part • State minimum liability is often inadequate

24. Auto Insurance Tips • Increase liability to at least 100/300/50: for self and uninsured motorists • Evaluate physical damage coverage on older cars • Take advantage of available discounts • Buy a less expensive car to insure • Notify insurer if driving patterns change

25. Homeowner’s Insurance Basics • Five sections to a HO policy: • Damages to house or other structures • Loss of personal property • Living expenses while home is repaired • Personal liability • Medical payments to others • Different types of “HO” policies

26. Three Important Tips • Photograph or videotape home contents • List brands and serial numbers • Store documentation away from home • Make sure home is insured for at least 80% of replacement cost • Otherwise, you’ll get partial payment for losses • Buy a “guaranteed replacement cost” rider for home (if available) and contents

27. Other Homeowner’s Insurance Tips • Pay the premium annually • Check on discounts for safety devices • Alarm system • Smoke detectors • Don’t select low ($250) deductibles • Consider flood insurance • Document damages

28. Umbrella Liability Coverage • Supplements liability limits of homeowner’s and auto policy • Also covers libel, slander, defamation of character, false arrest, boat or aircraft accidents, damages on another’s property • $1 million policies cost $150 to $250 • Sold in $1million increments

29. Umbrella Insurance Tips • Buy required underlying coverage • Check to see if service on non-profit boards is covered • Check exclusions (e.g., overseas coverage, business coverage) • Check discount for all property coverage with one insurer

30. Questions? Comments? Experiences?