Life, Health, and Loss of Income Exposures Chapter 4

1. Life, Health, and Loss of Income ExposuresChapter 4 ©2005, Thomson/South-Western

2. Chapter Objectives • List and describe the types of potential losses associated with the risk of premature death • Discuss the factors influencing the need to partially or fully replace a deceased’s income for his or her surviving children and/or spouse • Describe ways a business can lose money when an employee or owner dies prematurely • Explain the nature of a mortality table and give examples of how it can be used for personal risk management • Describe several types of medical expense loss that can be incurred • Distinguish between types of disability loss and explain the nature of the subjective element in disability • Explain the general principles underlying unemployment insurance that exists in all states • Describe several factors influencing the frequency and severity of income losses due to retirement

3. Exposures Due to Premature Death • Most people face a risk associated with death • That of timing • Death is sure to occur ultimately but the specific day and time it will strike are generally unknown for most of a person’s life • If death occurs suddenly when an individual is performing important and unique functions for an employer • The resulting financial loss to the business can be significant • If death occurs during a period when an individual is a major financial provider for young children or other dependents • The effects on the survivors can be devastating • If the death occurs “too late” • A person may outlive his or her financial resources

4. Exposures Due to Premature Death • Premature death • Death that occurs before the life stage where death becomes increasingly accepted by society as part of the natural, expected order of life • On average baby boys born in the U.S. in 2000 can expect to live for 74.1 years • Baby girls can expect to live for 79.5 years • Some persons believe that for newly born children, any death that occurs prior to these ages is premature • For risk management purposes, it is helpful to classify any death prior to a planned retirement age as premature

5. Executor Fund • When a person dies, there are some immediate expenses associated with the funeral and burial or other disposition of the body • These services can be paid for on an itemized basis or through package plans • Average over $5,000.00 in addition to the cost of a cemetery plot and headstone • Soon after the funeral, arrangements must be made for paying the deceased’s outstanding debts • And for transferring any remaining assets and personal effects to survivors

6. Table 4-1: Services that can be Provided for or Arranged by Funeral Directors

7. Executor Fund • Sometimes used to refer to these expenses because the executor of the estate needs funds to pay for the expenses incurred as a result of the death • Executor fund expenses arise no matter when death occurs • Some expenses such as estate taxes may grow more burdensome as a person ages and accumulates large amounts of wealth

8. Income Needs of Survivors • If someone is providing full or partial monetary support for other family members • That person’s death will affect the family financially as well as emotionally • As a person passes through different stages of live • The degree to which others are financially dependent on him or her changes

9. Surviving Children • Young children are usually totally dependent on their parents for food, clothing, shelter, and other necessities • A parent’s death has the potential for eliminating a child’s primary or sole source of income • The timing of a parent’s death will affect children differently • Depending on the ages and circumstances of the children when the death occurs • The parent must also decide whether or not they wish to contribute toward paying for a child’s college education

10. Surviving Spouse • During the course of a couple’s married lives, there be maybe many situations in which people shift the degree to which they depend on each other financially • Leads to the dynamic rather than static analysis of potential income needs • The relative degree of financial dependence of each spouse on the other is always subject to change • When children enter the picture, work patterns may change

11. Other Surviving Dependents • An individual may provide some degree of financial support for persons other than a spouse or child • Examples include • An elderly parent living with a grown child • Grandchildren living with their grandparents • Siblings living together

12. Business-Related Exposures • If an employee performs services that would be especially hard to replace • That person may be considered a key employee • His or her death may cause plans or projects to be abandoned • Or the business may seek a replacement person following the death of the key employee • Costs involved may include • Loss of efficiency for a period of time • Increased salary to attract someone new • Training and development expenses for the replacement

13. Business-Related Exposures • A person who has ownership rights in a firm may die • When a sole proprietor, partner, or a major stockholder dies • That person’s ownership may pass to persons unfriendly to the firm • It may even result in liquidation of the firm in order to pay the person’s executor fund expenses • Competitors may obtain controlling ownership by purchasing shares from families of deceased stockholders • Those who inherit the deceased rights may enter the business • But due to inexperience may cause losses or even bankruptcy

14. Likelihood of Premature Death • Aggregate death rates in the U.S. have been declining for many years • Due to advances in medical technology and improved economic status • In calculating the probability of premature death, mortality tables have been developed • Express the probability of living and dying at various ages in a convenient format for a particular assumed population of persons

15. Likelihood of Premature Death • Death rates in insurance mortality tables are purposely overstated for conservativeness • To reflect the possibility of unusual fluctuations in death rates in some years • Figure 4-1 contains a graph of 2001 CSO death rates on a semilogarithmic scale • Death rates during the first few years of life are higher than they are following ages nine or ten • Beginning at about age 60 death rates began to climb significantly • At every age, the death rate is higher for males than females

16. Figure 4-1: The Mortality Rate, 2001 CSO Mortality Table

17. Needs vs Human Life Values • Identifying needs and resources is consistent with the overall risk management process • Identified risks are analyzed and alternatives are considered and combined into a comprehensive plan for their management • Human life value may have relevance • The sum of money that, when paid in installments of both principle and interest over the individual’s remaining working life • Will produce the same income as the person would have earned after deducting the assumed amounts for tax and personal maintenance expenses

18. Exposures Due to Loss of Health • Losses resulting from health problems usually fall into two categories • Expenses that must be paid for medical care • Income that cannot be earned due to time away from work while health problems persist • While loss of health can be permanent, it is more often a temporary phenomenon

19. Medical Care Expenses • Expenditures for medical care in the U.S. have exploded in recent years • Now equal about 16.7 percent of disposable personal income • Factors contributing to the high cost of health care • The mere fact that people are living longer • Because health problems usually become more frequent and severe with age • New medical technology and the demand by patients for state-of-the-art treatment • The increasing frequency and severity of liability awards for medical malpractice • Doctors and hospitals must pay higher malpractice insurance premiums • They may also performed extra procedures and tests in addition to those that are probably necessary as a defensive measure • Cost shifting • Higher hospital charges are assessed to some patients but not to others

20. Medical Care Expenses: Hospitalization • Approximately 37 percent of personal health care expenditures in the U.S. is attributable to hospital costs • Expenses are incurred for items such as room and board, lab tests, supplies, prescription drugs, services by physicians, surgeons, nurses, etc. • The frequency and severity of losses vary considerably by geographic location • The national average number of days for a hospital stay is 5 • However, in Nebraska and Hawaii the average is 8 • While in New Mexico, Oregon and Idaho the average is 4.5

21. Medical Care Expenses • Physicians and surgeons services • Fees vary according to the • Geographic area • Medical specialty of the provider • Type of visit (initial, follow-up, or in the hospital) • Dental care • About five percent of all personal health care expenses • Some of the expenses are for major restorative work • But many expenses result from procedures that are preventable

22. Medical Care Expenses • Prescription drugs and other expenses • Represent over five percent of U.S. healthcare expense • Mental health services • Common problems include depression, anxiety, phobias, and obsessive-compulsive behavior • In recent years the use of mental health services has increased considerably as have the costs of these services

23. Medical Care Expenses: Long Term Care • Persons age 85 and over as a percentage of the population have been growing at a fast pace • Diseases such as arthritis, Alzheimer’s and osteoporosis become more prevalent with age • Persons with these ailments are less likely to be able to maintain independent living arrangements • Long term care options include • Skilled nursing home care • Custodial nursing homes • Personal care homes • Intermediate nursing home care • Home health care • Expenses depend on the level of medical services provided • The cost for one year of custodial nursing home care can easily exceed $50,000

24. Loss of Income • Disability loss • When a person is unable to work because of an illness or injury • Most disabilities are temporary • The person eventually recovers and returns to work • However some are permanent • Disabilities can be further classified as • Total • Person is completely incapable of gainful employment during the time of the disability • Partial • Person experiences a decreased ability to earn a living but not a complete cessation of employment possibilities

25. Causes of Disability • Accidents • Illnesses • Most common cause • There are differences between males and females regarding causes of disability • Males are more likely to experience accidents • Female are more prone to illnesses • The risk of disability increases with age

26. Length of Disability • Continuance tables have been developed to gauge the likely severity of disability for personal risk management purposes • Table 4-5 provides information regarding the likelihood of initial and continuing disabilities • For 25-year-olds employed in generally nonhazardous occupations • While it is quite likely that many people will at some point suffer a disability resulting in time lost from work • The probability that the disability will be permanent is rather low

27. Table 4-5: Disability Continuance Table …

28. Effects of Disability • Primary loss is the loss of income that would have been earned if the person had not become disabled • The length of time of the disability is the major determining factor in determining the overall size of the income loss • Income losses can have varying impacts on family members • Depends on the degree to which other persons rely on that income for their support • In contrast to death, no significant decrease in living expenses is expected when a person is disabled • Living expenses may also increase if nursing home care or other assistance is required

29. Other Income Loss Exposures: Unemployment • During peacetime years the U.S. employment rate has typically ranged between 4 and 7 percent • Government unemployment insurance programs are in effect in all states • Designed to alleviate the effects of short term, involuntary unemployment • Only offers a floor of protection, not full wage restoration

30. Other Income Loss Exposures: Unemployment • To be able to collect unemployment insurance benefits • Unemployed worker must either have • Worked for some minimum period during the previous twelve months • Earned some minimum amount of wages • Most states require a one week waiting period before benefit payments begin • Claimants must be able to work if work is offered

31. Other Income Loss Exposures: Unemployment • A worker may be disqualified from receiving benefits • The worker may lose the benefits for a specified number of weeks or for the duration of unemployment • Or suffer a reduction in benefits • Reasons for disqualification • Voluntarily quitting a job without good cause • Discharge for misconduct connected with the work • Refusal without good cause to apply for or accept suitable work • Unemployment due to a labor dispute

32. Other Income Loss Exposures: Retirement • There is a high probability that most young people will live to the traditional retirement age of 65 • Sources of income for elderly persons • Payments from employee retirement plans • Federal social security benefits • Part time earnings • Investment income from financial assets • Public assistance • Unfortunately, many older people have very limited amounts of guaranteed income and few financial or property assets • Experts believe between 70 and 80 percent of pre-retirement income is needed • For a retired, married couple to maintain the same standard of living • Also few people know exactly how long they will live • People may outlive their retirement savings