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CHAPTER 5
Health, Homeowner's, Automobile, and Liability
Insurance:
Structure, Concepts,
and Planning
Chapter 5: Non-life Insurances
1
INTRODUCTION
In buying property and casualty insurance:
Insure against significant risks and bear small risks
Compare rates before making a commitment
Reduce risks through preventive measures
Review coverage periodically
Chapter 5: Non-life Insurances
2
GENERAL PRINCIPLES
INDEMNITY AND LOSS SHARING
Insurer indemnifies insured for actual loss, not for a profit
Policyholder shares in the loss with the insurer
INSURANCE AGAINST SIGNIFICANT RISKS
Avoid wasting valuable resources by insuring against small losses
Manipulate insurance deductibles to reduce insurance cost
Chapter 5: Non-life Insurances
3
GENERAL PRINCIPLES
SHOPPING FOR INSURANCE
Select a policy that provides all desired coverages at a reasonable price
LOSS CONTROL THROUGH PREVENTIVE MEASURES
Lower insurance costs by reducing potential hazards
ORGANIZATION OF PERSONAL RECORDS
Chapter 5: Non-life Insurances
4
Difficulties in P&C
Special skills required to determine the amount of protection needed
Money is diverted from other needs and savings so not buying the correct amount is very possible
Challenge is to not get emotional Shopping around can be beneficial
Chapter 5: Non-life Insurances
5
Health Insurance
Who is covered? Government covers 33% Employers cover 43% Self-insurers comprise 7%
20% of the population are uninsured
Chapter 5: Non-life Insurances
6
HEALTH INSURANCE INTRODUCTION
NEED FOR HEALTH INSURANCE
SOURCES OF HEALTHCARE
BLUE CROSS and BLUE SHIELD MANAGED CARE ORGANIZATIONS
Health Maintenance Organizations (HMOs) Preferred Provider Organizations (PPOs) Exclusive Provider Organizations (EPOs) Point of Service (POS) Plans
SELF-FUNDED EMPLOYEE HEALTH BENEFITS COMMERCIAL INSURANCE COMPANIES GOVERNMENT HEALTHCARE INSURANCE
Chapter 5: Non-life Insurances
7
TYPES OF HEALTH INSURANCE
TYPES OF HEALTH INSURANCE Hospital Insurance
Hospitalization Insurance Expense reimbursement – INS pays a flat rate Service contracts – pay actual costs
Hospital Indemnity Insurance $XX maximum paid each day to policyholder; they make up the
difference
Hospital-service-incurred Plans Pays directly to hospital – Blue Cross type plans
Surgical Insurance Pays $XX for certain procedures
Medical Expense Insurance Doctors ETC.
Chapter 5: Non-life Insurances
8
TYPES OF HEALTH INSURANCE
TYPES OF HEALTH INSURANCE Major Medical Expense Insurance
Pays charges that other policies may not
Maximum of 1 – 2 million payout per lifetime
Comprehensive Health Insurance Combines all into one package
Not as popular as it used to be
Supplemental Health Insurance Dental Expense Insurance Vision Insurance Prescription Drug Insurance
Chapter 5: Non-life Insurances
9
HEALTH INSURANCE CONTRACT
Covered benefits Excluded conditions and pre-
existing conditions No longer legal
Loss sharing Deductible and fixed co-pay Coinsurance Stop loss Lifetime cap
Chapter 4: Life Insurance
10
HEALTH INSURANCE CONTRACT
Contract provisions Grace period and reinstatement period Notice of claims Change of occupation and illegal
occupation Intoxicants and narcotics Coordination of benefits
Chapter 4: Life Insurance
11
Summary of Health Insurance Deductibles and Coinsurance
Chapter 5: Non-life Insurances
12
Bill = $20,000, $500 deductible, 80-20 coinsurance, loss limit $5,000
20,000
- 500
19,500
X 20%
3,900 patient
15,600 insurance
Summary of Health Insurance Deductibles and Coinsurance
Chapter 5: Non-life Insurances
13
Bill = $80,000, $500 deductible, 80-20 coinsurance, loss limit $5,000
80,000
- 500
79,500
X 20%
15,900
5,000 patient
74,500 insurance
GROUP HEALTH INSURANCE Overview
Generally cheaper than individual policy
Usually more comprehensive
Major Disadvantage: Change of employment means loss of group coverage
New laws have reduced some of this pain
“portable”
Important Developments Cobra – remain under former employer’s plan until new plan takes
effect Very expensive
Only person with pre-existing illness really interested
HIPAA – protects insurability If insured over past 24 months the new company’s policy cannot refuse or
impose pre-existing illness restrictions
NMHPA – new born and mother protection act
WHCRA – women's healthcare and cancer act Covers reconstruction treatment after mastectomy
Chapter 5: Non-life Insurances
14 of 37
CHARACTERISTICS OF GROUP HEALTHCARE POLICIES
NO PHYSICAL EXAM NECESSARY
GROUP RATES GENERALLY CHEAPER THAN INDIVIDUAL POLICY
GENERALLY BROAD COVERAGE
Major Disadvantage: Change of employment means loss of group coverage
Chapter 5: Non-life Insurances
15
Government Health Care Insurance
Federal Health Insurance Programs: For People Age 65 or Older
Medicare and Medicaid
Medicare’s Hospital Benefits (Part A):
Financed by SS Payroll Taxes
Medicare’s Medical Benefits (Part B) Optional:
Financed by General Tax Revenue & Paid Premiums
Medicare Advantage (Part C)
Prescription Drugs Coverage (Part D)
Gaps in Medicare Significant gaps exist in Medicare’s coverage
Medicare Act Creates Health Savings Accounts Prescription Drug Benefits (Medicare Act of 2003)
Medigap or Medicare Supplement Policies
Chapter 5: Non-life Insurances
16
Medicare and Gaps
Table 5-2 Medicare and the Gaps
Chapter 5: Non-life Insurances
17
MediGap Coverages
Table 5-3 Medicare and Medical Supplemental Insurance
Chapter 5: Non-life Insurances
18
TAXATION OF HEALTH BENEFITS
BENEFITS ARE GENERALLY TAX FREE
INDIVIDUAL PREMIUM PAYMENTS ARE TAX DEDUCTIBLE (subject to AGI floor)
EMPLOYER HEALTH BENEFITS ARE TAX FREE TO EMPLOYEE
EMPLOYER PREMIUM PAYMENT IS A DEDUCTIBLE BUSINESS EXPENSE
Chapter 5: Non-life Insurances
19
IDEAL HEALTH INSURANCE COMPANY
Maintains high loss ratio
Enjoys one of two highest ratings from Best's Insurance Report
Offers efficient, fair, and courteous claim services
Prohibits cancellation of policy
Maintains a policy of not raising premiums based on claims
Chapter 5: Non-life Insurances
20
IDEAL HEALTH INSURANCE PLAN
Step 1. Select Appropriate Plan Step 2. Analyze Coverage Step 3. Examine Costs Step 4. Check Quality of Plans Step 5. Convenience Factor
Chapter 5: Non-life Insurances
21
DISABILITY INCOME INSURANCE
Basic Needs For some the chance of becoming disabled is greater then the
chance of death Long-term inability to earn a wage
Only 30% of SS disability claims are approved Workers comp only covers from on the job accidents
Types of Disability Insurance Short-term Long-term
Waiting Period Time a person must wait until payments begin Like a deductible concept
Short-term usually 0 – 30 days
Long-term 1, 3, 6 months (3 months most popular
Chapter 5: Non-life Insurances
22
DISABILITY INCOME INSURANCE
Definition of Disability Buyer beware
Categories
Payment if cannot perform ANY occupation
Payment if cannot perform the occupation you were trained for
Partial disability – usually if you earn over 55% of previous income
Residual disability – can make up the difference of lost income
Useful to have guaranteed insurability to buy additional coverage later w/o proof of insurability
Premiums not deductible from income but the benefits are not taxable
Integration with Social Security Pays a certain limit less whatever SS pays
Be careful because of difficulties with getting SS benefits
Chapter 5: Non-life Insurances
23
TAXATION OF DISABILITY BENEFITS
INDIVIDUAL POLICY Benefits are tax free to the person, if he or she
paid the premiums Premium payments for disability insurance is not
a deductible item on an individual tax return
GROUP POLICY Benefits are taxable to the employee, unless the
premium was paid with after-tax employee dollars
Employer premium payments are considered a gross income item to the employee
The employer can write off premium payments as a business expense
Chapter 5: Non-life Insurances
24
Features of Good Disability Policy
Table 5-4 Features of a Good Disability Policy
Chapter 5: Non-life Insurances
25
Disability Insurance Need
Table 5-5 Disability Insurance Need
Chapter 5: Non-life Insurances
26
LONG-TERM CARE INSURANCE Overview
Covers expenses of care should a person be unable to take care of themselves
Normally nursing home care Not necessarily elderly
Best policies cover in home care
NEED FOR LONG-TERM CARE INSURANCE
COST OF CARE
LOSS SHARING
Elimination or waiting period
Daily benefit amount
BENEFIT PERIOD
Chapter 5: Non-life Insurances
27
DISABILITY INSURANCE CONTRACT AND RIDERS
COVERED SERVICES BENEFIT TRIGGER
Unable to perform 2 of 6 ADLs or cognitive impairment Physician certifies condition Condition expected to last ≥ 90 days
Riders Shared cost Inflation protection Waiver of elimination period for home care Waiver of premium Guaranteed renewability
Chapter 5: Non-life Insurances
28
LONG-TERM CARE SERVICES VARIETY OF CARE AVAILABLE
Skilled nursing care Intermediate nursing care Custodial care Home care Assisted living Life care facilities Adult day care Pre-hospitalization Alzheimer’s coverage Etc.
Chapter 5: Non-life Insurances
29
TAXATION OF LONG-TERM CARE BENEFITS
“QUALIFIED” POLICY BENEFITS ARE TAX FREE UP TO DAILY BENEFIT LIMIT
INDIVIDUAL PREMIUM PAYMENTS ARE TAX DEDUCTIBLE (subject to AGI floor)
EMPLOYER HEALTH BENEFITS ARE TAX FREE TO EMPLOYEE
EMPLOYER PREMIUM PAYMENT IS A DEDUCTIBLE BUSINESS EXPENSE
Chapter 5: Non-life Insurances
30
HOMEOWNER'S POLICY
INTRODUCTION Elements of homeowner's (HO) policy coverage
are:
On the house
For personal property
Against homeowner's liability
For medical payments for bodily injury or property damage caused to other people or property
Standard HO policy is a package deal
Chapter 5: Non-life Insurances
31
LOSS SHARING
Coinsurance Rule of 80
Deductibles Step 1 – calculate required coverage
subject to “Rule of 80”
Step 2 – calculate the recovery percentage
Step 3 – calculate the loss recovery (loss x recovery percentage less the deductible)
Amount of Insurance on Home
Chapter 5: Non-life Insurances
32
Forms of Homeowner’s Policy
HO Policy comes in: Broad Form
Fire and lightening
Wharves Windstorms, hail, riot , vehicles, smoke
Falling objects
Weight of ice and snow
volcanoes
Special Form Earthquakes
Floods
Chapter 5: Non-life Insurances
33
Forms of Homeowner’s Policy
Types of HO policies:
HO-2, Broad Form
HO-3, Special Form
HO-4, Contents Broad Form
HO-5, Comprehensive Form
HO-6, Coverage for Condo Owners
HO-8, For Older Homes
Chapter 5: Non-life Insurances
34
Types of Homeowner Coverages
Policies differ due to varying coverages:
Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use Coverage E: Personal Liability Coverage F: Medical Payments to
Others
Chapter 5: Non-life Insurances
35
Forms of Homeowner’s Policies
Table 5-7 Forms of Homeowner’s Policies
Chapter 5: Non-life Insurances
36
Forms of Homeowner’s Policies (contd.)
Table 5-7 Forms of Homeowner’s Policies
Chapter 5: Non-life Insurances
37
Homeowner Coverages
Chapter 5: Non-life Insurances
38
POLICY PROVISIONS
Home Definition of insured Insured locations
Unscheduled Personal Property
Market value Actual value versus
replacement cost
Chapter 5: Non-life Insurances
39
POLICY ENDORSEMENTS
Inflation guard Personal property replacement cost Scheduled personal property floater Additional living expense coverage Backup sewers and drains Identity restoration Home business coverage Business ordinance
Chapter 5: Non-life Insurances
40
SPECIALTY FORMS OF INSURANCE
Special Insurance Flood insurance Earthquake insurance Hurricane insurance Private mortgage insurance Home office protection Insurance on watercraft Title insurance Crime insurance High valued dwelling
Chapter 5: Non-life Insurances
41
Form A: Fire
Chapter 5: Non-life Insurances
42
Form B: Homeowner’s Policy Status
Chapter 5: Non-life Insurances
43
AUTOMOBILE INSURANCE
INTRODUCTION
Damages resulting from auto accident:
Property Damage (Including Damage to Automobile) Bodily Injury (Including Death)
Major Components of Personal Auto Policy:
Liability Coverage Medical Payments Uninsured Motorists Coverage for Damage to Insured's Auto Duties after Accident or Loss General Provisions
Chapter 5: Non-life Insurances
44
Summary of Basic Automobile Coverage
Table 5-10 Summary of Basic Automobile Coverage
Chapter 5: Non-life Insurances
45
BASIC COVERAGES OF PERSONAL AUTO POLICY Liability Coverage (Part A)
Bodily Injury Liability
Property Damage Liability
Medical Payments (Part B) Uninsured Motorists (Part C) Coverage for Damage to Insured's Auto (Part D)
Comprehensive Physical Damage
Collision/Overturn
Duties after Accident or Loss (Part E) General Provisions (Part F) Factors Affecting Premiums Miscellaneous Considerations
Cost of Auto Insurance
Loopholes in Auto Insurance
Chapter 5: Non-life Insurances
46
NO-FAULT INSURANCE
Elements of Basic No-fault Plan:
Accident victims’ losses should be covered by their insurance company
Right to sue for additional compensation is significantly limited
No-fault insurance is mandatory Insurance companies must provide safeguards
against cancellation or non-renewal
Some states have adopted add-on no-fault insurance
Summary: Types of Insurance
Chapter 5: Non-life Insurances
47
Types of Insurances
Chapter 5: Non-life Insurances
48
Types of Insurance Items/Events Covered
Liability Injuries to others and damage to their property
Medical Payments Medical and/or funeral expenses incurredbecause of an auto accident, regardless ofwho is at fault
Uninsured andUnderinsuredMotorist
Expenses (liability and/or physical damage)incurred when the insured is the victim of an accident involving an uninsured vehicle,or a vehicle that has insufficient coverage
Physical Damage Damage to the insured vehicle from anaccident (collision) or causes such as theft, fire, or vandalism (comprehensive)
UMBRELLA LIABILITY INSURANCE
INTRODUCTION
NEED FOR LIABILITY INSURANCE
GENERAL CHARACTERISTICS
Stacks on top of underlying liability coverage (auto and homeowners)
INSURANCE COVERS Cost of legal defense Liability judgments
Chapter 5: Non-life Insurances
49
MISCELLANEOUS LIABILITYINSURANCE COVERAGE
DIRECTOR'S LIABILITY INSURANCE
PROFESSIONAL LIABILITY INSURANCE
MALPRACTICE INSURANCE
Chapter 5: Non-life Insurances
50