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Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

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Page 1: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Chapter Nineteen

The American Economy

Personal Finances

~~~~~

Insurance Against Hardship

Page 2: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship
Page 3: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

What is Insurance?life is full of risks and uncertainties

• illness or accident• losing one's job• fire or flood could damage one's house• not being able to earn a living because of age or illness

insurance• arrangements that protect people, at least in part, against the

economic impact of risks and uncertainties• system of paying a small amount to avoid the risk of a large loss

premium• small amount a person pays for insurance protection• may be paid yearly or at regular times throughout the year

policy• the contract that describes the type and amount of insurance

protection

Page 4: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

private insurance• voluntary insurance individuals and companies pay

to cover unexpected losses• many different kinds of private insurance companies

• write policies covering almost every possible kind of economic and physical risk

how does insurance work?• a large insurance company has millions of policyholders

who pay their premiums regularly• part of this money goes into a reserve fund

• state laws specify how much reserve fund a company must maintain• the amount depends on the kind of insurance the company issues and the

number of policyholders

• when someone makes an accident claim, payment in the amount specified by his or her policy is made from the reserve fund• there usually are only a few thousand payments out of the reserve

fund each year• insurance companies invest the premiums they collect

• dividends, interest, and other investments income pay the expenses of these companies and earn profits for their shareholders

Private Insurance

Page 5: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Types of Private InsuranceLife Insurance

• provide the policyholder's family with money if the policyholder dies• the family is protected from financial hardship

• beneficiary• person named in the policy to receive the money when the

policyholder dies• two kinds

• term life• covers only a specified period of time• relatively inexpensive• often chosen by couples who have young children or very high bills

• allows the surviving spouse to care for the children and pay off large debts• whole-life

• covers the policyholder throughout his or her life• more expensive

Disability Income Insurance • cover if they are injured in an accident or suffer an illness• provides payments to replace lost wages when a person cannot

work due to total or partial disability• in case of death, the beneficiary receives the amount of the policy

Page 6: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Health insurance• covers medical or hospital expenses• major-medical and hospitalization

• pays medical costs resulting from a serious illness or injury• premiums are higher than disability premiums because people are more

likely to become ill than they are to become disabled• pays part of hospital bills

• other plans pay doctor, dentist, and other medical expenses• premiums are often shared by policyholders and their employers

Property and Liability Insurance• protect personal property and protect against liability claims• homeowners' and renters’ insurance

• protects people's homes and personal property from events such as fires, hurricanes, vandalism, and theft

• provides coverage if a visitor is accidentally injured while visiting a person's home or apartment

• automobile insurance• covers financial losses due to automobile accidents• coverage if car is stolen, vandalized, or damaged in an accident or by

an act of nature such as a tornado

Types of Private Insurance

Page 7: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Social InsuranceGreat Depression of the 1930s

• caused many Americans much hardship and suffering• many businesses and factories closed• millions of men and women lost their jobs• banks failed, and thousands of people lost their life savings

New Deal• President Franklin D. Roosevelt’s response to Great Depression

• recommended Congress pass a series of laws – 3 Rs• brought immediate assistance to needy people• prevent future recessions• protect against severe economic risks and hardships

social insurance• government programs to protect individuals from future hardship• almost everyone can receive benefits from such laws

Social Security Act of 1935• set up a system of social insurance called Social Security

• three major parts1. old-age, survivors, and disability insurance2. unemployment insurance3. workers' compensation

Page 8: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Social InsuranceOld-Age, Survivors, and Disability Insurance

• people pay a percentage of their salaries each month while they work to receive cash benefits later when they need them most• during the years when workers earn money, they and their

employers make contributions to a fund (FICA)• after workers retire, or if they become disabled and their earnings

stop, they receive payments from the fund as long as they live• if workers die before reaching retirement age, their families receive

"survivors'" payments• a payment is made for each child under 18 and for the widow/widower

paying for Social Security• contributions are paid equally by workers and by employers

• actually a payroll tax, because they are compulsory, or required• self-employed people pay the entire contribution themselves

receiving Social Security• benefits received by retired or disabled workers are based on

their average earnings over a long period of time• recipients receive monthly checks

• was never intended to provide the total income of retirees

Page 9: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Social InsuranceUnemployment Compensation

• plan to help workers who lose their jobs due to circumstances beyond their control

• to receive benefits• unemployed workers must register with a state employment office

• must report periodically to the office to see if it can help them find jobs• if the job search is unsuccessful, unemployed workers receive weekly

benefits based on their average earnings over a certain period of time• most states provide benefits for up to 26 weeks

• program is financed by employers• federal law requires all businesses to pay a special tax• state governments pay benefits out of the federal money collected

Workers’ Compensation• helps people who have job-related injuries or illnesses resulting

from working conditions• pays the medical expenses of the workers• helps replace any lost income• pays death benefits to the survivors of workers killed on the job

Page 10: Chapter Nineteen The American Economy Personal Finances ~~~~~ Insurance Against Hardship

Social Insurancehealth insurance programs added in 1965

• Medicare• helps U.S. citizens who are 65 and older or disabled pay for

hospital care and for some nursing home care• includes a voluntary medical insurance plan to help older citizens pay

their medical bills• Prescription medication coverage added in 2003

• Medicaid• provides money to help states pay the medical costs of people with

low incomes