RISK MANAGEMENTRISK MANAGEMENT

InsuranceInsurance

Insurance Terminology RiskRisk: uncertainty, unpredictable events which lead to loss or

damage InsurerInsurer: business that agrees to pay the cost of potential future

losses InsuredInsured: person or company protected against loss PolicyPolicy: contract between the policy holder and the insurer

specifying the terms of the insurance arrangements PremiumPremium: the fee paid to the insurer DeductibleDeductible: the amount paid out of pocket by the policy holder

before insurance coverage begins

Insurable Risks Personal RisksPersonal Risks: loss involving your income and

standard of living Life Insurance Health Insurance Disability Insurance

Property RiskProperty Risk: loss to personal or real property Property insurance for homeowners, renters, car, other

possessions Liability RisksLiability Risks: loss that occur when your errors or

inappropriate actions result in bodily injury to someone else or damage someone else’s property Liability Insurance

Types of Insurance

Health Disability Life Homeowner’s/Renter’s Automobile

Health Protects against financial loss resulting from injury, illness, and

disability. Covers emergencies and routine medical expenses

Doctor Visits Hospital Surgical Dental Vision Long-term care Prescriptions

61% of Americans have employer-based health insurance Very Expensive to find health insurance as an individual

Types of Health Insurance Coverage Basic HealthBasic Health: medical, hospital, and surgical costs

Office visits, X-rays, laboratory tests, prescriptions (generic)

Necessary surgeries only: not cosmetic or elective surgeries

Major MedicalMajor Medical: protects against catastrophic expenses of serious injury or illness

Dental & VisionDental & Vision: usually at additional cost with maximum benefits per year per person May cover only certain types of services. Insured pays the

difference

Health Plans Preferred Provider OrganizationPreferred Provider Organization: healthcare providers that band

together to provide health services for set fees. Patients choose doctors from list Limits on types of services and fees Co-pay usually required in addition to premium

Health Maintenance OrganizationHealth Maintenance Organization Has its own facilities and offers prepaid medical care to its members. Patient chooses one doctor to be Primary Care Physician PCP

Health Savings AccountsHealth Savings Accounts: set pre-taxed money aside to pay medical expenses not paid by your insurance. Money remaining grows

Flex Spending AccountsFlex Spending Accounts: Like HSA except it must be used up in the year set aside or you lose it

Disability Insurance

1 out of 10 people will become disabled before age 65

Replaces a portion of one’s income if they become unable to work due to illness or injury

Typically pays between 60%-70% of full time wages

Usually requires a waiting period 30-180 days Duration would be until age 65 Often part of a benefits package an employer

offers its employees

Worker’s Compensation

Covers your expenses if your injury or illness resulted from your job.

Pays monthly Carries a death benefit Burial Payment Allowance for living expense for survivors Determined by your earning and work history

Life Insurance

75% of American adults have life insurance Money is paid upon the policy holder’s death

only BeneficiaryBeneficiary: the recipient of policy's proceeds Purpose: provide money for family members

or dependents when wage earner dies

Types of Life Insurance Term Life Insurance PolicyTerm Life Insurance Policy

Contract remains in effect for specific time period At specified time coverage ceases with no remaining value Like paying rent—Money is gone if you are still living at end of time period Low cost Decreasing Term: coverage decreases each year while premium remains

the same Renewable Term: gives insured right to renew each year without having to

pass a physical exam. Premiums increase death benefit is the same Permanent Life Insurance PolicyPermanent Life Insurance Policy

Policy continues as long as premium is paid Cash Value: savings accumulated in a permanent policy that you would

receive if you canceled your policy. Policy holder can cash out the policy Get money back.

Life Insurance

Purposes of Life Insurance To pay off a home mortgage or debt upon death To provide lump-sum payment to children when they reach

a specified age To provide an education or income for children To make charitable bequests after death To provide for retirement income To accumulate savings To make estate and inheritance tax payments To take care of children’s needs as they are growing up To provide cash value that can be borrowed

How Are Premiums Determined?

Age: Age: Mortality TablesMortality Tables predict the probability of death at

different ages Younger people means lower premiums

Health FactorsHealth Factors Diabetes or heart disease probably means you are

uninsurable Smoker will pay higher premiums

OccupationOccupation Risky jobs = higher premiums

Homeowner’s Insurance

Fire occurs in someone’s home in the US every 74 seconds

Combines property and liability insurance PropertyProperty: damage to structure and possessions

Possessions are protected worldwide Fire, wind, water, smoke, criminal activity

LiabilityLiability: protect the insured party from being held liable for other’s financial losses Someone falls on your steps

Renter’s Insurance

Protects insured from loss to the contents of the dwelling only – not the dwelling itself

Homeowner’s Insurance will not cover possessions of renters

Covers Loss of Use: hotel accommodations until dwelling is habitable again

May have to buy special coverage for some items Can get Liability included for additional premium

How Much Insurance is Enough?

Insure contents for half the value of the building Insure building for replacement cost. Insurance

won’t pay more than replacement value Prepare a Comprehensive Personal Property

Inventory Earthquake or Flood endorsements add more

coverage for a higher premium Personal Property Floater: coverage for expense

specific expensive pieces of property (jewelry) no matter where is may be located

Attractive nuisance: swimming pool homeowner is liable for injuries

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