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1.This document is FCS5207, one of a series of the Department of Family, Youth and Community Sciences, Florida Cooperative Exte nsion Service, Institute of Food and Agriculture Sciences, University of Florida. This material was adapted for use in Florida with permission of the University of Idaho Cooperative Extension System. Publication: July, 2001. Pl ease visit the EDIS Web site at http://edis.ifas.ufl.edu.The Institute of Food and Agricultural Sciences is an equal opportunity/affirmative action employer authorized to provide resea rch, educational information and other services only to individuals and institutions that function without regard to race, color, se x, age, handicap, or national origin. For information on obtaining other extension publications, contact your county Cooperative Extension Servic e office. Florida Cooperative Extension Service / Institute of Food and Agricultural Sciences / University of Florida / Christine Taylor Wadd ill, Dean 2.Josephine Turner, Ph.D., CFP, professor, Family and Consumer Economics, and reviewed by Nayda I. Torres, Ph.D., professor and chair, Department of Family, Youth and Community Sciences, C ooperative Extension Service, Institute of F ood and Agricultural Sciences, University of Florida, Gainesville, 32611, and Patricia G oodgame, extension agent II, Volusia County. FCS5207Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE1Adapted by Josephine Turner2OverviewPurchasing insurance is the primary way families protect themselves against the risk of financial loss caused by damaging or destructive events. Insurance helps to protect you by pooling your potential risks with others who are in similar risk situations. With insurance, you pay a small amount at regular intervals (called a premium) to an insurance company to cover your costs should the damaging effects of a large loss occur. In effect, you transfer some of your financial risk to the insurance company. Remember insurance is regulated by state law and policies may vary from state to state. This lesson begins by identifying three common types of risks that families facepersonal, property, and liability risksand looks at ways to reduce or eliminate them. One solution is insurance coverage. Plans are available to transfer or reduce several types of risk. This lesson identifies and explains the most common forms of insurance that the average family should be aware of and may wish to purchase. These include various types of health, disability, life, automobile, and property and casualty insurance. The lesson wraps up with worksheets to help you decide how much insurance coverage your family needs, and with a look at r ecent legislation about obtaining individual health insurance policies in Florida. Identifying Financial Risk Families commonly face personal, property, and liability risks. Personal risk is the loss of income (and increased expenses) resulting from unemployment, illness, disability, and premature death. Property risk is the loss of personal property and real estate caused by fire, wind, accident, or theft. Liability risk involves loss because of neglect or carelessness that results in bodily injury or property damage to another person. For example, a person might fall on a broken step and break a leg. Or you may fail to stop at the stop sign and run into another car. Or your dog could bite the mail carrier. Options for Dealing with Risk How can you best cope with these types of risk? Some options are to: minimize the risk accept the risk or a portion of it transfer the risk
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 2 August 2001Minimize the Risk You cant eliminate risk, but you can postpone, minimize, or control some losses. For example, youll be more likely to stay healthy if you develop sound, safe, health-care practices. If you lock doors, it is more difficult for burglars to steal from your home or car. By driving carefully, you lessen the chances of liability if an accident occurs. Accept or Share the RiskSome people choose to accept certain risks or portions of them. For example, you may choose to develop a savings program instead of buying life insurance to pay for burial expenses. Or you may insure against major medical bills or property damage but plan to assume some medical or property loss through a deductible. Transfer the Risk Some insurance programs offer options for transferring everyday risks, and there are other ways to accomplish this on your own. For example in a two-income household, the risk of losing the breadwinners income may be made less traumatic because of shared income responsibilities. A second wage earner in the family is one way to protect against complete loss of income. Buying Insurance Buying insurance is an important decision for which you will need to be well informed. Insurance coverage is a basic part of overall financial planning and should not be viewed as an isolated purchase. Plan to review your policies over time as your needs change. Shop carefully for insurance protection. Discuss your insurance needs with agents from several companies. Your aim is to buy insurance that fits your needs, rather than being sold protection that you dont need. You will find considerable variations in rates and coverage, so select the policies that best suit your particular needs. Types of Health Coverage The following information will help you to determine your familys health insurance needs. With rising medical costs, health insurance has become a necessity. Individual Health Insurance Before deciding how much insurance you need, ask yourself this question: How much can you afford to pay for medical expenses? Some predictable costs, such as routine checkups, fit into a long-range spending plan. A few unpredictable expenses might be handled without straining the familys financial well-being. This strategy of assuming certain medical expenses is called self-insurance. The deductible on a health insurance policy, for example, represents the amount of loss you agree to self-insure against. Policies with higher deductibles will have lower premiums. Deductibles should not ex ceed the am ount you can afford to pay out of current income and cash reserves. Once you have determined your self-insurance limits, look next at medical expense and disability coverage. Medical Expense Coverage The high cost of medical care will require you to have insurance to cover most of the risk. To plan your medical expense coverage, identify the types of coverage available, and buy the maximum limits you can afford. Typical types of health coverage include hospitalization, surgical, major medical, and comprehensive.Hospitalization. This covers daily room, board, and regular nursing services in the hospital. You will also be covered for certain hospital services and supplies, such as X-rays, lab test, and medication. Know specifics if you are considering a hospital coverage policy: The number of days of hospital care covered. The amount covered for daily room and board. How the hospital benefits compare with other policies.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 3 August 2001Ask at your local hospital about daily charges so you can determine what will be covered by the insurance policy you are considering.Surgical. This pays for surgical procedures only. Check the policy for a detailed list of the surgical operations covered and know the maximum benefit paid for each procedure. Surgeon fees vary, so youll want a policy that will cover the amounts a ccepted by the doctors in your community.Major Medical. Basic hospital, surgical, and medical policies pay benefits that have relatively low maximum payments. If you were badly injured, your bills would probably ex ceed those payment limits. Major medical insurance usually picks up where basic coverages leave off. Most major medical policies cover a fixed amountusually 75 or 80 percentof all expenses above a deductible. Upper limits on payments can start at $10,000, and you can purchase policies that w ill cover you to unlimited amounts. Most families need major medical coverage as part of a health insurance plan. If you cant afford the total health insurance coverage you would like, it is a good idea at least to buy major medical with a $500 or $1,000 deductible. This will protect your against catastrophic medical bills.Comprehensive. This insurance option combines all or most of the above benefits into a single comprehensive plan. A good comprehensive policy will cover most of the costs of illness and injury. Although some individual plans are available, most comprehensive plans are offered through group policies. What To Look for in Health Insurance You should know the following information about any health insurance plan you select. Maximum Benefits How much is the maximum benefit (or is coverage unlimited)? If the maximum benefit has been partially or fully used up once, how will this affect a second claim? Are there separate maximum benefits for each claim, or is there a yearly maximum benefit for all illnesses or accidents?Deductibles. How much is the deductible? This is the initial amount of health expenses you are required to cover. You will want to know this amount, and whether it is yearly or per illness?Internal Limits. Are there benefit limits on certain expenses, such as hospital room or surgery?Waiver of Premium. Does the policy allow you to stop paying your premium during an illness or disability?Pre-existing Condition. This is a medical condition or ailment you had before the policy goes into effect. Most insurance policies exclude payment on pre-existing conditions. Know how your policy deals with this situation.Renewability. Is the policy renewable, and if renewed, can the premiums increase? Avoid Duplication: Coordinate Coverage When you purchase a health insurance plan, coordinate the new benefits with any that you or your spouse already receive from employers. You dont need to duplicate coverage. Consider Insurance Alternatives Shop around and consider the alternatives. Everyone should have major medical insurance. A major illness or accident can bring on economic chaos. If you are eligible for group medical insurance, take advantage of it. If not, compare the cost of Blue Cross/Blue Shield with other plans. Note the various features of each. Consider taking a larger deductible in order to pay a smaller premium. See if an HMO (Health Maintenance Organization) is near you. Often an HMO offers group coverage to an individual who is not otherwise eligible to be in a group medical plan.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 4 August 2001Disability Insurance If you become disabled and cant work, disability insurance (or loss of income insurance) can provide some income until youre ready to re-enter the labor force. Some employers continue to pay salaries or wages during temporary absences from the job as the result of accident or illness. But, after a time, full pay will be reduced or eliminated. Disability benefits are limited to a percentage of regular income, usually 50 to 70 percent of a workers earnings before taxes. So, if your pay is $350 a week, benefits might be $175 to $245. These policies generally require total disability before benefits are paid. Some policies provide benefits even if an individual partially recovers from a total disability. Know how total disability is defined in the policy. It may have one or both of the following definitions: Unable to perform your previous occupational duties. Unable to engage in any type of job for which you are suited by education, training, or experience. Disability insurance policies generally have waiting periods before benefits begincommonly 14, 30, or 90 days. The longer the waiting period, the lower the premium cost. Depending on the contract, benefit periods for disability income insurance policies can range from 1 year, to age 65, or even for life. The longer the benefit period, the higher the premium cost. When figuring out how much disability insurance you need, consider how long your employer will pay you if you are unable to return to work. Also, look at how long other benefits will continue, such as Social Security disability payments and Workers Compensation (if disability is work related). Income also may come from savings, investments, or a spouses earnings. Most disability payments are tax -free, so youre reasonably well protected if you can cover 60 to 70 percent of your present income. Persons who have good employer disability plans and who are eligible for Social Security benefits often are adequately covered. If you do need extra protection, get a policy that the company cant cancel and you can renew each year (guaranteed noncancellable and renewable). Know if the company can raise the premium when you renew. Rates vary widely for disability insurance, so shop around. Even if you are not drawing a salary, you need to determine if the extra costs of your becoming disabled could be covered by family income. If not, consider disability insurance, but know that not all companies sell disability coverage to those not employed. Social Security and Workers Compensation If you are or have been employed, you may be entitled to medical and disability benefits under program such as Social Security and Workers Compensation. These benefits can form a base upon which to build added coverage, but they will not satisfy your needs for health insurance. Your Social Security Office can answer question about benefits. Check Social Security Web site: www.ssa.gov or call toll free 1-800-772-1213. For the deaf or the hard-of-hearing please call 1-800-325-0778. Workers compensation covers on-the-job accidental injuries and illness caused by your employment. The program is funded by employer contributions. Use Worksheet 1 to help you decide how much disability insurance you need. Life Insurance The primary purpose of life insurance is to protect your dependents from lost income when you die. The right amount of insurance varies with your dependents financial needs. Consider these situations:A married couple, both employed, no children.The husband and wife are not financially dependent on each other, so the death of either spouse probably would not cause serious financial hardship unless a large debt is owed.A married couple with young children, and a wife who is a full-time homemaker. There is a vital need for life insurance because the wife and children are solely dependent on the husbands income.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 5 August 2001A single parent with young children. This is another case where there is a vital need for life insurance because the children would have no source of income if the parent died. Consider the following when purchasing life insurance: How many dependents are there to provide for? How old are they? Could the current life style be maintained if one of the wage earners died? Will the surviving spouse be able to enter the work force? Are both spouses working? What Social Security benefits will be available to the surviving spouse and children? Will employee benefits be available? The two most common types of life insurance are term and whole life. Other less common forms combine features of both these basic types. The best type of life insurance product for you will be determined by your age and personal circumstances. Term Insurance Term insurance is for those who want maximum protection at the least cost. This insurance provides protection without savings or a buildup of cash values. Term insurance insures your life for a fixed period of time. Benefits are paid only if you die within that time period. It is often called temporary insurance, and is usually taken out for a period of 5, 10, 15 or 20 years. If you renew the contract, you will pay a higher premium because premiums increase with age. Some term life contracts are not renewable after age 65. You can pay extra to include a clause in the contract that allows you to converts the term policy to a whole life or endowment policy without an additional medical exam. Term insurance premiums are lower than those for whole life. The young couple with small children and limited income may find term insurance the only way to get enough life insurance to suit their needs. The basic types of term policies are level term and decreasing term. With level term, the face value (amount paid on death) remains the same for the life of the contract. With decreasing term insurance, the face value decreases on a monthly or yearly basis until it eventually reaches zero. In the same vein, you can purchase mortgage insurance as decreasing term or level term. If purchased as decreasing term, the balance of the mortgage is paid in case of death. The policy decreases in face value over time as the mortgage is paid. The remaining settlement goes to the beneficiary. (A beneficiary is the person named in the policy to whom insurance money is paid when the policyholder dies.) Employee group-life insurance is another form of term insurance. You have coverage as long as you work for the employer under whom the plan is arranged. Employee group life policies may include the option of converting to a whole life policy after termination of employment. Whole Life Insurance This insurance, also known as straight or ordinary life, provides protection at a flat premium rate for as long as you live. Once issued, no further health examinations are required to continue coverage. Limited payment policies allow you to pay off all premiums within a certain period of time, such as 20 years or age 65. In this case, premiums are higher, since they are paid over a shorter period of time than ordinary policies. The annual cost of whole life insurance is much higher than term insurance, but whole life premiums never increase as the cost of term does. The added amount you pay for whole life (over the cost of term) is really a form of savings. It produces what is known as cash value, which you can borrow against at low interest rates or use as collateral for a loan. An outstanding loan would be subtracted from survivors benefits if you were to die before the loan was repaid. If you stop paying premiums, the cash surrender value (technically called the nonforfeiture value) can be taken as cash or used to purchase other insurance.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 6 August 2001Other Forms of Life Insurance In the past few years, several new types of life insurance have been introduced. These policies combine features of both term and cash-value insurance. They are interest-sensitive: As the interest paid on savings increases or decreases, the interest earned on the savings feature of the policy and/or the premium increases or decreases. The most common policies are called universal life or variable life. Universal life provides insurance with cash values that increase based on current interest rates that may change during the life of the contract. Variable life provides benefits that vary based on the performance of a specific group of securities the insurance is tied to. How To Decide How Much You Need The important thing when buying life insurance is to determine how much you need and buy no more than that. To help you decide this, refer back to the Yearly Plan and Spending worksheet (Lesson 1) and the Your Net Worth Statement worksheet (Lesson 2). Then check your Social Security and pension benefits. Carefully examine these budget sheets with insurance in mind. What income will be available for the family if you die? Perhaps it will include: Spouses income (if he or she works, or can return to work); Social Security payments (if the spouse is eligible for them); Income from dividends and interest; Benefits from a pension plan; or Proceeds from an existing plan, or from insurance already in force or included in coverage at your place of employment Now look at the expense side of your budget. Which expenses will decrease for the rest of the family if you die? Some expenses to consider include the cost of food, clothing, transportation, and life insurance premiums. Typically the average family needs 75 percent of previous take-home pay in order to cover expenses and maintain its life style. Therefore, accurate budget sheets are crucial to establishing a correct picture of what it costs you to live. In addition to replacing income, it is a good idea to have extra insurance to cover future cash requirements in the event the breadwinner dies. Some expenses have already been listed in the liabilities column on your Net Worth Statement worksheet (Lesson 2). Be sure to include: Mortgages, installment loans, current bills, and other debts; Education expenses; if your children are near college age, you will have to calculate more closely than if they are younger; and Estate settlement expenses, such as administration of the estate, probate costs, attorney and accountant fees, appraisal fees, taxes, final unreimbursed medical expense, and funeral expenses. Rule of thumb: Allow 2 to 5 percent of the total estate, plus up to $6,000 for funeral expenses With so many variables, you can see how the amount of insurance needed changes over the years. Make sure to reevaluate you needs at least every 5 years. Finally, you also want to avoid being over-insured. Careful planning will tell you the amount of coverage you need, which may not be the amount an agent tries to sell you. Your Net Worth Statement worksheet and Yearly Plan and Spending worksheet have helped you to learn which assets will produce income, which liabilities should be paid off with insurance, and what it would cost you to maintain your lifestyle. Automobile Insurance As far as automobile insurance is concerned Florida is a no fault state. Florida car owners are required to carry Personal Injury Protection (PIP). PIP is a broad version of medical payments insurance. It pays for medical care, lost wages and replacement services for the injured party, and pays regardless of fault. Florida car owners must show proof of the following minimum coverage before they can purchase a tag for their car: (1) Liability
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 7 August 2001$10,000 per person and $20,000 per accident, (2) Property damage of at least $10,000 and (3) No Fault Medical of $10,000. Coverage in addition to the minimum may be desirable and will increase the premium only slightly, i.e. not in proportion to the premium for the required coverage. In addition to the required insurance, Floridians may also want to buy collision, comprehensive, and uninsured motorist insurance. Collision insurance may be required on a new car but may not be important, as the car gets older. Dropping collision coverage when the cars resale value is so low that you could handle the loss yourself or the repairs will cost more than the car is worth may be a good idea. Comprehensive insurance pays for damage to your car (or replacement cost) if it is stolen, damaged by fire or windstorm, or if it is vandalized. Uninsured motorist pays for injuries or damage to you caused by another driver who is uninsured or underinsured. Check your car insurance coverage and make sure it is adequate. It is also a good idea to compare prices with other companies to check the cost of similar coverage. Property and Casualty Insurance Property and casualty insurance provides reimbursement coverage in the event of fire, theft, flood, or wind damage. This type of insurance allows you to make repairs and buy replacements that your financial assets wouldnt typically cover. When purchasing property and casualty insurance, it is important to understand what will be covered by the insurance company, and what you must take care of ourselves. Homeowners policies (as they are called) usually cover: Fire insurance on the house; Extended coverage for damage to the house by such things as wind, hail falling objects, smoke, and motor vehicles; Allowance for additional living expenses if the homeowner has to live in a motel or rented house while repairs are made: Allowance for personal property lost because of fire, theft, or mysterious disappearance; this covers items such as clothing, books, cameras, stereos, and household furnishings; and Liability claims resulting from any injuries suffered by other while on your property, such as if the mail carrier is bitten by your dog or falls over a toy left on the sidewalk; liability coverage would include payments for medical expenses. To get the most from the money you spend on household insurance, make an inventory of your household possessions. This will help you to determine how much coverage to buy, and it is useful in filing claims. If you did not begin a household inventory following Lesson 2, now is the time. Go through each room and list personal possessions with a date of purchase and purchase price. This inventory should be as detailed as you can make it. Inventory forms are available from insurance agencies or you can make your own. Once the inventory is complete, put a copy in a safe-deposit box or a fireproof container. When selecting a household insurance, do the following: Consider large deductibles to reduce premiums Compare costs and coverage from different companies Read the policy and know exactly what it covers and what to do if you have a loss Inform your insurance agent of additions to your house and major purchases so your insurance coverage can be kept up to date.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 8 August 2001Worksheet 1How Much Disability Insurance?A. Annual family expenses (refer to Plan Your Spending worksheet completed in Lesson 1) $___________ B. Sources of incomeAnnual Income .. ___________Social Security benefits (if eligible) .. ___________Disability benefits from work ___________Income from income-producing assets (Evaluate income from assets youve listed on your Net Worth Statement, Lesson 2) ___________Other income (IRA funds can be withdrawn without penalty if you are totally disabled) .. ___________ Total sources of income .. $ ___________ C.Additional income needed (Subtract B from A) $___________
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 9 August 2001 Risk Reduction Plan Worksheet 2Use this form to think about financial risks, your resources to offset these risks, and changes that are needed. RisksFinancial impactWays of reducing financial impact Your present resources* Changes needed DisabilityLoss of one incomeLoss of services(Temporary or permanent)Increased expensesOther lossesSavings, investmentsDisability insuranceOther resourcesIllnessLoss of one incomeCatastrophic hospital expensesOther lossesHealth insuranceHealth maintenance organizationsMilitary health servicesMedicare, MedicaidSavingsOther resourcesDeathLoss of one incomeLoss of servicesEstate settlement expensesOther expensesEstate planningLife insuranceVeterans life InsuranceSocial Security survivors benefitsOther resourcesProperty lossFire, storm, flood damage to propertyRepair or replacement cost of theftOther expensesAutomobile insuranceHomeowners insuranceFlood insuranceSavingsLiabilityClaims and settlement costsLawsuits and legal expensesLoss of personal assets and incomeOther expensesMaintaining propertyHomeowners insuranceAutomobile insuranceMalpractice insuranceOther resources*Consider benefits available from all sources Social Security benefits, employee benefits, as well as other assets.
Show Me the Money Lesson 4: Protecting Against Financial Risks: INSURANCE Page 10 August 2001Florida Department of InsuranceIf you have questions or problems with an insurance company licensed to do business in Florida, you can get help from: Florida Department of Insurance 200 East Gaines St reet, Tallahassee, FL 32399-0300 (850) 413-3100 Consumer Helpline (toll-free) 1800-342-2762 Web site: http://www.doi.state.fl.us/ When you write, be sure to include your name and address, the name of the company and agent, the policy type and number, and the details of the problem. When you call, be sure to have this information in front of you. Summary of Suggested Activities Regarding InsuranceWhen making insurance decisions, ask yourself What if questions. What risks do I/my family take? What things could possible happen? Which of these risks must I assume myself, and which can I pay an insurance company to take over? Do I already have coverage against some of these risks? Discuss this with your family. Complete Worksheet 2 Risk Reduction Plan, to help you decide which policies and coverage you need. Some things you will need to do are: Review your coverage if you have health insurance. If you have none, consider the purchase of major medical insurance then other health insurance as you can afford it. Decide if you need disability insurance and, if so, how much. Use Worksheet 1 to help with this. Decide if you need life insurance. Use the information from How to Decide How Much You Need to help you determine your life insurance needs.