Insurance Basics

Annie’s National Network Initiative for Educational Success (ANNIES) at Iowa State University Extension

www.extension.iastate.edu/annie

Insurance Basics

Adapted from Money Talk: Women’s Financial Education Series



Objectives• increase your awareness of the financial cost of various

risks in life

• discuss key characteristics of different types of insurance policies

• help formulate questions to ask insurance professionals

• help identify your current insurance strengths and weaknesses



Life is Full of Risks…Many Have Financial Consequences

• Damage to truck in accident• Fire that destroys home, farm buildings and/or possessions• Loss of income due to disability• Death of an earner/key personnel• Loss of a homemaker’s services• Large medical bills for disease or injury• A court judgment of liability for damages



People Manage Risks in Five Ways:

• Risk avoidance• Risk reduction• Risk acceptance (Unknowingly accepting risk

with no plan is called do nothing and hope for the best)

• Risk transfer (insurance)• Self-Insure



Production Marketing Financial LegalHuman

Resources

In The Five Areas of Risk Management

Insurance Contracts



Insurance Basics

• Protect against risks by paying premium• “Large Loss Principle” (size of loss matters)• Major “large-loss” risks:– Loss of income due to disability– Death of an earner/key personnel– Destruction of structures (fire, flood, etc.)– Liability losses due to a court judgment– Large medical expenses (e.g., cancer treatment)



Generally Unnecessary Insurance

• Credit insurance (life, disability, unemployment)

• Life insurance for children

• Cancer insurance

• “Double Indemnity” insurance riders

• Hospital indemnity policies

• Flight insurance

• Car rental collision-damage waivers



General Insurance Tips• Check policies for “owner”, “Insured”, & “beneficiaries”• Insure for major losses• Choose a highly rated insurance company• Select the highest deductible you can afford• Pay premiums annually or semi-annually• Avoid duplicating coverage• Ask about available discounts• Follow “The Rule of Three”



Parts of an Insurance Contract

• Declarations page

• Insuring Agreements

• Exclusions

• Endorsements and Riders



Policy Features That Limit Coverage

• Benefit coordination clauses

• Deductible

• Elimination period

• Co-payment

• Co-insurance

• Policy limit



Life Insurance

• Protects against loss of earner’s/key personnel income• Provides money to replace homemaker’s services• Factors to consider include:– current assets and debts– earning power of surviving spouse– other sources of income – projected expenses



Types of Life Insurance• Term Life

– Level term

– Decreasing term

• Permanent Life (cash value)

– Whole life

– Variable life

– Universal life



General Life Insurance Tips• Avoid simplistic formulas

• Never cancel existing policy until you have new one in hand

• Review beneficiary designations

• Buy credit life coverage only if you cannot get life insurance elsewhere

• Compare policies: interest-adjusted net cost



Two Primary Types of Health Insurance

– Indemnity or “traditional”• Annual deductible • Co-insurance up to stop-loss limit

– Managed care (HMOs, PPOs)• Read “the fine print” for details• Emphasizes preventative care and screenings• Require use of in-network medical providers



General Health Insurance Tips

• Look for a policy that is “guaranteed renewable”or “noncancellable”

• Inquire about post-retirement coverage

• Note pre-existing condition clauses

• Be cautious about switching policies

• Keep good records!



Other Health Benefit Programs

• SHIP (State Health Insurance Program)• COBRA– Extends group coverage for up to 18 months– Covers employers with 20 or more workers– Ex-worker must pay full cost, plus 2%

• Free/low cost screenings & immunizations



Disability Insurance

• Covers income loss from inability to work• Maximum coverage: 60% -70% gross pay• Particularly important for self-employed• Key factors:– Definition of disability• Own Occupation• Any Occupation

– Waiting period



Disability Insurance Tips

• Base elimination period on

– Adequacy of emergency savings

– Accrual (if any) of employer sick leave

• Buy a noncancellable policy to age 65

• Request that an ex-spouse buy coverage to protect support payments

• Try to get benefit of 100% of net income



More Disability Insurance Tips

• Look for a policy with residual benefits

• Consider a cost-of-living rider

• Avoid gender-based policies (women pay more)

• Purchase a waiver of premium rider

• Look for a “recurrent disability” clause



Long Term Care Insurance• “LTC” means wide range of services:

– Home health care

– Nursing home care

• Three ways to handle risk of LTC costs:

– Retain it (self-insure)

– Avoid it (no guarantees)

– Transfer it (LTC insurance)



Who Should Buy LTC Insurance• If premiums are no > 10% of annual income

• If you’re able to handle 20% -30% increase

• If > $75,000 of assets per person (excluding house)

• If > $30,000 annual income per person

• Around age 60 (55-65)

• Couples concerned about well spouse



Additional LTC Insurance Tips• Understand how to trigger benefits (ADLs)

• Buy a “compound” inflation rider

• Consider key policy features:

– Elimination period

– Length of time benefits will be paid

– Benefit amount ($ per day)



Auto Insurance Basics• Factors that affect coverage• Two parts:– Liability coverage• Single limit (e.g., $300,000)• Split limit (e.g., 100/300/50)

– Physical damage (collision & comprehensive)• Liability coverage is most important part• State minimum liability is often inadequate



Auto Insurance Tips

• Increase liability to at least 100/300/50: for self and uninsured motorists

• Evaluate physical damage coverage on older cars

• Take advantage of available discounts

• Buy a less expensive car to insure

• Notify insurer if driving patterns change



Homeowner’s Insurance Basics• Five sections to a HO policy:

– Damages to house or other structures

– Loss of personal property

– Living expenses while home is repaired

– Personal liability

– Medical payments to others

• Different types of “HO” policies



Three Important Tips• Photograph or videotape home contents– List brands and serial numbers– Store documentation away from home

• Make sure home is insured for at least 80% of replacement cost– Otherwise, you’ll get partial payment for losses

• Buy a “guaranteed replacement cost” rider for home (if available) and contents



Other Homeowner’s Insurance Tips• Pay the premium annually

• Check on discounts for safety devices

– Alarm system

– Smoke detectors

• Don’t select low ($250) deductibles

• Consider flood insurance

• Document damages



Umbrella Liability Coverage

• Supplements liability limits of homeowner’s and auto policy

• Also covers libel, slander, defamation of character, false arrest, boat or aircraft accidents, damages on another’s property

• $1 million policies cost $150 to $250

• Sold in $1million increments



Umbrella Insurance Tips

• Buy required underlying coverage

• Check to see if service on non-profit boards is covered

• Check exclusions (e.g., overseas coverage, business coverage)

• Check discount for all property coverage with one insurer



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Insurance Basics