Personal Insurance

Full freedom-of-choice plans allow you to choose any doctor and hospital. These policies call for a "deductible." This means that you must pay a stated amount first, before the insurance company begins paying benefits. The deductible commonly runs from $100 to several thousand dollars; and the rule here is the higher the deductible you are willing to accept, the lower the cost of your insurance. "Co-insurance"- the part of the medical costs you are obligated to pay with your insurer, is also involved.

For example, most freedom of choice plans will pay 75% to 85% of all eligible medical costs above the deductible, you pay the remainder. In other words, a medical cared bill totaling $10,000 of eligible expenses would leave you paying $1,500 to $2,500 above the deductible. These policies that require you to pay a portion of the costs above the deductible, usually feature a "stop loss" provision. This is the point where you stop sharing the costs with the insurance company and the insurance company pays all the bills at 100% for the balance of the current calendar year.

Preferred Provider Organizations (PPO) Plans allow the insureds to choose a doctor or hospital from a list of "preferred" providers in order to receive maximum benefits. If you go to a doctor or hospital who is not a member of the preferred list, the plan will cover a lessor percentage of the costs. PPO plans have many of the same features of freedom-of-choice plans including coinsurance and stop loss provisions. Check with the insurance carrier BEFORE you use the plan to determine if your physician or hospital is a contracting provider with your plan. Also, it is your responsibility under these types of plans to make sure your doctor refers you to other "preferred" providers.

Prepaid Health Contracts

Health Maintenance Organizations (HMOs) were formed with the idea of controlling health costs and providing preventive health care before members become ill. HMOs are comprised of hospitals, doctors and allied medical personnel who have contracted to provide health care to members in return for a pre-paid monthly charge.

When joining an HMO, members select a doctor, the "primary care physician," from a list provided by the HMO. Typically family practioners, internists, and pediatricians; these doctors manage all medical care including referrals to specialists and whether further lab tests or x-rays are needed. The system is designed to eliminate any unnecessary care which would ultimately increase total health care costs.

HMO's provide incentives for individuals to seek medical care. Office visits are provided for small copays- usually $10 or $15. Prescriptions are available for small copays also. Hospital expenses are usually covered at 100% for little or no copays. With an HMO, you do not have the option of going to a medical provider who is NOT part of the HMO network. HMO's are available on both a group and individual basis.

Government Sponsored Health Programs

Managed Risk Medical Insurance Board (MRMIB)--- The State of California sponsors a health care plan for individuals who have been unable to secure health care coverage through normal channels. To be eligible for this plan, an individual must have been declined for coverage in the past 12 months and meet certain residency requirements as well as waitng periods before benefits are available. Ask your agent for more information or call 1-800-289-6574.

Health Insurance Plan of California (HIPC)--- This program is also sponsored by the State of California. HIPC is a group health insurance pool for small employers (3-50 full-time employees).

It guarantees coverage to employees in any of one of 20 different health care plans offered mainly through HMO-type health plans. Your employer can get more information from an insurance agent or by calling HIPC at 1-800-447-2937.

Medicare--- A federal program which provides medical coverage for people over the age of 65 and for those who are permanently disabled. Contact your local Social Security office for more information and enrollment instructions.

MediCal--- This health plan is funded jointly by California and the federal government but administered on the state level. MediCal provides medical assistance to low-income families and individuals of all ages participating in cash-assistance programs. Contact your local county Social Services Department for elgibility requirements.

Reimbursement health insurance plans consist of four major parts - deductible, co-insurance, stop loss and payment limit.

Deductible - The annual amount your policy states you must pay before the insurance company will begin paying it's share of each claim. The policy deductible limits normally include a limit per individual and another larger limit per family. If your policy allows you to adjust the deductible, as the deductible increases, the policy premiums decrease.
Co-Insurance - After the deductible has been paid by the insured, the policy will state the amount that is required to be paid for each claim. This is the co-pay amount. The larger percentage that you agree to pay of each claim, the lower the policy premiums will be.
Stop Loss - The stop loss limit is often referred to as the maximum out of pocket amount you are required to pay. This is the sum of the deductible and the co-pay. Examples of stop loss amounts would be $2,500, $5,000, $10,000, etc. The higher the stop loss the lower the policy premiums will be.
Payment Limit - The payment limit is the maximum amount the insurance company will pay the insured. Examples of payment limits are $500,000, $1million, unlimited. The higher the payment limit the higher the premiums will be.

Most group policies offer limited flexibility for the insured to adjust policy limits. With individual policies, savings can be realized when adjustments are made to the deductible, stop loss and co-insurance amounts. Due to the extremely high cost of individual health insurance plans, it is not uncommon for those that are self employed to only carry a major medical policy. A major medical policy would be designed to protect only against major medical claims. Claims would not be made for periodic trips to the doctor and other minor medical expenses. This would basically be a policy with a high deductible, co-pay percentage stop loss amount and payment limit. It is highly recommended that the payment limit for all policies be as high as possible. In our highly litigious society, a payment limit of $1million is a minimum starting point.

2. Disability

Statistics tell us that 25% of all 40 year old men will become disabled prior to reaching the age of 65. Disability insurance is designed to pay a percentage of the current income when a person becomes medically disabled. The three risk factors that affect the disability policy premiums are: the type of disability (total or occupational), occupational classification and the elimination period (same as the deductible).

Type Disability - A disability policy that requires proof of total disability before benefits are paid requires that the insured is unable to be employed in any type of work. Social Security disability insurance requires proof of total disability before any benefits are paid. Occupational disability insurance requires that the insured be unable to perform the duties of his/her current occupation.
Occupational Classification - Every occupation is classified based on risk. Premiums are based on risk. For example, a desk clerk would be classified in a much lower risk classification than a truck driver working for a moving company. The more risk the more you will pay. Some occupations present such a great risk that disability insurance is cost prohibitive.
Elimination Period - The elimination period is the period of time that must elapse after being disabled before the policy will begin to pay benefits. The longer the elimination period the lower the policy premiums.

Disability insurance coverage is obtained from two primary sources:

1. The government, through :

Social Security, a federal government program, disability benefits are paid to "totally and permanently" disabled employees and sometimes to family members. Benefits are based on the amount of time you worked, how much you earned, your age at the disability, your marital status and dependents. There is a five month waiting period, and benefits are reduced by worker's compensation and other government benefits and
Worker's Compensation, governed by state law, varies from state to state. Employers are required to pay for employee coverage. Benefits are determined as a percentage of the worker's wages (60 to 70 percent is common) and generally are subject to minimum and maximum amounts.

2. Private insurance companies, through:

Employer programs. Employer disability coverage varies from employer to employer. Not all employers have disability coverage. You should check your employer's benefit handbook or summary plan description for the details on any coverage.
Group programs. Various professional, industry, fraternal and other affiliation groups may offer group disability coverage. This coverage often has favorable premium rates and may provide basic coverage when no other and
Individual Policies. Policies may be purchased by an individual even if his or her employer offers a disability benefit. If there is duplicate coverage, however, you would want to know about the coordination of benefits provisions of each policy.

How much disability insurance you need depends upon your current income requirements. Disability policies often limit coverage to a percentage of earnings or to a maximum dollar amount. Would this limited amount be enough for you and your family to live on? Would you have alternative means of support?

Disability benefits are sometimes subject to income tax. You need to determine if your benefits are subject to tax and, if so, how much would be left after taxes are paid.

If the insurance was purchased on your behalf by your employer, the benefits will generally be taxable when you receive them. If you pay for the coverage, benefits are generally tax free.

To start your analysis, estimate your "short-term and "long-term" income requirements.

Short-Term - Short-term needs are often addressed in two ways. An employer sick pay plan pays employees for sick days which are usually earned annually. Additionally, an employer may have an accident or sickness plan that pays partial or full salary, after some waiting period, for a defined period of time (for example, up to two years).
Long-Term Disability - a disability that exceeds a specified period of time. The actual number of days or months considered "long-term" will vary by insurer.

Compare these needs with the benefits you are entitled to, if any, from federal programs (such as Social Security), state programs (such as worker's compensation), and any group coverage (such as that provided by your employer).

If these benefits do not fully meet your needs, investments or other assets close the gap? If not, you may need to consider an individual disability policy. If you do decide to purchase an individual disability policy, you should look closely at the:

Perils Covered. A policy may provide benefits resulting either from accidental bodily injury alone (accident only coverage) or from accidental bodily injury or sickness (accident and sickness coverage).
Maximum Benefit Period. You may choose a benefit period ranging from as short as six months to as long as your lifetime (sickness coverage is often limited to age 65). You should select a benefit period based upon your needs.
Definition of Disability. Understanding the definition of disability in a particular policy is critical. The definition could refer to an inability to perform the duties of any occupation, or of your occupation, or of your specific job. In addition, the definition may require either partial or total disability.

The best policies define disability as the inability to do your regular job for a certain period of time. Under these policies, you know you're covered when a disability puts you out of your job. This type of policy costs more; but the increased peace of mind you gain is generally well worth the increased premium.

Waiting Period. The waiting period is the number of days after a covered disability occurs before benefits begin. The period can range from no days for accidents and seven days for sickness to as much as one or two years for accidents and sickness. When selecting a disability policy, you should coordinate the waiting period with any other coverage you have.

The recommended type of disability policy would be one that would cover you if you are unable to perform your current occupation with an elimination period of a maximum of one year. Occupational disability insurance is not designed to replace your previous income for life but rather to provide you with a supplemental source of income (normally a maximum of 80% of your current income) until you can be employed in an alternative occupation. An alternative occupation will normally require time for further education or training. Therefore, occupational disability insurance is designed to only pay benefits for a limited period of time (4-6 years).

3. Life

The most expensive product purchased by most people yet probably the least understood is life insurance or better called "death insurance". Simply put, there are many different types of life insurance policies and life insurance plans that are sold but in effect, all life insurance is term insurance. Remember, life insurance should be bought not sold. Know what you need and what type of policy you want. Find an agent who will provide you with quotes not one that tries to sell you an expensive inadequate insurance plan (see the INSURANCE Links for instant online quotes). You should always shop for insurance because the prices for the same product can vary greatly.

Clients are sold various life insurance policies and plans while insurance companies purchase term insurance from reinsurance companies. Reinsurance companies sell insurance to insurance companies to cover the possible risk of claims by their clients. In some cases, insurance companies are so large that they are self insured with corporate financial reserves. Annual term insurance is the least expensive insurance available. This is the type of insurance that insurance companies normally purchase from reinsurance companies to protect against possible claims.

WHY do you need life insurance?
WHO needs life insurance?
HOW MUCH life insurance do you need?
WHAT KIND of life insurance is best?
How much of my dollar actually buys insurance?

WHY do you need life insurance?

The purpose for life insurance is to replace lost income or to pay for final expenses. The reason insurance of any kind should be purchased is due to the unacceptable risk of loss and the negative financial consequences that follow. If the risk of loss is acceptable or the loss would not result in a unacceptable negative financial consequence, then insurance is not necessary.

WHO needs life insurance?

Life insurance should be purchased for anyone whose death would cause a financial burden to the remaining family members. This would obviously include the primary income earner but also a spouse who might stay at home and be responsible for caring for young children. If you ever wondered how much "mom" is worth, go to the CHILDREN Links and run a quick calculation. I believe you will find that to hire Mary Poppins to come to the rescue won't be cheap.

HOW MUCH life insurance do you need?

A general rule is to have eight to ten times the annual amount of your expenses that would be required as a result of the death of the primary income earner. For example, if the income is $50,000 annually then a life insurance policy with a death benefit of approximately $500,000 would be adequate. This money could then be invested at a rate of approximately 8-10% which would allow for an annual return of approximately $40-50,000. The key is to be able to continue life with as few changes as possible. The loss of a loved one is enough to adjust to without the stress and worry associated with the loss of income required to live.

Life insurance can also be used to liquidate large debts such as a mortgage. The least expensive way to cover these debts is with adequate life insurance rather than and expensive mortgage insurance policy.

WHAT KIND of life insurance is best?

As it is explained above, there are many different types of life insurance policies and plans but there is in effect only one kind of insurance - TERM. All policies and plans with their confusing names are wrapped around plain old term insurance. A particular insurance plan may require you to pay additional premiums so as to build up value in the policy but the insurance is still the same. In a value building policy you are purchasing two things - insurance and savings. Therefore, the best kind of insurance to purchase is low cost term insurance for the period that is required.

Some life insurance policies accumulate cash value as a means of pre-funding future insurance cost. Examples of these policies are: Whole Life, Universal Life, Variable Life, and Universal Variable Life. One of the biggest faults of these type of policies is that in the event of the death of the insured, the pre-funded amount, referred to as the cash value, is not refunded to the beneficiary after the death of the insured.

For example, let's assume you purchased a cash value building life insurance policy with a death benefit of $100,000 (1) which had a cash value of $10,000 (2). If the insured died, how much money would the beneficiary receive from this policy?

You would think that the policy should pay the full death benefit plus the money you put into the policy as savings. If that is what you thought, you would be wrong. Remember, unless you surrender the policy, the cash value build up is used to pre-fund the future cost of the life insurance. In effect, the insurance company is using the additional money you pay to offset their cost of the insurance they must purchase to cover the life of the insured. You will NEVER get your cash value unless you surrender the policy. That doesn't sound like a very good savings plan to me.

There is a type of plan that makes you believe you are getting your cash value back called a Universal Life Plan. A Universal Life Policy gives you two options. Option A and option B. If you compare a Universal Option B plan with a Universal Option A plan for the same amount of insurance, you will see that with the option B plan you are paying more. In effect, with the option B plan, you are buying more life insurance. An option B Universal adds a minimum cost of 10% to the policy in order to increase the death benefit in increments equal to the cash value accumulation. The following quote from a life insurance handbook used by life insurance professionals says:

"It is possible, subject to some rather broad constraints, to design a policy that can provide almost any kind of benefits desired. Accordingly, some companies have designed policies that provide a death benefit equal to the face amount of insurance plus all premiums paid to date, or equal to the face amount plus the cash surrender value at the time of death. Since both the aggregate of premiums paid to date and the cash surrender value increase over time, a policy which provides for the return of premiums or cash surrender value at death is in effect providing a continually increasing amount of insurance. Premiums for such policies necessarily reflect a charge for the additional protection."

The bottom line is that if your policy is designed to pay the face amount plus the cash value, you will be paying for it in the form of more insurance.

How much of my dollar actually buys insurance?

Below are two charts showing how much of your insurance dollar actually goes to buy insurance. Not reflected in the first chart is the extremely high commissions that are required on cash value type policies during the first year. Commissions on these type of policies can be as much as 70% - 110% of the first years premiums in addition to initial fees and administrative charges. This is why cash value building policies accumulate "$0" during the first 1-3 years of the life of the policy.

Another fact is that the rate of return for your cash value contributions is based on the dollars that are left after the insurance is bought and the commissions and administrative cost are paid. The average real rate of return of most cash accumulating life insurance policies is 3-4%. In the chart below that would equate to only 47% of your dollar ($0 during the first few years). The rates of return quoted on the policy will normally reflect a cash value growth based on an "assumed" rate of return rather than a "guaranteed" rate.

The above chart shows a typical breakdown of where your dollar goes in a cash value policy. After the first year, commissions are 10-15%, contributions to your cash value building account (pre-funding of future insurance) is approximately 47%, administrative charges of 5-10% and finally the remaining 31% or so will go to buy life insurance.

As you can see in the red section of the pie chart above, each dollar that you spend on term life insurance will buy approximately 60-70% more coverage as a result of the policy not accumulating any cash value. Always shop for the best prices when looking for life insurance. Prices do vary. Always buy guaranteed renewable level term for the period that you anticipate needing the protection (10, 15, 20, year). Remember, life insurance is intended to transfer the risk to someone else while you build savings to become self insured. So, don't forget to develop a plan for saving money (see SAVING section and LONG - TERM section).

There are many reasons why a cash value building life insurance plan is a bad buy. Use insurance to transfer risk and use savings plans to save money.

3. Long-Term Care

What Is It and How Is It Useful?
How Do You Assess Your Needs?
What Products Are Available?
Premium and Policy Considerations
Other Considerations

What Is It and How Is It Useful?

Long-Term Care Long-term care insurance can protect you against the cost of long-term nursing home care, home health care and other health or disability-related services you may need.

If you're independently wealthy, the potential cost might not concern you. For many, however, the costs will become a significant burden because they do not have private insurance and most employer health plans do not include long-term care benefits.

Will Medicare help?

Certain costs are covered by Medicare:- up to 150 days of inpatient hospital care and 100 days of nursing home care per benefit period, but only in a Medicare-certified skilled nursing facility, and then only if admission to the nursing home follows a hospital stay. These restrictions may result in little or no coverage for you. Other costs of long-term care may be covered by a Medicare Supplemental Plan (or a "Medigap" plan).

Hospital Care. You have up to ninety day coverage for each benefit period. You pay a deductible of $716 for the first 60 days of coverage and then a coinsurance charge of $179 per day for up to 30 additional days. Finally, you have a lifetime 60 day reserve in which you are required to pay a coinsurance amount of $358 per day.

Nursing Home Care. Currently, the first 20 days of your stay in a skilled nursing facility are paid for by Medicare. After 20 days, coverage continues for up to 80 more days; however, you are required to pay a coinsurance charge of $89.50 per day.

Benefit Period. A benefit period starts when you enter the hospital and ends 60 days after the day you leave. There is no limit on the number of benefit periods during your lifetime.

Will Medigap help?

Medicare supplement (or Medigap) insurance is private insurance that you purchase that is designed to pay expenses not covered by Medicare. Examples of expenses covered include the hospital and medical deductibles and the coinsurance payments. Medigap policies generally do not extend coverage. Therefore, Medigap insurance should not be viewed as long-term care insurance.

What about Medicaid?

Medicaid is the health insurance system for the indigent. It covers long-term care and, in fact, pays almost half of all nursing home costs. Many people will not qualify for Medicaid benefits because of certain income and asset limitations. You must "spend down" your income or assets to a level determined by each state before you can begin to receive benefits. You may have to give up control over most or all of your assets before you receive benefits.

In addition to Medicare, Medicaid and Medigap insurance, you can purchase long-term care insurance, a relatively new product.

How Do You Assess Your Needs?

Could you afford nursing home care if it cost as much as $6,000 a month?

To assess your need for long-term care insurance, consider these questions:

Are your assets or income enough to both cover the cost of nursing home care and provide support for your family?
What is the average cost of nursing home care in your state?
Do you come from a family with a history of medical problems or issues? A "dread disease" policy can cover you against the cost of a particular disease, such as cancer. This type of policy may be suitable if a particular kind of illness runs in your family.
If you cannot pay for care yourself, can you count on support from family members or friends?
Do you come from a family with extended life expectancies? The longer you live, the more likely it is that you may require some type of on-going nursing care. In this situation, long-term care insurance should be considered

What Products are Available?

Long-term care insurance is relatively new. The policy usually covers one or all of the following needs:

Nursing Home. A public or private facility that provides a variety of types of care ranging from custodial to skilled care. You need to determine if the benefits under a particular policy cover the type of care provided by a particular nursing home.
In-Home Care. The care is provided in your own home. The type of care can be limited by a particular policy. You should look for a policy that pays for a variety of in-home services (skilled nursing care, home health aides, homemaker assistance) since your needs may vary over time.
Respite Care. The care provided by a medical professional as a temporary substitute for a family member who is providing in-home care on a daily basis.
Hospice Care. The care provided to help and support an individual who is terminally ill.

The care given for each of the above needs is generally categorized as:

Skilled Care. Care that is provided by skilled medical personnel such as doctors, registered nurses and professional therapists.
Intermediate Care. Care that is less specialized than skilled care and is delivered by trained personnel under the orders of a doctor and supervision of registered nurses. This type of care is often needed for a long period of time.
Custodial Care. Care that focuses on the activities of normal daily living such as bathing, eating, dressing, and other routine activities. It is usually provided by non-medical personnel. It may also be referred to as personal care.

Premium and Policy Considerations

The costs of premiums associated with long-term care insurance differ dramatically, depending on the type of benefit the policy offers, as well as the terms and exceptions that are specified in the policy. Generally, policies differ on the amount of benefit they will pay each year and the total benefit to be paid over the life of the policy.

Some of the terms you will encounter when purchasing a long-term care policy include:

Guaranteed Renewability. A policy that is guaranteed renewable for life prevents the insurer from canceling the policy except for nonpayment of premiums.
Elimination, Waiting or Deductible Period. The elimination, waiting or deductible period specifies the number of days you must wait before the policy will begin paying benefits to you. This period will vary depending upon the particular policy and may be as long as 200 days.

Tip: If you have adequate cash reserves, consider a policy with a longer waiting period as a way of reducing your premium cost .

Inflation Rider. This feature provides for the anticipated rise in the cost of long-term care. A rider to offset inflationary increases, however, can increase premium cost by as much as one-third.
Waiver of Premium. A waiver of premium will allow you to stop making your premium payments once you begin to receive benefits.
Non-Forfeiture Clause. This clause will allow you to receive either a refund of a portion of the premiums that you have paid or a reduced paid-up benefit if you terminate your coverage before you collect any benefits.
Non-Cancelable Clause. A policy that will remain in force with the same cost of premiums throughout the life of the policy. The policy can only be canceled is for nonpayment of premiums.

Policies will often except or exclude certain conditions. You should carefully read the policy to determine if coverage is excluded or affected by any of the following:

Custodial Care. The policy should provide coverage for skilled, intermediate and custodial care. Custodial care is basic and does not need for licensed medical professionals. It is an essential element of any coverage.
Pre-Hospitalization Requirement. Some policies require the individual to be hospitalized before receiving long-term care for benefits to be paid. Many individuals do not go to long-term care facilities directly from a hospital, so this requirement can result in a denial of benefits at a crucial time.
Pre-Existing Condition. A medical condition for which you have sought medical advice or treatment or had symptoms within a specified period before applying for coverage. An insurance company may refuse to pay benefits for care for pre-existing conditions.
Alzheimer's Coverage. A good policy will provide coverage in the event of Alzheimer's disease. This disease is generally described in policy language as "organically based mental conditions." If such coverage is not specifically mentioned, Alzheimer's coverage is probably not included in the policy.

Other Considerations

Since long-term care insurance is relatively new, it can be difficult to compare policies. Policies offer different benefits, include different terms, and exclude different conditions.

Check out the financial condition of the insurance company. As with any kind of insurance, investigate the ratings of the insurer.

Comparison shop for premiums and features. Do your shopping as early as possible. If you wait until age 75 to purchase this insurance, your premiums can be double the premiums you would pay at age 65. If you are considering changing or switching long-term care policies, do not cancel the old policy until you have determined that any pre-existing condition clauses in the new policy do not apply.

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