Trieschmann, Hoyt & Sommer
Life, Health, and Loss of Income Exposures
Chapter 4
©2005, Thomson/South-Western
Chapter Objectives
• List and describe the types of potential losses associated with the
risk of premature death
• Discuss the factors influencing the need to partially or fully replace a
deceased’s income for his or her surviving children and/or spouse
• Describe ways a business can lose money when an employee or
owner dies prematurely
• Explain the nature of a mortality table and give examples of how it
can be used for personal risk management
• Describe several types of medical expense loss that can be incurred
• Distinguish between types of disability loss and explain the nature of
the subjective element in disability
• Explain the general principles underlying unemployment insurance
that exists in all states
• Describe several factors influencing the frequency and severity of
income losses due to retirement
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Exposures Due to Premature
Death
• Most people face a risk associated with death
– That of timing
• Death is sure to occur ultimately but the specific day and time it will
strike are generally unknown for most of a person’s life
• If death occurs suddenly when an individual is
performing important and unique functions for an
employer
– The resulting financial loss to the business can be significant
• If death occurs during a period when an individual is a
major financial provider for young children or other
dependents
– The effects on the survivors can be devastating
• If the death occurs “too late”
– A person may outlive his or her financial resources
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Exposures Due to Premature
Death
• Premature death
– Death that occurs before the life stage where death
becomes increasingly accepted by society as part of
the natural, expected order of life
• On average baby boys born in the U.S. in 2000
can expect to live for 74.1 years
– Baby girls can expect to live for 79.5 years
• Some persons believe that for newly born children, any death
that occurs prior to these ages is premature
• For risk management purposes, it is helpful to
classify any death prior to a planned retirement
age as premature
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Executor Fund
• When a person dies, there are some immediate
expenses associated with the funeral and burial
or other disposition of the body
– These services can be paid for on an itemized basis
or through package plans
– Average over $5,000.00 in addition to the cost of a
cemetery plot and headstone
• Soon after the funeral, arrangements must be
made for paying the deceased’s outstanding
debts
– And for transferring any remaining assets and
personal effects to survivors
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Table 4-1: Services that can be Provided for
or Arranged by Funeral Directors
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Executor Fund
• Sometimes used to refer to these
expenses because the executor of the
estate needs funds to pay for the
expenses incurred as a result of the death
• Executor fund expenses arise no matter
when death occurs
– Some expenses such as estate taxes may
grow more burdensome as a person ages and
accumulates large amounts of wealth
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Income Needs of Survivors
• If someone is providing full or partial
monetary support for other family
members
– That person’s death will affect the family
financially as well as emotionally
• As a person passes through different
stages of live
– The degree to which others are financially
dependent on him or her changes
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Surviving Children
• Young children are usually totally dependent on
their parents for food, clothing, shelter, and other
necessities
• A parent’s death has the potential for eliminating
a child’s primary or sole source of income
• The timing of a parent’s death will affect children
differently
– Depending on the ages and circumstances of the
children when the death occurs
• The parent must also decide whether or not they
wish to contribute toward paying for a child’s
college education
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Surviving Spouse
• During the course of a couple’s married lives,
there be maybe many situations in which people
shift the degree to which they depend on each
other financially
– Leads to the dynamic rather than static analysis of
potential income needs
• The relative degree of financial dependence of
each spouse on the other is always subject to
change
• When children enter the picture, work patterns
may change
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Other Surviving Dependents
• An individual may provide some degree of
financial support for persons other than a
spouse or child
– Examples include
• An elderly parent living with a grown child
• Grandchildren living with their grandparents
• Siblings living together
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Business-Related Exposures
• If an employee performs services that would be
especially hard to replace
– That person may be considered a key employee
• His or her death may cause plans or projects to be
abandoned
– Or the business may seek a replacement person following the
death of the key employee
– Costs involved may include
» Loss of efficiency for a period of time
» Increased salary to attract someone new
» Training and development expenses for the replacement
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Business-Related Exposures
• A person who has ownership rights in a firm may
die
– When a sole proprietor, partner, or a major
stockholder dies
• That person’s ownership may pass to persons unfriendly to
the firm
• It may even result in liquidation of the firm in order to pay the
person’s executor fund expenses
• Competitors may obtain controlling ownership by purchasing
shares from families of deceased stockholders
• Those who inherit the deceased rights may enter the
business
– But due to inexperience may cause losses or even bankruptcy
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Likelihood of Premature Death
• Aggregate death rates in the U.S. have
been declining for many years
– Due to advances in medical technology and
improved economic status
• In calculating the probability of premature
death, mortality tables have been
developed
– Express the probability of living and dying at
various ages in a convenient format for a
particular assumed population of persons
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Likelihood of Premature Death
• Death rates in insurance mortality tables are
purposely overstated for conservativeness
– To reflect the possibility of unusual fluctuations in
death rates in some years
• Figure 4-1 contains a graph of 2001 CSO death
rates on a semilogarithmic scale
– Death rates during the first few years of life are higher
than they are following ages nine or ten
– Beginning at about age 60 death rates began to climb
significantly
– At every age, the death rate is higher for males than
females
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Figure 4-1: The Mortality Rate,
2001 CSO Mortality Table
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Needs vs Human Life Values
• Identifying needs and resources is consistent
with the overall risk management process
– Identified risks are analyzed and alternatives are
considered and combined into a comprehensive plan
for their management
• Human life value may have relevance
– The sum of money that, when paid in installments of
both principle and interest over the individual’s
remaining working life
• Will produce the same income as the person would have
earned after deducting the assumed amounts for tax and
personal maintenance expenses
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Exposures Due to Loss of Health
• Losses resulting from health problems
usually fall into two categories
– Expenses that must be paid for medical care
– Income that cannot be earned due to time
away from work while health problems persist
• While loss of health can be permanent, it
is more often a temporary phenomenon
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Medical Care Expenses
• Expenditures for medical care in the U.S. have exploded in recent
years
– Now equal about 16.7 percent of disposable personal income
• Factors contributing to the high cost of health care
– The mere fact that people are living longer
• Because health problems usually become more frequent and severe with
age
– New medical technology and the demand by patients for state-of-the-art
treatment
– The increasing frequency and severity of liability awards for medical
malpractice
• Doctors and hospitals must pay higher malpractice insurance premiums
• They may also performed extra procedures and tests in addition to those
that are probably necessary as a defensive measure
– Cost shifting
• Higher hospital charges are assessed to some patients but not to others
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Medical Care Expenses:
Hospitalization
• Approximately 37 percent of personal health
care expenditures in the U.S. is attributable to
hospital costs
– Expenses are incurred for items such as room and
board, lab tests, supplies, prescription drugs, services
by physicians, surgeons, nurses, etc.
• The frequency and severity of losses vary
considerably by geographic location
– The national average number of days for a hospital
stay is 5
• However, in Nebraska and Hawaii the average is 8
• While in New Mexico, Oregon and Idaho the average is 4.5
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Medical Care Expenses
• Physicians and surgeons services
– Fees vary according to the
• Geographic area
• Medical specialty of the provider
• Type of visit (initial, follow-up, or in the hospital)
• Dental care
– About five percent of all personal health care
expenses
– Some of the expenses are for major restorative work
• But many expenses result from procedures that are
preventable
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Medical Care Expenses
• Prescription drugs and other expenses
– Represent over five percent of U.S.
healthcare expense
• Mental health services
– Common problems include depression,
anxiety, phobias, and obsessive-compulsive
behavior
– In recent years the use of mental health
services has increased considerably as have
the costs of these services
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Medical Care Expenses: Long Term
Care
• Persons age 85 and over as a percentage of the
population have been growing at a fast pace
– Diseases such as arthritis, Alzheimer’s and osteoporosis
become more prevalent with age
• Persons with these ailments are less likely to be able to maintain
independent living arrangements
• Long term care options include
–
–
–
–
–
Skilled nursing home care
Custodial nursing homes
Personal care homes
Intermediate nursing home care
Home health care
• Expenses depend on the level of medical services provided
– The cost for one year of custodial nursing home care can easily exceed
$50,000
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Loss of Income
• Disability loss
– When a person is unable to work because of an
illness or injury
• Most disabilities are temporary
– The person eventually recovers and returns to work
• However some are permanent
• Disabilities can be further classified as
– Total
• Person is completely incapable of gainful employment during
the time of the disability
– Partial
• Person experiences a decreased ability to earn a living but
not a complete cessation of employment possibilities
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Causes of Disability
• Accidents
• Illnesses
– Most common cause
• There are differences between males and
females regarding causes of disability
– Males are more likely to experience accidents
– Female are more prone to illnesses
• The risk of disability increases with age
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Length of Disability
• Continuance tables have been developed to
gauge the likely severity of disability for personal
risk management purposes
• Table 4-5 provides information regarding the
likelihood of initial and continuing disabilities
– For 25-year-olds employed in generally
nonhazardous occupations
• While it is quite likely that many people will at
some point suffer a disability resulting in time
lost from work
– The probability that the disability will be permanent is
rather low
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Table 4-5: Disability Continuance
Table …
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Effects of Disability
• Primary loss is the loss of income that would have been
earned if the person had not become disabled
• The length of time of the disability is the major
determining factor in determining the overall size of the
income loss
– Income losses can have varying impacts on family members
• Depends on the degree to which other persons rely on that income
for their support
• In contrast to death, no significant decrease in living
expenses is expected when a person is disabled
– Living expenses may also increase if nursing home care or other
assistance is required
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Other Income Loss Exposures:
Unemployment
• During peacetime years the U.S.
employment rate has typically ranged
between 4 and 7 percent
• Government unemployment insurance
programs are in effect in all states
– Designed to alleviate the effects of short term,
involuntary unemployment
– Only offers a floor of protection, not full wage
restoration
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Other Income Loss Exposures:
Unemployment
• To be able to collect unemployment
insurance benefits
– Unemployed worker must either have
• Worked for some minimum period during the
previous twelve months
• Earned some minimum amount of wages
• Most states require a one week waiting
period before benefit payments begin
• Claimants must be able to work if work is
offered
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Other Income Loss Exposures:
Unemployment
• A worker may be disqualified from receiving
benefits
– The worker may lose the benefits for a specified
number of weeks or for the duration of unemployment
– Or suffer a reduction in benefits
• Reasons for disqualification
– Voluntarily quitting a job without good cause
– Discharge for misconduct connected with the work
– Refusal without good cause to apply for or accept
suitable work
– Unemployment due to a labor dispute
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Other Income Loss Exposures:
Retirement
• There is a high probability that most young people will live to the
traditional retirement age of 65
• Sources of income for elderly persons
–
–
–
–
–
Payments from employee retirement plans
Federal social security benefits
Part time earnings
Investment income from financial assets
Public assistance
• Unfortunately, many older people have very limited amounts of
guaranteed income and few financial or property assets
• Experts believe between 70 and 80 percent of pre-retirement
income is needed
– For a retired, married couple to maintain the same standard of living
• Also few people know exactly how long they will live
– People may outlive their retirement savings
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