Personal Finance
Seventh Edition
Chapter 12
Health and Disability Insurance
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Background on Health Insurance (1 of 2)
• Health insurance: insurance offered by private
insurance companies or the government that covers
health care expenses incurred by policyholders for
necessary medical care
• Health insurance is critical for financial planning – It’s a
major determining factor in retirement!
• Many people continue to work when they are ready to
retire, simply because they cannot afford health
insurance.
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Background on Health Insurance (2 of 2)
• Cost of health insurance rising rapidly
• In 2023, the average annual premium for an individual
was more than $8,435 per year. For family coverage, the
premium average is $23,968. (kff.org/reportsection)
• Your health insurance decision is not whether to obtain it,
but which health plan to purchase and how much
coverage to purchase. EVERYONE NEEDS HEALTH
INSURANCE.
• Many options available
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Private Health Insurance
• Private health insurance: health insurance that can be
purchased from private insurance companies to provide
coverage for health care expenses
• Types of private health insurance coverage
– Most common are fee for service (indemnity) plans or
managed care plans
Private health insurance is used by people who
unemployed, self-employed, or retired but not old enough
for Medicare (under 65)
IT IS VERY EXPENSIVE!
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Private Health Insurance
– Health maintenance organization (HMO): a health
insurance plan that covers health care services
approved by doctors; a primary care physician
provides general health services and refers patients to
a specialist as necessary
– Preferred provider organization (PPO): a health
insurance plan that allows individuals to select a health
care provider and covers most of the fees for services;
a referral from a doctor is not required to visit a
specialist
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Contents of Health Care Plans (1 of 4)
• Identification of insured persons
• Location
• Preexisting conditions (after the Affordable Care Act,
employers can no longer charge higher rates or deny
coverage due to pre-existing conditions)
• Cancellation and renewability options
• Other coverage
– Rehabilitation
– Mental health
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Contents of Health Care Plans (2 of 4)
– Pregnancy
– Dental insurance: insurance that covers part or all of
the fees imposed for dental services, including annual
checkups, orthodontics, and oral surgery
– Vision insurance: insurance that covers part or all of
the fees imposed for optician and optometrist services,
including annual checkups, glasses, contact lenses,
and surgery
– DENTAL AND VISION ARE USUALLY SEPARATE
COVERAGES AND HAVE SEPARATE PREMIUMS.
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Contents of Health Care Plans (3 of 4)
• Determinants of unreimbursed medical expenses
– Deductible – The amount you must pay before
insurance “kicks in” and pays
– Coinsurance – After you meet the deductible, this is
the percent you pay (usually 20%)
– Stop-Loss provision – After you meet this amount, you
will not be responsible for further expenses in the
calendar year.
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Contents of Health Care Plans (4 of 4)
• Expenses not covered by private insurance plans
– These should be included in your budget
– Flexible spending account: an account established
by the employer for the employee to use pretax
income to pay for medical expenses
▪ Funds cannot be carried over to the next year (Use
it or lose it!)
– Health Savings Account (HSA) – a savings account
that allows you to set aside pretax income you can use
to cover expenses not covered by private insurance
plans
▪ Funds can be carried over to subsequent years
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Government Health Care Plans (1 of 4)
• Medicare
– Provides health insurance to people over age 65
– Part A covers inpatient care in hospitals or nursing
facilities and some home health
– Part B is optional coverage (doctor’s offices)
– Part C is a combination of Part A and Part B provided
through private insurance companies
– Part D provides coverage for prescription drugs
Everything except Part A has a premium you pay. The
premium amount is deducted from your social security
check each month.
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Government Health Care Plans (4 of 4)
• Medicaid: a federal program that provides health care
to the aged, blind, disabled, and needy families with
dependent children
• Recipients must meet federal guidelines
• Administered on a state-by-state basis
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Regulations in Health Care Insurance
(1 of 2)
• Consolidated Omnibus Budget Reconciliation Act (COBRA)
– COBRA allows continuation of coverage provided through
an employer’s plan for 18 months
• Health Insurance Portability and Accounting Act (HIPAA)
– HIPAA prohibits insurance companies from denying health
insurance coverage based on applicant’s health status,
medical history, previous claims, or disability
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Regulations in Health Care Insurance
(2 of 2)
• Affordable Care Act
– Patient Protection and Affordable Care Act (PPACA)
passed in 2010
– Allows young adults to continue on their parent’s plan
until age 26
– Health insurers cannot deny applicants based on
preexisting conditions
– Remains a contentious political issue
– Mandate to have insurance repealed in the Tax Cuts
and Jobs Act of 2017
▪ Becomes effective in 2019
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Disability Insurance (1 of 4)
• Disability income insurance: insurance that provides
income to policyholders in the event that they become
disabled
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Disability Insurance (2 of 4)
• Sources of disability income insurance
– Individual disability insurance
– Employer disability insurance
– Insurance from Social Security
▪ Income determined by amount of Social Security
contributions you have made
– Insurance from Workers’ Compensation
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Disability Insurance (3 of 4)
• Disability insurance provisions
– Amount of coverage
▪ May be a dollar amount or a percentage of your
income
– Probationary period: the period extending from the
time your disability income application is approved until
your coverage goes into effect
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CHAPTER 13:
LIFE INSURANCE
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LIFE INSURANCE
• Life Insurance – Provides a payment to a specified
beneficiary when the policyholder dies.
• It allows you to provide financial support for your family
when you die. If you have a $100,000 life insurance
policy, then your beneficiary will receive that amount at
your death.
• It provides support when the breadwinner dies.
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Psychology of Life Insurance
• Many people put off the purchase of life insurance,
because they don’t want to face their own mortality.
• They don’t want to think about it.
• People should think of their spouses/children when
deciding about the purchase of life insurance.
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Applying for Life Insurance
• Complete a detailed application form with medical history,
personal information, and lifestyle.
• If you suffer from a chronic illness such as diabetes, your
premium will be higher
• Higher premiums for riskier lifestyles: skydiving, scuba
diving, police work, etc…
Tell the truth on your application! If you lie, you can lose
benefits later.
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Types of Life Insurance
TERM INSURANCE: Inexpensive; most of the time, this is
what’s recommended! Insurance is provided over a certain
term. If the insured doesn’t die, money is just lost (but that’s
a good thing. )
For example, a 20-year level premium (meaning the
premium stays the same for 20 years) for a 25 year old man
for a $250,000 policy may be around $200 per year.
Not expensive. It’s a cheap way to provide insurance for
your family – Remember this when you start out with your
family!
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Types of Life Insurance
• WHOLE LIFE INSURANCE: Referred to as “permanent”
insurance. It’s more expensive, but provides cash value
that builds up inside the policy.
• You can tap into the cash value if needed while you’re still
alive.
• Whole life is expensive, and although there are times when
it is appropriate, it’s typically not your best investment.
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Types of Life Insurance
• UNIVERSAL LIFE – Provides insurance sort of like a
whole life policy, but the cash value portion is invested
according to the wishes of the policy holder (you choose
your own investments) You can also temporarily increase
the face value of your policy with a TERM RIDER.
• With Universal life, if you build up enough cash value, the
premiums can be paid with the cash value
• VARIABLE LIFE – Similar to Universal, but the policy
holder directs specific investments for the policy.
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Determining the Amount of Life
Insurance Needed
Two Methods to determine how much you need: (1) Income
Method or (2) Budget Method
Income Method: Simply figures a number times your
annual income: example, $100,000 income x 25 = $2.5
million.
(Some planners recommend 10 x annual income. I
recommend 25 x annual income)
This method does not take into account monthly expenses or
the number of children in the household.
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Determining the Amount of Life
Insurance Needed:
Budget Method: Determines your life insurance needs by
considering your household’s future budget and your current
financial situation.
Takes into account your (1) Annual Living Expenses, (2)
Special Future Expenses, (3) Debt, (4) Job Marketability of
your Spouse, and (5) Value of Existing Savings
**Many insurance companies have apps that will help you
calculate this number. This is a much more specific
calculation than the income method.
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Contents of a Life Insurance Policy
• Beneficiary – The one who gets paid if insured dies
• Grace Period – Period between due date and cancellation
date.
• Nonforfeiture Clause – Allows you to keep your cash value
if you terminate your policy prior to death
• Loans – Some whole life policies allow loans against cash
value
• Incontestability Date – Date after which the provisions of
the policy cannot be canceled.
• Renewability Option – Allows you to renew your term
insurance policy for another term (premium may go up)
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Choosing an Insurance Company
• Choose a company that has a good ratings score
• Company should have a good, strong financial condition
• Make sure the company will provide good customer
service (easy to send in forms, make changes, etc.)
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