5 || Managing Risk and Insurance

Use the following questions to prepare for topics within this course. Be thorough! 

1. Why is it important to carry insurance?
2. Why is it important to be sufficiently covered?
3. What does risk management mean to you?

In its simplest definition, risk management is the process of determining risk and designing a plan to manage it. Therefore, the first step in risk management is determining risk. Financially speaking, what are some of the things that could jeopardize your financial wellbeing? Some of the more common situations are listed below:

• Loss of Employment
• Adverse Economic Conditions
• Divorce
• Hospital Bills
• Catastrophes or Acts of God
• Major Accidents

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When you think about it, the most valuable asset that most of us possess is the ability to earn income. If that ability were cut off or severely restricted, most of us would be in financial turmoil rather quickly. Therefore, the greatest financial risk we face is the loss of our ability to earn income. There are many ways you could lose your ability to work: recreation or work-related injury, sickness, accident, etc. For example, if a loved one were to become severely ill, you might have to quit your job to care for him or her. Furthermore, your physical well-being is not the only factor affecting your income.

The second step towards risk management is to develop a plan to manage risk. Developing a personal risk management plan need not be a time-consuming or difficult task, but it is an important part of being financially responsible.

An adage states, “If you fail to plan, you plan to fail.” Most people never develop a plan to manage financial risks! If you are like most people, you probably have not developed such a plan. A personal risk management plan can help you protect the people that you love and grant you peace of mind.

There are many ways to develop a risk management plan, but in this course, this information will focus the majority of our attention on insurance. Many people purchase insurance to cover the costs associated with accidents or illness. Others purchase it to cover the costs associated with one’s own death. Still, others purchase insurance to protect their property and the property of others. Whatever the reason, the important thing about insurance is that you use it to plan—just in case something does happen.

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Insurance can be a helpful tool to offset risk, but it can be difficult to determine if you have the right coverage and if you have it in the right areas. For example, upon examining your insurance policies, you may find that you are overinsured in some areas and underinsured in others. If so, or if you do not have any insurance at all, seek advice from a knowledgeable and trustworthy insurance agent. Listed below are some of the common risks that people insure themselves or their property against:

• Loss of health
• Loss of financial assets through personal liability claims
• Loss of income through accident or sickness
• Loss of property through fire, theft, or natural disaster
• Loss of life

The purpose of this section is to help you develop your own unique risk management plan and to identify those events that pose a financial risk to you and your family. You need to identify which methods you currently use to deal with risks and gaps in your current financial plan. You also need to identify the insurance that will minimize risks to you, your family, and your property.

The following is an example of how you might go about evaluating risk and what you might do to cover it. For this example, we will suppose that your car was totaled in an accident (the cost to repair the car is more than it is worth). Below are four ways to prepare for such a risk.

Note: The ways to prepare for such risks do not address legal obligations regarding automobile insurance.

Bear the Risk

You assume the total financial risk for the car. Many people drop collision insurance on older cars because the deductible is as much, or close to, the value of the car. They deem it economically unfeasible to pay for a portion of auto insurance that they can cover themselves.

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 Transfer the Risk

You arrange for someone else to bear the financial risk—typically an insurance company. Many people purchase collision insurance on their cars to cover the financial loss of their automobiles. In most cases, people have such coverage because their car is worth more than they could bear to pay for if it was damaged or totaled. In the event of an accident, the insurance company must either repair it to its pre-collision condition or grant a cash settlement for the value of the car.

Note: Most people have a collision deductible that they must pay if their car is wrecked. The deductible is generally between $100 to $1,000. The higher the deductible, the lower the insurance premium. 

Reduce the Risk

You reduce the likelihood of the accident happening, or you take preventive action to reduce its impact. Many people will avoid speeding and/or drive defensively in order to prevent accidents from happening—at least the ones that they can control.

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Remove the Risk

You find alternatives to driving a car; thus, eliminating the financial impact of having an accident. Many people never purchase a car. They will often use public transportation to travel around town. They may even ride a bicycle. These people never need automobile insurance; therefore, they will never have to purchase another car, pay a deductible, or have to drive cautiously.

The next section will delve more deeply into insurance planning. Pay particular attention to it as you review it.

The whole point of insurance is to protect the financial well-being of you and your family. Insurance is or should be, a primary tool in your financial toolbox. You never know when an accident might happen. It may be as simple as a fender bender, a cut on the finger, or a leaky pipe. Or it may be as tragic as a fatal accident. Regardless, insurance will help you to manage these risks.

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Numerous books have been written on this extensive subject, but here we will stick to the basics. The following types of insurance will address most of your individual insurance needs (in the following pages, we will discuss each in greater detail):

• Automobile
• Homeowner’s
• Health
• Disability
• Life
• Long Term Care

Automobile Insurance

Automobile insurance not only covers automobiles, but it also covers people and property. In other words, it covers the insured party and his or her vehicle, and third parties and their property. It is usually meant to provide insurance in case of an automobile accident, but its coverage may also extend to such things as theft and damage. The following is common coverage for an automobile policy (some of which is required by state law).

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Bodily Injury

This coverage pays for injuries that are caused to others because of an auto accident you caused. This insurance will pay for another person’s medical bills for which you are legally liable. The amounts of coverage are usually expressed in paired limits (A/B). Where “A” is the limited amount of coverage per person and “B” is the limited amount of coverage per accident (in thousands of dollars). For example, if the bodily injury liability is stated as 100/300, then the per-person amount is limited to $100,000 and the per-accident amount is limited to $300,000.

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Now you need to ask yourself, What happens if the medical bills go over the limit designated to pay the claims? Unfortunately, there is a chance that you may be sued by the injured party and be required to pay the balance out of your own personal funds. Therefore, you should evaluate the limits that you want your insurance to carry. Of course, greater limits will mean that your

insurance will be more expensive. So ask yourself, Is it worth the risk to leave me so vulnerable when liability coverage is relatively inexpensive? You should consult with a qualified insurance agent or an attorney to determine the limits you should carry.

Note: Most states require a minimum amount of liability coverage that each insured driver must carry.

Property Damage

This coverage pays another party for damages you caused because of an auto accident. It covers damage to their auto(s) and/or to other property, such as their house or place of business. This coverage is mandatory in most states.

Uninsured/Underinsured Motorist

This insurance covers you and your property against damage from others who do not have liability insurance or from those whose liability insurance is insufficient to cover the damage you have suffered. Again, limits of thousands of dollars are available to pay medical bills to you if you are injured by a party that has no insurance. It is recommended that you match the limit that you choose for bodily injury limits, but lower limits may be chosen.

Another recently introduced coverage may be purchased if you only carry liability insurance like many do if their car is 10 years old or older. It is called Uninsured Motorist Property Damage.

This insurance is designed to cover you in the event of a hit-and-run accident. It has a $3,500 limit in most states and often requires a deductible, such as $100 or $250. Individual insurance companies determine how it applies. However, some companies will only pay this claim if you know and have the contact information of the person that caused the damage, such as a note left on your car. The reason behind this logic is that someone may simply name someone not responsible for the accident and fraudulently collect for the accident.

Personal Injury Protection (PIP)

This coverage is available in some states. It covers medical expenses and other damages. This insurance will pay regardless of who is at fault; hence, it is sometimes called no-fault insurance. Most states have a minimum coverage per person, with no limit on the number of persons. There typically are no deductibles or coinsurance under PIP. This is the first coverage to pay when there are injuries. It pays before major medical and any liability insurance pays. In addition to medical payments, it also covers the following:

• Lost Wages (up to 85% of lost wages and up to $250 a week for one year)
• Loss of Services (often up to $20 a day for up to one year)
• Survival Benefit (in some states, a small final expense benefit (around $3,000) for a spouse will be paid)
• Funeral Expenses (in most states, a benefit averaging $1,500)

The intent of this coverage is to make sure that medical providers are paid promptly for their services, no matter who is at fault in the accident. Should a protracted legal battle occur because of the question of fault, monies are immediately made available to pay for bills. Different states have different plans, but coverages range from $3,000 to $25,000.

Listed below are other items that are often available for one’s auto insurance. They are usually complimentary enhancements to an automobile insurance policy that are added for a minimal cost.

Collision Coverage
This coverage pays for the replacement or repair of a vehicle when it is damaged in an auto accident—no matter who caused the accident. This coverage usually comes with a deductible (the higher the deductible, the lower the premium for this coverage). In most states, if you finance the vehicle with a lending institution, you must include this coverage in your auto insurance.

Note: Whenever you have a policy with a deductible, select a low enough deductible that you can afford to pay it if you need to make a claim.

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Comprehensive Coverage
This coverage pays for the replacement or repair of a vehicle when it is damaged by things other than an auto accident, such as loss by fire or hail, vandalism, or by hitting a large animal. Again, this coverage usually comes with a deductible and you must include this coverage in your auto insurance if you finance the vehicle.

Glass Deductible
This is a separate deductible if you have rocks or other items kick up and break or crack your windshield (it is typically lower than a comprehensive deductible).

Loss of Use
If you lose the use of your car due to the fault of another, this item should pay alternate transportation until yours can be repaired (also known as rental car coverage). Usually, the limit is $35, $50, or $75 per day for alternative transportation.

Towing and Roadside Service
If you run out of gas, experience a breakdown, or lock your keys in the car, this item will pay for all or part of the assistance.

This insurance provides coverage for your home and it covers liability for injuries and/or damage that occurs on your property. Homeowner’s insurance is critically important if you own a home. It usually exists as two types of coverage: personal property coverage and liability coverage.

Personal Property Coverage

Personal property insurance covers your house and separate structures for almost any type of damage, except for such things as wear and tear, earth movement, flood, nuclear hazards, and earthquakes. Coverage for your house, and any attachments, such as cabinets and carpeting, are included in most states. Separate structures, such as detached garages or tool sheds, are generally covered for up to 10% of the amount of the coverage on your house. Separate structures used for business purposes are NOT usually covered by this insurance; however, they may be insured under business policies with an additional premium.

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Under most insurance policies, your personal property, located anywhere in the world, is typically covered for up to 75% of the amount of coverage on your home. However, if such items are located at a second residence, like a vacation home, the policy typically only pays up to 10%. You may need secondary property insurance to cover additional properties. While your house is covered for most types of damages, your personal property is covered for damages resulting from the following 17 specific perils:

• Fire
• Lightning
• Vandalism
• Windstorm
• Hail
• Theft
• Explosion
• Weight of Ice, Snow, or Sleet
• Riot or Civil Commotion
• Sudden and Accidental Discharge of Water or Steam
• Falling Objects
• Bulging, Cracking, Rupture, and Burning of Steam from Hot Water Systems
• Aircraft
• Vehicles
• Artificially Generated Electrical Current
• Smoke Damage (if sudden and accidental)
• Freezing of Plumbing, Heating, and Air Conditioning Systems

Note: Some of the preceding perils may be excluded from your policy. Always confirm what is covered and what is excluded with your insurance agent.

There are two ways insurance companies can reimburse you for damages to your property in a covered loss:

• Replacement Cost: The old items are replaced with new ones (ignoring any allowance for depreciation)
• Cash Value: The old items are reimbursed with cash at a depreciated value

Additionally, if you cannot live in your house because of the damage, most insurance companies will cover additional costs of living. They will often pay for hotels and meals while repairs are being made to your house—up to a year. They could also pay for loss of rent if the damaged portion of your house is rented to others and is unlivable. Many people are unaware that a standard homeowner’s policy also pays up to an added 5% of the amount of coverage on your home for landscaping if landscaping repairs need to be made. It may also pay for the loss of bushes and trees on a per-item basis; however, most policies have a $500 limit on each item.

Personal liability coverage insures you against lawsuits if you are deemed NEGLIGENT in the care of your property. For example, if you fail to clean ice and snow off your home porch and someone falls and injures themselves, you could be legally liable for their medical bills. Lawsuits can arise from many different sources. Listed below are just a few examples:

• The use of your premises, including swimming pools and trampolines
• Other residential property that you use as a rental
• The actions of your pets
• Unintentional acts committed by you or qualified family members (either on or off your premises)

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Perhaps, the most important coverage in a homeowner’s policy is the legal costs that it pays for if you are sued. Legal coverage pays for such things as court costs, attorney fees, investigator fees, expenses for witnesses, and witness fees. It also pays reasonable expenses for actual loss of wages (typically $60 to $80 per day). It may also pay the premium on appeal bonds, should your insurance company choose to settle the suit out of court. Most policies do not have a limit on these crucial coverages, which can be nearly a priceless benefit in some cases.

Additional Coverage
Policies may include the following additional provisions:

Guest Medical Provision
This provision covers you for non-negligent accidents that happen on your property. For example, if your neighbor comes over for a barbecue and burns himself on your barbecue grill, often a small limit is available to pay for their medical bills.

 Emergency First Aid
This provision covers emergency first aid you render to other people at the time of an accident that is covered by your policy.

 Other People’s Property
This provision covers damage to other people’s property that is caused by you or a qualified family member when you are not legally liable (coverage is generally limited to $500).

 Personal Floaters
These policies extend coverage for personal articles, such as jewelry, furs, or fine arts—especially when their value is higher than the limits stated in the general policy. Floater policies will pay up to the limit of the appraised value of the individual item. At the time the coverage is purchased, a professional written appraisal of the items will likely be required. In addition, homeowner policies will often pay up to specified limits for computer equipment, gun collections, or other high-value items.

 Cash
Many people do not realize that the limit on lost cash is quite low (often only $200). For that reason, it is not a good idea to carry large amounts of cash—especially when traveling. It is advisable that you use Traveler’s Checks when you travel. Such checks can be quickly and easily replaced almost anywhere in the world.

The following are other policies (endorsements), which may be added to the homeowner’s insurance (for additional premiums). Such policies are often used because people live in areas that warrant its benefit.

Earthquake Coverage
If an act of nature allows the ground to shift and your house is damaged or crumbles to the ground, this coverage will pay to rebuild and/or repair your house. It is an additional premium and the cost can vary greatly due to the construction of your house. For example, frame home construction is much less expensive to insure than solid brick construction.

Flood Coverage
This covers your house and personal property if OUTSIDE surface water enters your house and ruins the property inside it. Standard homeowner’s insurance typically covers water losses only if the water comes from INSIDE the house, as from a pipe that freezes and bursts. (The resulting damage is often covered, but the appliance or pipe that caused the loss is usually not covered.)

Earthquake, Flood, and Mudslide Coverage
This coverage is similar to Earthquake and Flood damage, but only includes damage from mudslide or hill slippage that damages your house.

Liability Umbrella Coverage
This coverage increases the liability protection over all of the assets you own. However, the underlying assets often have to have their liability limits increased to a certain level (often $500,000) before an umbrella policy will qualify for the increased coverage. These policies cost about $150 to $200 per year and typically cover from 1 to 5 million dollars.

Insurance companies often offer discounts for those with a healthy lifestyle and those that practice loss prevention. Some of the most common discounts are listed below.

• Non-smoker Discount: Persons who do not smoke are often allowed a discount because of the reduced fire hazard.
• Protective Devices Discount: This discount is often available to homeowners whose house is equipped with such items as burglar alarms, deadbolt locks, fire and smoke alarms, and/or an automatic fire suppression sprinkler system.
• New House Discount: This discount is granted because newer houses are often safer because they are built to code and have newer safer building materials. To qualify for the discount, such houses generally have to have been constructed within the last 8 to 10 years.
• Renovation Discount: This discount applies to houses that have been recently upgraded. Such upgrades usually involve the house’s plumbing, electrical, roof, heating and air conditioning systems, etc.
• Auto/Home Discount: This discount is often granted to those who purchase their auto and home policies with the same insurance company.
• Senior Discount: Some insurance companies, or associations like the American Association for Retired Persons (AARP), provide discounts to those who are over 50 years old.

Health Insurance

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Health insurance is used to cover the costs associated with health-related issues, such as accidents and illness. Choosing and using health insurance can be complicated and confusing. It is wise to obtain advice and counsel from experts in the industry and/or from your human resource advisor if you participate in a group plan through your employer.

Most health plans are traditional 80/20 plans. This means that the insurance company will pay 80% of the bills while the insured pays 20% (after deductibles and copays) until an annual limit is reached. After the limit is reached, the insurance company will often pay 100% of the bills. Additionally, a lifetime limit might be specified, such as $1,000,000, or there may be none at all. An abbreviated description of some common health insurance terms and benefits is listed below.

• Deductible: This is usually a charge, in addition to the premiums, that the insured must pay before the insurer pays benefits. This payment is usually renewed each year.
• Shared Cost Coinsurance: Insurance where the insurer and the insured pay specific percentages of the bills (usually 80/20—as explained above).
• Out-of-pocket Maximum: Excluding the deductible, this is the maximum amount that the insured will have to pay per year if claims are filed.
• Doctors’ Office Visits: Insurers usually cover the cost of visiting the doctor (in his or her office) 100%, minus a copay (paid for by the insured).
• Prescription Costs: Most health insurance companies also pay for prescription costs relating to accidents or illnesses. The insured usually has to pay a copay as well.
• Hospital Benefits: These are benefits that cover the costs associated with a hospital stay. Admission deductibles are often payable by the insured.
• Emergency Room Benefits: Most insurers will cover the cost of the insured has to visit an emergency room, minus an emergency-room copay.
• Surgical Benefits: These benefits often involve same-day surgery where the patient is not kept overnight. Payments, minus any deductible and/or copay, are covered by the insurer.
• Diagnostic X-ray and Lab Services: These services are usually covered by the insurer, minus any deductible and/or copay.
• Wellness Benefits: These benefits often include physical exams and routine lab work. They may also include childcare.
• Mental and Substance Abuse Benefits: These are often covered, as well.
• Additional Benefits: These usually include such things as home health care, hospice care, ambulatory services, medical supplies, durable medical equipment, etc.
• Dental Benefits: Many health insurance companies also offer the following benefits for dental work (usually involves an annual deductible and sometimes copays):
  • Preventive and Diagnostic: These are typically x-rays, examinations, and semi-annual cleanings.
  • Basic Restoration: These typically include tooth fillings.
  • Major Restoration: Typically includes crowns and root canals.
  • Orthodontics: Includes braces and major teeth straightening.

Generally, health insurance companies want their clients to use networks of specific medical providers. These include health providers that have agreed to the terms and conditions, and to the payment plans of the health insurance company. The insured is encouraged to use only health professionals within their network. The insured will typically have to pay higher prices if they use professionals outside of the network.

There is a great deal to learn about this critical insurance coverage. It is designed to restore about two-thirds of an individual’s income should he or she become unable to physically work and earn an income.

Most people have trouble living within their income; therefore, when a serious accident or sickness becomes a disability, earned income is interrupted and bills increase, creating a need for supplemental income.

Most people believe that accidents only happen to other people. It is surprising to learn that the likelihood of losing the ability to work is greater than the likelihood of dying in an accident. The following table states the odds of becoming disabled (per 1,000 people).

If you are like most people, you probably do not have disability insurance. If you became disabled today, could you support yourself and/or your family tomorrow? If so, for how long? Do you want to assume the financial risk yourself or would you be better off letting an insurance company bear the risk? Consider the following when considering the preceding questions:

• Savings: Do you have enough money saved to cover the short and/or long-term costs of living?
• Loans: Would you borrow to cover your costs? Interest and principal payments are more debt. When you cannot earn income, you cannot easily pay debts.
• Family and Friends: Would you want to rely on friends and relatives to cover your costs?
• Charity: Would you accept charity to sustain you?
• Welfare: Would you accept public welfare?

The most basic definition of life insurance might be money that is paid when the insured dies. Its main purpose is to provide money (a death benefit) to pay off the insured’s debts and/or to pay a beneficiary. It is often used to provide for spouses and families if the insured dies. It may also be used as an investment protection tool, as we shall discuss later in this section.

Lengthy books have been written about the subject of life insurance. Most people are confused by the type and amount of life insurance that is appropriate for them. In this section, we will define some important life insurance policies; and on subsequent pages, we will discuss your decision to purchase life insurance.

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Term Life Insurance

As the name suggests, term life insurance provides death benefit protection while the coverage is in force, but only for a limited period of time (called a term). Terms may be for any period, but they are commonly for 1, 5, 10, 15, 20, or even 30 years. During the term, the premiums paid for the policy remain fixed. After the term, the premiums may be increased (sometimes substantially— especially as the insured becomes older).

Term policies build no equity or cash value, much like renting an apartment provides no value to the renter. However, term insurance is sensible to purchase when the insured is young and the need for coverage is greatest. A young wage earner with a family to support is usually better able to afford the lower premiums than term life insurance offers.

As a person becomes older (around the mid-fifties), the premiums become much more expensive. Moreover, as a person ages into his 60s and 70s, the price often becomes prohibitive. Industry surveys indicate that most term policies lapse because they become unaffordable to even the most affluent clients.

Whole Life and Universal Life Insurance

It is estimated that only about 2% of term life insurance policies ever payout in a death claim. For this reason, permanent policies that build equity and cash value were developed. It is much like owning a home, where you can access its equity and even sell the home to recoup the investment that you have paid into over the years.

Whole life and universal life insurance is designed to stay in force for your entire life. It is also called permanent insurance because it builds equity—cash value that you may access for almost any reason. As long as you leave enough equity in the policy to keep paying the life insurance and service costs, about 80% of its value may be borrowed or loaned at very favorable interest rates. Many parents have paid for their children’s college education with this forced savings plan. Also, many people have used this type of money to buy their first house. Car buyers have also benefited from the funds these policies provide. The main difference with permanent policies is that with whole life the premiums can be locked in for the life of the policy (the premiums are more flexible with universal life). While they are initially higher than term policies, the overall cost of the policies is usually lower than term. However, if the premiums are increased, it is usually at a slower rate and the increase must apply to the entire group of policyholders, so you cannot be priced out of the insurance if your health declines and you suddenly have tremendous medical claims.

In addition, the separate cash value account increases based upon the insurance company’s general performance. Since these large firms must meet many requirements, such as required reserves, they tend to invest the premium dollars carefully so the stability of these industry contracts has been superb. Since most of us have long-term needs, a long-term solution exists with permanent life insurance. They are most suitable for long-term obligations, like supporting a surviving spouse for many years. Other uses include cash for estate taxes, death taxes, funding retirement needs, and many business applications.

The uses for money in cash value insurance policies are nearly endless. Listed below are several things for which the monies from such policies may be used.

• • Medical bills
  • Creation of an estate
  • Payment of estate/inheritance taxes
  • Payment for children’s college education
  • Supplemental retirement and pension funds
  • Mortgage pay-off
  • Student loan pay-off

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In this discussion, you need to remember that you must qualify to purchase life insurance contracts. You must pass a health evaluation, which determines your eligibility. Since none of us knows when our health will take a turn for the worse, it is smart to obtain life insurance as soon as is economically feasible. Once you cross the line of un-insurability, you may find this type of protection unavailable at any price! On the other hand, once you have this insurance, only failure to pay the premiums can deprive you of this valued protection. Even if a company in the industry goes out of business, the policyholders are rarely left without protection. Typically, another company will buy the policies and continue to offer you protection in one form or another. Despite the criticism of insurance companies and their practices, they have provided stability of finances better than any other industry.

Acquaint yourself with a good insurance agent who can explain the policies to you. These are state-licensed individuals that must provide you accurate information regarding the choices that are available to you.

This is not an exhaustive treatise on the uses of life insurance, but it does provide a basic framework that should help you make a wise decision. You need to make sure that your family is well cared for if you cannot personally do so.

Financial Benefits of Life Insurance

Life insurance is often an undervalued tool. For hundreds of years, ever since the shipping industry began in England in the 1800s, people have devised ways to protect their property, families, and businesses with insurance. Because of the economic benefit that insurance provides society, insurance has been given some powerful tax advantages. The following lists five ways that life insurance can help you financially:

• Earnings from insurance are tax-deferred (the earning are not taxed in the current year)
• Personal income taxes are deferred (federal, state, and local)
• Cash may be withdrawn from the policy income-tax-free (in the most permanent types of policies that build cash value)
• The beneficiary will receive a tax-free death benefit
• Withdrawals and loans can be made available from the policy at lower than average interest rates

Lastly, but still of great importance, is long-term care insurance. This coverage is available when a disability or illness prevents you from conducting your normal daily activities. It provides for your care when you are not able to care for yourself. It is a policy that pays for such things as hospice care, nursing home care, assisted living, etc. Many people wait until they are close to retirement to explore the advantages and weigh the benefits of investing in this option. However, many experts are encouraging those in their 40s and 50s to at least investigate this option—while their health is still good enough to qualify and the costs are very low. However, if you wait until you are uninsurable (develop health problems) it may be too late to use this option, or you may be forced to pay very high costs for it.

When considering this coverage, you should ask yourself, Would I choose to lose my home and/or all the precious assets I have worked for my entire life just to have someone else look after me? Or, Would I rather someone else offset the high costs of being cared for? The great thing about this insurance is that it provides several options to fit your budget and perceived need. Listed below are several options:

• You Can Choose a Daily Benefit Amount: Typically between $50 and $400 per day. (Charts are generally available to show you the average cost per state of a nursing home or other care facilities.)
• You Can Choose an Elimination Period: This is a waiting period that must expire before your benefits begin. (This acts just like a car insurance deductible before your insurance company starts to pay.) The usual periods are 30, 60, 90, and 120 days.
• You Can Choose a Benefit Multiplier: This is the number of years that the benefits will run. A common set of choices are three, five, or an unlimited number of years. (The longer the period, the larger the premium required.)

After you have made the preceding choices, your next step is to determine your maximum benefit amount. To do so, multiply together the daily benefit amount, your benefit multiplier (in years), and 365 (days per year). For example, $100 daily benefit x 5 years x 365 days = $182,500 maximum benefit amount (if you selected unlimited for your benefit multiplier, there will be no maximum benefit amount).

To account for the effects of inflation, most policies invite you to add riders that will automatically increase your daily benefit amount each year. Some common riders include the following:

• Guaranteed Purchase Option: Increases the daily benefit and remaining maximum benefit by 5% or 10% each year, up to a maximum age (often around 80) that the policy renews.
• 5% Simple: Increases your daily benefit by 5% per year.
• 5% Compound: The same as 5% Simple, but increases by 5% per year compounded (like interest in a bank).
• 5% Term Compound: The same as 5% Compound, but compounds for a specified term, such as 20 years.

To buy a long-term care policy you must be in fairly good health, as determined by an insurance company underwriter. To be eligible for benefits, a doctor must certify that you need the level of care described in the policy.

The doctor should determine the following:

• • You must need hands-on assistance to perform at least two of the Activities of Daily Living (ADLs) listed below:
    • Bathing
    • Eating
    • Using Toilet Facilities
    • Transferring continuance or dressing OR round-the-clock supervision due to severe awareness impairment (meaning regular ambulatory assistance, monitoring and changing of medical dressings, and 24-hour care due to loss of mental faculties)
      AND
    • You are expected to need care for at least 90 days
      AND
    • Recommended services are included under your policy

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There are many more details regarding long-term care insurance, such as home health care services and care coordination, which are beyond the scope of this brief introduction. Companies should have brochures that allow you to carefully compare the costs and benefits that they offer. However, the preceding are a few of the major items you should consider when selecting a policy that fits your needs.

There are many things to consider when deciding which insurance provider (or agent) to use. Several of the major considerations are listed below:

Product Quality
There can be distinct differences between insurance policies. It is crucial that you compare similar policies and check the fine print. Read the Key Facts document carefully and look for benefits.

Claims History
Before taking out a policy, you should contact your prospective insurer and review their claims history. Insurance companies should have procedures for processing claims and those claims should be on file with the company. Pay specific attention to the company’s willingness to provide information.

Financial Strength
When evaluating any insurance company, a reasonable starting point is to review their ratings (opinions of the insurance companies financial condition). These are often provided by rating services, such as A.M. Best and Standard and Poor’s. You may also want to use Consumer Reports to search for articles on related insurance topics.

Benefits
When it concerns insurance benefits, you need to determine your specific needs and wants. Ask yourself, Does the potential provider (or agent) offer precisely what you are looking for? In deciding on a plan, you have to determine what is most important to you because all plans will have trade-offs.

Plan Comparison
There are many aspects to consider when comparing insurance plans. Such aspects include location, services, quality of care, and cost.

President John F. Kennedy stated, “There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.”

By not carrying insurance coverage, you are taking no action and incurring great risks. You manage and reduce your risk by incorporating insurance into your financial planning.

There are an inordinate amount of insurance resources, providers, and coverage. Using the data in this course, you are now equipped with the ability to sort through the various offerings. You are prepared to discuss your personal risk management needs. Use these resources to plan and minimize any potential risks to your future.

Test time: 

1. What are four ways to prepare for risks?
2. What types of insurance are available?
3. What are the best ways to choose an insurance company?