Economics Unit 7

*Health is Determined by:

Health behavior (40%), genetic disposition (30%), social circumstances (15%), medical care (10%), and environment (5%)

Insurance

Transfers risk of loss to another party (insurance company)

Premium

The cost of insurance paid to the insurer

Deductible

The amount the insured must pay before insurance coverage begins

Copayment

A fixed cost-sharing amount paid by the insured

Coinsurance

A percentage-based-cost-sharing between insured and insurer

Indemnity

Insurance that compensates policy owners only up to their actual loss, preventing them from profiting

*Risk Management Strategies

Depend on frequency (how often) and severity (how costly) of potential risks

*Risk Management Characteristics

• High frequency/high severity: Avoid the risk

• Low frequency/high severity: Purchase insurance

• Medium frequency/medium severity: Manage the risk

• High frequency/low severity: Accept the risk

Health Behavior

Any action taken by an individual that directly impacts their health

Health Insurance

Manages unpredictable healthcare costs

• Average hospital stay costs exceed $10,000

Medicare

Provides coverage for those age 65+ or disabled

Medicaid

Provides coverage for low-income individuals and families

State Children’s Health Insurance

Provides coverage for children in moderate-income families

Managed Care Plan

(HMOs, EPOs) Control costs through provider networks

Fee-for-Service Plan

Offers flexibility but higher costs

Health Maintenance Organization (HMO)

Provides medical care through a network of doctors and hospitals located in a specific area

Exclusive Provider Organization (EPO)

Coverage typically only includes the use of doctors, specialists, clinics, and hospitals in the plan’s network

Consumer-Driven Plan

Lowers monthly premiums in exchange for higher out-of-pocket costs

COBRA (Consolidated Omnibus Budget Reconciliation Act)

Allows continued employer coverage after employment termination

Health Savings Account (HSA)

Allows you to save money on a pretax basis to pay for qualified medical expenses (the money rolls over each year)

• High-deductible health plans allow for HSA contributions

Flexible Spending Account (FSA)

Allows you to put money aside on a pretax basis each year (you must spend it or lose it)

Disability

Inability to work due to illness or injury

*Long-Term Disability

Typically covers 65% of pre-disability income

Own Occupation

Unable to perform your specific occupation (job)

Modified-Own Occupation

Unable to perform your occupation (job) but could do other work

Any Occupation

Unable to perform any occupation (job)

Elimination Period

The waiting time before benefits begin

Workers’ Compensation

Covers only work-related injuries or illnesses

*Emergency Funds

Should cover expenses during elimination period

Policy Owner

Makes premium payments

Insured

The person whose death triggers policy payout

Insurable Interest

Where the policy owner suffers financial loss if the insured dies

Beneficiary

The person who receives death benefit

Contingent Beneficiary

The secondary recipient if primary beneficiary dies

Term-Life Insurance

Provides coverage for a specific period

Cash-Value Life Insurance

Combines death benefit with savings component

Annual Renewable Term

A one-year life insurance policy that you renew annually

Variable Life Insurance

Allows you to invest in mutual funds with your cash value balance

Disability Premium Waiver

Ensures the insurance company pays your premiums if you become disabled

Convertibility Provision

Allows you to convert to a cash-value policy without proving you are healthy

Guaranteed Renewability

Allows you to extend your policy without taking a medical exam

Income Multiplier Method

Estimates life insurance needs by multiplying annual income (10x)

Complex Needs Analysis

Considers all debts, liabilities, and income replacement needs to calculate life insurance

Personal Automobile Policy (PAP)

An insurance policy that includes various coverage types for vehicles

Liability Coverage

Pays for others’ damages if you’re at fault

Collision Coverage

Pays for damage to your vehicle in accidents

Comprehensive Coverage

Covers non-collision damage (theft, weather, etc.)

Uninsured/Underinsured Motorist Coverage

Protects you if other driver lacks adequate coverage

Gap Coverage

Covers difference between car value and loan balance

Split Limit

Specifies maximum coverage amounts

Split Limit Characteristics (e.g., 25/50/10)

• 1st #: Maximum medical expense per person ($25,000)

• 2nd #: Maximum total medical expenses per accident ($50,000)

• 3rd #: Maximum property damage coverage ($10,000)

*Automobile Premium Factors

Include age, gender, location, driving record, and vehicle type

Peril

An event causing loss (fire, theft, windstorm)

Hazard

A condition increasing probability of peril (coastal location, smoking)

Named Perils Policy

Covers only specifically listed perils

Special Perils Policy

Covers all perils except those specifically excluded

Umbrella Policy

Provides additional liability coverage beyond standard policies

Renter’s Insurance

Covers personal property and liability for tenants

Activities of Daily Living (ADL)

Basic self-care tasks needed to live independently (bathing)

Long-Term Care Insurance

Covers assistance with activities of daily living (ADLs)

• Most appropriate purchase age is around 50

Long-Term Care (Need)

Inability to perform 2 or more ADLs

!Elimination Period

Waiting time before benefits begin

Benefit Period

Duration of coverage

Benefit Limit

Maximum Coverage

Pension (Defined Benefit) Plan

Provides guaranteed payments from employer for life

Defined Contribution Plan

Specifies employer deposits but doesn’t guarantee benefits

• Primarily funded by employees, sometimes with employer matches

401(k)

A defined contribution plan used by typical businesses

403(b)

A defined contribution plan used by schools and non-profits

457(b)

A defined contribution plan used by state and local governments

Thrift Savings Plan

A defined contribution plan used by the federal government

*Average Retirement Savings in the U.S.

Approximately $65,000 per household

*Average Savings For Those Nearing Retirement

Approximately $255,000

Wage Replacement Rate

Typically ranges from 70-80% of pre-retirement income

Retirement Savings Rate

The percentage of income set aside for retirement

Longevity Risk

Refers to the possibility of outliving retirement savings

*Key Strategies for Successful Retirement:

• Start saving early

• Save at least 12% of income

• Automate savings

• Invest aggressively

*Investment Options Within Retirement Accounts

Include mutual funds, stocks, and bonds

Rollover

When retirement accounts can be transferred between employers or to IRAs

Trustee-to-Trustee Transfer (Direct Rollover)

Moves retirement accounts directly between institutions to avoid tax withholding.

60-Day Rollover Rule

Allows withdrawals to be deposited in another retirement account within 60 days to avoid taxes and penalties

Vesting

Determines ownership rights to employer contributions

• Employee contributions are always 100% vested

Automated Savings

Automatically moves money into retirement accounts

Retirement Income

The money you live on after you stop working

Interest

Money paid to you for using your cash

Dividends

Money a company gives to its shareholders from its profits

Capital Gains

Profit made from selling an investment for more than its cost

Asset Allocation

Assigns different percentages to stocks, bonds, and cash

Compound Growth

Earnings building on top of previous earnings over time

Traditional IRA Benefits

• Tax-deductible contributions (if eligible)

• Tax-deferred growth

• Asset protection from creditors

• Access to savings for certain emergencies

Roth IRA Benefits

• After-tax contributions (no immediate tax benefit)

• Tax-free qualified distributions

• No required minimum distributions (RMDs)

• Ability to withdraw contributions without penalty

*IRAs Can be Opened at

Banks, credit unions, investment companies, or brokerage firms

IRA Contribution Limits

Apply to total IRA contributions (both Traditional and Roth combined)

What Can be Contributed to IRAs?

Only earned income (wages, salary, self-employment)

Traditional IRA Tax Rules

• Contributions may be tax-deductible

• Distributions: Taxed as ordinary income

• Early Withdrawal Penalty: (Before age 59½) subject to 10% penalty plus taxes

Roth IRA Tax Rules

• Contributions are made with after-tax dollars

• Qualified distributions: Tax-free (if account open 5+ years and age 59½+)

• Contributions can be withdrawn tax and penalty-free anytime

Required Minimum Distribution (RMD)

Required retirement withdrawals

• Begin at age 72 for Traditional IRAs

• Failure to take RMDs results in 50% tax on undistributed amount

Early Withdrawal Penalty Exceptions

• First-time home purchase (up to $10,000)

• Qualified education expenses

• Disability or death

• Medical expenses exceeding certain thresholds

• Health insurance premiums during unemployment

Tax-Deferred

Income in an account is not taxed until it is withdrawn

Tax Deduction

An expense that lowers your overall taxable income