Module 8

Why insurance?

•Risk: an uncertainty with respect to economic loss.

•Risk avoidance

•Loss prevention

•Risk assumption

•Insurance (shared risk)

•Risk: an uncertainty with respect to economic loss.

•Loss prevention \~ what can you do to minimize your losses?

•Don’t want your home vandalized? Then install security gates, lights, get a loud barking dog.

•What you are trying to do is everything you can to minimize the chance you will suffer a financial loss without avoiding it entirely.

•Risk assumption \~ ok, you realize that you can’t leave your car in the garage AND still get to work; thus, you assume the risk that some idiot will crash into you.

•You know the odds are not in your favor….accidents always happen!!!

•Insurance (shared risk) \~ this is where you pay someone/thing to help you offset the cost should your car be involved in a crash!

•Or your home vandalized, or you are diagnosed with cancer!

•Insurance (shared risk) \~ Insurance companies KNOW the risk statistics; they are just hoping to get enough money out of you in monthly premiums to off set the cost of paying for your financial loss/costs.

•Insurance (shared risk) \~ for example: •77% of motorists in the US have been in at least one accident in their lifetime. For every 1000 miles you drive, your chances of getting into a car accident are 1 in 366

•Doctors have known for decades that men are more likely to develop cancer than women. Men have a one in two chance of being diagnosed with cancer during their lifetimes; for women, the chance is one in three, according to the National Cancer Institute

The average American family pays an estimated $22,463 every year for health insurance. •But costs vary pretty widely based on factors like your age, the number of people on your plan, the level of coverage, your location and your employer.

HEALTH INSURANCE:

•A contract that requires your health insurer to pay some or all of your health care costs in exchange for a premium.

•WHY??? Because alone, health care is very expensive!

•WHY??? Because the insurance company assumes they can get more money out OF you, than pay out FOR you.

CAN YOU AFFORD “HEALTH”?

•The average hospital stay is 4.6 days, at an average cost of $13,262.

•If surgery is involved, hospital costs soar through the roof.

•Some of the most common surgeries have price tags that top $100,000.

•What if you don’t have insurance to share the costs?

AMERICAN SPENDING ON HEALTH CARE

•Americans including the government spent nearly $4.3 trillion on health care in fiscal year 2022

•Medicare: $830 Billion (Employees pay 1.45% of their paychecks to partially pay for this cost)

•Medicaid: $626 Billion (main recipients: elderly and children)

•Veterans: $127 Billion

SPENDING INCREASES:

•Health spending in the U.S. increased by 2.7% to $4.3 trillion or $12,914 per capita.

•This growth rate is substantially lower than 2020 (10.3% percent).

•This substantial deceleration in spending can be attributed to the decline in pandemic-related government expenditures offsetting increased utilization of medical goods and services that rebounded due to delayed care and pent-up demand from 2020.

•Overall, health spending was 18.3% of GDP in 2021 compared with 19.7% of GDP in 2020.

2009

•16% or 50,000,000 Americans did not have health insurance….including 7,300,000 children.

•Children without health care do not get inoculated for contagious diseases.

inoculated: immunize (someone) against a disease by introducing infective material, microorganisms, or vaccine into the body.

SIGNIFICANT DECLINE

•In 2022, the fraction of the US population without health insurance fell to 8%: the lowest number on record (Lee et al., 2022).

•What contributed to this decline?

The Solution: The Patient Protection and Affordable Care Act

•Federal statute signed into law by on March 23, 2010. Together with the Health Care and Education Reconciliation Act it represents the most significant regulatory overhaul of the country’s healthcare system since Medicare and Medicaid in 1965.

The Affordable Care Act (PPACA)

•Prohibits insurers from denying coverage to individuals due to pre-existing conditions \~ like cancer, diabetes, and depression.

•Requires insurers to offer the same premium price to all applicants of the same age and geographical location without regard to gender or most pre-existing conditions (excluding tobacco use)

•Allows dependents to stay on parent’s insurance until age 26 •If you are on your folk’s health insurance plan, this is why.

•Prior to this, many insurance companies booted 18-year-olds off their folk’s insurance.

•Financially subsidized individuals not covered by an employer-sponsored health plan, Medicaid, Medicare or other public insurance programs (such as Tricare) by paying a portion or all of their monthly insurance premium.

WHO CARES?

•Does/should this matter to you personally if these unfortunate souls do not have health insurance?

YES, YES, YES!!

•Because people without insurance do NOT go to the doctor; as a result they are likely to spread what ever cold, flu, TB, Ebola, STD that they have on to everyone else.

•Medical intervention prevents epidemics….but if I can’t afford insurance, then I won’t go to the doctor….

•Everyone loses.

THINK ABOUT IT……..

• In the classroom, how many of you wipe down the desk?

• How many of you wipe down the button on the water fountain when you refill your container?

• What do you use to open a door? Do you touch the door handle?

• What if an undiagnosed measles carrier sneezes next to you in class?

• We say “bless you” and then also get measles from them!!! Ugh.

2010

•1999-2011 Average health insurance premium went up 260%

In 2019

•$7,188 annual premium for a single person

•$20,576 annual premium for a family policy

2023 \~ HEALTH CARE PREMIUMS

•$7,911 annual premium for a single person •$22,463 for family coverage.

•Note: a “family” policy can be a single parent and ONE child. It does not have to be multiple adults and children to cost this much.

Even With insurance

•Two thirds of U.S. bankruptcies were due, in part, to medical expenses.

Did you know…

•Hospitals frequently charge the full price for services for those who have no insurance and less for those who do.

•Why?

An Answer…

•Settlements!

•Hospitals typically receive less than their billing price because insurers and government programs “negotiate” price discounts on behalf of the patient.

•The uninsured have no such negotiators.

Why would a Dr. or hospital do this?

•Because a payment from an insurance company is likely more reliable than a payment from a person who has no insurance.

•Financially, they want to stay “besties” with insurance companies.

DEDUCTIBLE

•The portion of your health care bill that you must pay BEFORE insurance will pay for your bill

CO-INSURANCE

•The portion of your bill that insurance will pay in conjunction with you paying a portion of your bill:

•80/20

•Means insurance pays 80% of your charges….you pay 20%

CO-PAYMENT

•A fee that you pay at the doctor/hospital for services rendered.

Major Types of Health Care Coverage

•Basic health insurance

•Major medical expense insurance

•Dental and eye insurance

•Dread disease and accident insurance

Basic Health Insurance

•Hospital insurance -- covers hospitalization expenses including room fees, nursing fees, and drug fees.

•Surgical insurance -- covers only the direct costs of surgery including the surgeon’s fees and equipment fees.

•Physician expense insurance -- covers physicians’ fees including office fees, lab fees, and X-ray fees.

Major Medical Expense Insurance

•Covers medical costs beyond the basic plan.

•Normally requires co-payments and deductible payments.

•Stop-loss provision -- limits the total out-of-pocket expenses incurred by the insured to a specific dollar amount.

•Life-time cap -- total amount the insurance company will pay over the life of a policy.

•This has mostly been eliminated by the Patient Protection Affordable Care Act.

Dental and Eye Insurance

•Eye exams, glasses, contact lenses, dental work, and dentures.

•Expensive unless provided with an employer plan.

Dread Disease and Accident Insurance

•Covers only specific illness or accidents.

•Provides a set dollar amount of reimbursement.

Identifying the Various Health Care Providers

1\. Private health care plans

2\. Non-group (individual) coverage plans

3. Government-sponsored health care plans

1\. Private Health Care Plans

A. Fee-for-service or traditional indemnity plans

B. Managed health care

i. health maintenance organizations (HMOs)

ii. preferred provider organizations (PPOs)

A. Fee-for-Service or Traditional Indemnity Plans

•Provides greatest choices (dr.)

•Coinsurance –%

•Co-payment or deductible --$

•Relatively expensive and require more paperwork.

•\*\*\*\*\*UGA NO LONGER OFFERS THIS TYPE TO ITS EMPLOYEES!!!!!!!!!!!!!!!!

A2. High Deductible Plan

•HIGH deductible that you must meet before insurance will pay for labs, office visits, prescriptions.

•Amount must be at least $1000. Average is $5000.

•Benefit is a lower monthly premium.

•Maybe for healthy people who won’t likely use the insurance anyway.

B. Managed Health Care

•Pays for and provides health care services to policy holders.

•Limits choices (dr).

• Monthly premium and copayment

Health Maintenance Organizations (HMOs)

•The most popular form

•A system of doctors and hospitals for a flat fee

•Three types of HMO’s

•individual practice association plans

•group practice plans

•point-of-service plans

•Provide health services including preventative maintenance.

•Assigned a Primary Care Physician who decides your care.

•Programs typically have co-pays where you pay a specific amount of out of pocket expenses.

Preferred Provider Organizations (PPOs)

•A cross between fee-for-service plans and HMO plans.

•A group of doctors, which work at a reduced cost

•Additional fees if use a non-member doctor or center.

•You pay for the care when you receive it rather than in advance.

•This discount is passes along to policy holders in the form of reductions or eliminations of deductibles and/or copayments.

COBRA RIGHTS

•Allows an employee to remain on employers insurance if the employee worked for an employer who has more than 20 workers.

•Can stay on the COBRA plan for 18 months.

•Usually use this when between jobs.

2\. Individual Insurance

•Provides an expensive, tailor-made policy to the purchaser

•Shop around

3\. Government-Sponsored Health Care Plans

•Workers’ Compensation •Medicare •Medicaid

Workers’ Compensation

•Insurance to workers injured on the job

•Payment for work-related accidents and illness

•Coverage is determined by state law and varies by state

•\*\*\*\*\*YOU GO TO YOUR EMPLOYERS DOCTOR NOT YOUR OWN DOCTOR\*\*\*\*\*

Medicare

•Medical benefits to the disabled and to those 65 and older

•Cost is covered through Social Security tax

•You pay 6.2% of your paycheck to Social Security

•Divided into two parts --A and B

•Part A: hospitalization portion; requires no premium.

•Most don’t pay a monthly premium if they or spouse has 40 or more quarters (10 years) of qualifying employment

Medicaid

•Health care for low income, blind, or aged persons.

•Payments may be used to offset the premiums, deductibles, and co-payments incurred with Medicare

•Medicaid in Georgia is called Peach Care.

•Payments for Medicaid come from the general tax fund paid by working Americans.

BOTH

•An elderly person who is also low income can qualify for both Medicare and for Medicaid.

For Employees:

•Flex accounts

•Health Savings Accounts

•Disability insurance

Medical Reimbursement or Flexible Spending Account

•funded with pre-tax dollars.

•pays unreimbursed medical expenses.

•Very flexible, but some expenses are not eligible for coverage.

•Use it or lose it!

Health Savings Accounts

•Tax deductible savings account into which individuals and employers deposit tax sheltered funds to use to pay for medical bills and out of pocket expenses

Tax deductions

•SOME health care expenses can be included when filing itemized taxes.

Disability Insurance

•Provides income in the event of a long-term illness or injury

•Doesn’t pay money to the doctor………pays money to YOU to help cover your expenses when you are unable to work due to a medical condition.

•Costly to activate from one’s paycheck each month.

Long-Term Care Insurance

•Provides a daily dollar benefit for the costs of long-term care

•Expensive

Other Health Documents

•Health Care Proxy: designate who can make health decisions on your behalf

•Living Will: designate in advance what you want your treatments in emergencies or at end of life

•Power of Attorney: Gives person absolute power to manage your affairs.

The Insurance Industry

◼ Over one million people are employed by 35,000 insurance companies.

◼ Almost 1 out of every 12 dollars spent in the U.S economy goes to pay for insurance.

Insurance

◼ In insurance, risk is defined as uncertainty with respect to economic loss.

◼ When you have a financial interest in something (life, health, income, property)—you face risk that your budget cannot absorb a decrease or a loss of that item.

Risk

◼ The possibility of experiencing harm, suffering, danger, or loss is known as RISK

Risk Aversion Theory

◼ 1) Rational people will try to reduce or avoid risk; and

◼ 2) risk is subjective in that individuals define the level of risk and uncertainty they can handle.

Probability

◼ A person weighing uncertainty and risk is judging the Probability, or likelihood, of a good or a bad outcome.

Ways to deal with risk

◼ Risk avoidance

◼ Don’t drive

◼ Risk reduction (loss prevention)

◼ Seat belts

◼ Risk assumption

◼ Accept certain level of risk

◼ Insurance (share risk)

◼ Economically recover from loss

Understanding the Logic Behind Insurance

◼ Insurance is an example of risk pooling -- individuals share their financial risks to reduce catastrophic losses from death, accidents, or health problems.

Life Insurance Life Insurance Policy Terms

◼ Premium -- the monthly cost of the policy

◼ Face value -- the benefit due upon death

◼ Insured -- the person whose life is covered by the policy

◼ Policy owner -- the individual or business that pays for and owns the policy

◼ Beneficiary -- the recipient of the benefit upon the death of the insured

Life Insurance May Not Be Necessary for the Following

◼ Single person, no dependents

◼ DINKS

◼ Married, but unemployed, individual without dependents

◼ Retired persons

DINK

◼ If you do not have someone financially dependent upon you……..then maybe don’t buy life insurance….put the money into retirement instead.

Insurance may be necessary for the following individuals:

◼ Those with dependents

◼ Married, single-income couple, with children

◼ Business owners

◼ Those estate exceeds the estate tax-free transfer threshold ($1 million)

Determine Your Life Insurance Needs: Two methods

◼ The earnings multiple approach

◼ To replace the annual salary stream of a bread winner for X years, normally 5 – 15 times gross salary is recommended.

◼ The needs approach

◼ To meet the needs of the household after the death of a breadwinner, both current and in the future.

Earnings Multiple Approach

◼ This approach is truly based on lost income, not on subjective expenses.

◼ It considers how much did the person earn….how much needs to be replaced so the family is not financially constrained?

◼ Adjust salary down to compensate for the reduction in household expenses.

◼ Meaning………..when I am gone by family will no longer need to spend $$$ on allergy meds, or peppermint ice cream, or leather coats, or scarves…….or or or………all the stuff that is JUST FOR ME!!!

◼ So those dollars DO NOT NEED REPLACED THROUGH LIFE INSURANCE DOLLARS

Adjust salary down based on household size.

◼ 5 to 4 = 20% drop

The numbers indicate family size; in that, if a 5 person household loses the mother, then the house size is now down to 4. Thus, there is a 20% drop in expenses because the mom is no longer consuming goods.

◼ 4 to 3 = 22% drop

◼ 3 to 2 = 26% drop

◼ 2 to 1 = 30% drop

This would be like a couple: if one passes away the other can see a drop of 30% in general in the household expenses.

For example: the deceased earned $100,000/year. BUT the life insurance policy should only be expected to cover 70% of that since the deceased is no longer there.

The Needs Approach -- The Seven Funds

◼ Immediate needs funds

◼ Debt elimination funds

◼ Immediate transitional funds

◼ Dependency funds

◼ Spousal life income funds

◼ Educational funds for child or spouse

◼ Retirement income funds

This approach is more subjective; in that, its questionable how much will the dependents eventually need?

How much will the spouse need?

Will the kids go to college?

Will the spouse go to college?

Very uncertain with regards to expenses.

The Needs Approach -- The Calculation

◼ Add all funding needs to determine total need

◼ Subtract current insurance coverage and other available assets

◼ This determines amount of additional insurance coverage necessary

UGA provides a $25,000 life insurance policy on its employees; thus, my husband would subtract this amount from the amount that we would calculate as needed to support him when I am gone.

Major Types of Insurance

◼ Term insurance

◼ Cash-value insurance

Term Insurance

◼ Death benefit coverage for a specific term of time

◼ Only valid if the insured dies during the term of coverage

◼ Least expensive form of insurance

Cash-Value Insurance

◼ Provides a death benefit and an opportunity to accumulate savings

◼ Provides permanent insurance

Types of Cash-Value Insurance

1\. Whole life insurance

2\. Universal life insurance

3\. Variable life insurance

Whole Life Insurance and Its Features

◼ Permanent protection

◼ Fixed premium & death benefit

◼ Fixed cash-value that grows tax-deferred

◼ Much less death protection than term for the same price

◼ Yield on cash value portion is not competitive with yields on alternative investments

Universal Life Insurance and Its Features

◼ Permanent protection

◼ Flexible premium payments

◼ Flexible death benefits

◼ Cash-value fluctuates depending on the amount paid into the policy

Variable Life Insurance and Its Features

◼ Permanent protection; returns are earned on a tax-deferred basis

◼ Allows for either a fixed (straight variable) or flexible (variable universal) premium

◼ Flexible death benefit and fluctuating cash value, reflecting the mutual fund investment performance

Convertible term

◼ can be renewed for an agreed upon period up to a specific age…….in some cases up to age 94 ☺

◼ The premium increases each time

Decreasing term

◼ Renewable term where the premium remains constant….but the face value (death benefit) decreases

Group term….

◼ Insurance for a specific group of individuals who do not take a physical exam to be covered….

◼ MY $25,000 UGA POLICY IS THIS

Another Type

◼ Mortgage/credit group life:

◼ Required by your creditor to cover the value of the debt, usually the mortgage until you have 20% equity.

Clauses

◼ Beneficiary Provision

◼ Coverage grace period…unless you pass away

◼ Loan clause (cash value only)

◼ Nonforfeiture clause (what your choices are if you lapse)

◼ Policy reinstatement clause (3-5 yrs)

◼ Suicide/incontestability……(2 years)

Riders = additional cost

◼ Waiver of premium for Disability

◼ Accidental death…ups the death benefit

◼ Guaranteed insurability: increase benefit without exam

◼ Cost of Living: increases death benefit with inflation

◼ Living benefits: cash value grants early payout for terminally ill

Receiving Life Insurance

◼ Unfortunately if you are the beneficiary of a life insurance policy and you are receiving a payment that means you have suffered a loss.

Settlement Options

◼ Lump-sum settlement -- one time payout upon death of the insured.

◼ Interest-only settlement -- periodic payments of the interest earned by the principal.

◼ Installment-payments settlement -- periodic payments, normally for a fixed period, of both the principal and interest.

◼ Life annuity settlement -- periodic payments of both the principal and interest that continue for the life of the beneficiary.

◼ Note: Life insurance death benefits are income tax-free; however, in some cases state inheritance taxes may apply.

Think:

• Where and when do you plan on retiring?

–Age?

– Location?

–Amount in retirement account?

Retirement is like a 3- legged stool

1\. Social Security

2\. Employer Contributions

3\. Personal Savings Contributions

The Aspects of Social Security

• Mandatory federal insurance program providing

– retirement, disability, and survivor benefits

• Paid for with a federal tax -- FICA

– 6.2% of your first $160,200 in 2023 pays into Social Security (after that \~ earnings not taxed by Social Security)

– 1.45% of your total earnings pay for Medicare – Equal match by your employer

Get this……

• Working Americans pay into Social Security; in that, for all of us our first $160,200 has 6.2% taken away from us and put into our S.S. account (to be paid out to us at retirement)

• Any earnings beyond $160,200 DO NOT HAVE SOCIAL SECURITY TAKEN OUT!

• So millionaires earning way more than this still pay the same amount into Social Security as someone earning $160K.

The Social Security work around:

• Amazon CEO Andy Jassy was paid $1.3 million, including a $317,500 salary (that is famously the maximum base salary any employee at the company can receive).

• The remaining $981,000 included company personal security costs, travel costs, and company contributions to his 401K plan.

• And of this $317,500; Social Security is only taken out on the first $160,200.

• The remaining $157,300 does not get taxed for Social Security purposes.

Social Security Eligibility

• To qualify for full benefits you must earn 40 credits

• Credits are the "building blocks" used to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefits.

• JUST LIKE CREDIT HOURS

• If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record.

• If you return to work later on, you can add more credits so that you can qualify.

• Limited benefits may be paid if you do not have enough credits.

• You must be 65 years of age to receive full benefits, but this will gradually increase to 67 in the future

• Reduced benefits may begin at age 62

Stay at home parents…

• The struggle for couples where one chooses to “stay at home” and raise the children while the other partner works in market production is that the “stay at home” puts zero dollars into his/her future Social Security.

• Which could be a real problem during retirement!!!!!!!!!

Earnings Limits on Social Security Benefits

• Prior to 2000, earning limits reduced Social Security benefits for many older workers.

• Senior Citizens’ Freedom to Work Act of 2000 eliminated the retirement earnings limit.

• Which means, now elderly individuals who either can’t really afford to retire or just don’t want to can continue to work and not be financially penalized for it.

• Which is why you will see some seriously ancient faculty members on campus!!!

Disability and Survivor Benefits

• Disability benefits for those physically or mentally impaired

– Impairment expected to result in death

– Impairment prevents “substantial work” for at least 1 year

Survivor’s benefits (this for the stay at home parent if s/he survives his/her working spouse)

– small payment to defray funeral costs ($275)

– continuing monthly payments to spouse, children, or parents -- with restrictions

HERE’S THE THING…

• When you are ready for your best post graduation job………you MUST ASK QUESTIONS ABOUT THE COMPANY’S RETIREMENT PROGRAMS BEFORE YOU DECIDE TO WORK FOR THE COMPANY.

Pension Plan

• contractual arrangement in which the employer provides benefits to employees upon retirement.

• Pension expenses are tax-deductible to the employer.

• The employee is taxed when the pension annuity (payment to you at retirement) is received from employer contributions or from originally “not-taxed” employee contributions.

– Meaning you didn’t pay taxes on the money when you put it IN the retirement account so you pay taxes on the money when you draw on it at retirement.

• The two most common types of plans are

• A) defined benefit pension plan

• B) defined contribution pension plan.

Contributory and Noncontributory Plans

• Contributory -- both you and your employer pay toward your retirement

• Noncontributory -- only your employer pays toward your retirement

• WHICH DO YOU WANT??????

Pension Terms

• Unfunded -- pensions are paid out of current company earnings or pay-as-you go

• Ouch……….what happens if you were working for Delta Airlines when it filed for bankruptcy, or Hostess, Or Toy-R-Us???

• Would really really really be hesitant about this type of pension.

• Vesting period -- required length of employment to be eligible to receive company paid pension benefits

• YOUR benefits, those you have put in on your own behalf are portable and go with you when you leave the company….the company’s contribution does NOT until you are VESTED!

UGA VESTING

• UGA’S VESTING PERIOD = 10 years

A. Defined Benefit Plans

• program stipulating the pension benefits employees will obtain when they retire.

• With this type you know how much your pension benefit payment will likely be when you retire.

Defined Benefit Plans-- Limitations

• Lack of portability – pension does not go with you if you leave the company

• Company changes in the plan with little notice

• Few plans adjust benefits for inflation

• Some are those unfunded plans that lack safety.

B. Defined Contribution Pension Plan

• program under which an employer agrees to make a specified contribution each year based on the pension benefit formula.

• Agree to pay into pension on your behalf.

• The formula may consider such factors as years of service, salary levels, and age.

• Note that only the employer's contribution is defined and that there is NO GUARANTEE regarding the future benefits to be received by employees.

Meaning….

**• We’ll put the money in there for ‘ya but ain’t giving you no guarantees that it will be there when you want it at retirement!!!**

Employer-Sponsored Plans

A. Defined-contribution

A. You and your employer or employer alone contribute to retirement account

B. 401 (K) plans

A. You and your employer or you alone contribute to retirement account

A. Defined Contribution

Profit-sharing plans

1\. Based on firm’s performance Employee stock ownership plan (ESOP)

1\. Retirement funds invested directly into company stock

\*both of these are great if the company is flourishing, if not????

Profit-Sharing Plans

• Employer contributions can vary yearly due to profitability.

• Contributions can depend on your salary level.

• Some firms set minimums and maximums

. • Contributions ARE NOT guaranteed.