Chapter 12: Other Insurance

Chapter 12: Other Insurance

General Insurance Contract Terms

To minimize costs, the insurance industry has instituted several practices:

• Insurable Interest:
  • You can only insure against a loss that you yourself would suffer.
• Indemnity:
  • Your maximum reimbursement is the value of the item.
• Screening and Segregation of Applicants:
  • Separating people based on their risk categories.
• Deductibles:
  • The insurance company reimburses claims only for the amount above an established minimum. The insured pays up to the deductible before the insurance provider pays.
• Coinsurance:
  • The policyholder pays a stated percentage of the outlay along with the insurance company.
  • Example: 80/20 co-insurance, where the insurance company pays 80% and the insured pays 20%.
• Exclusions:
  • Eliminating certain conditions from insurance payout.
• Waiting Periods:
  • The amount of time before reimbursements are allowed.
• Prespecified Limits:
  • Establishes the amount the insurance company is willing to pay contractually.
• Experience-Based Alteration in Policy Costs:
  • Charges rates to policyholders based on their loss experience as clients.
• Use of Group Policies:
  • Can reduce adverse selection.
  • Motivates employers to help monitor for moral and morale hazards.
  • Reduces processing and marketing costs.

Types of Insurance Coverage

• Property and Liability
  • Home
  • Auto
  • Umbrella
  • Liability
• Personal
  • Life
  • Disability
  • Health
  • Long-Term Care
• Government
  • Unemployment
  • Worker's Compensation
  • Medicare
  • Medicaid
  • Social Security

Property Insurance

• Homeowners Insurance Coverages:
  • Real property (e.g., home, garage, shed).
  • Personal property (e.g., home contents).
  • Also covers loss of home use and medical liability for non-family "visitors."
• Property Insurance Rule:
  • If you can get insurance for a specific property type (e.g., auto), it won't be covered under another type of property insurance.
• Contract Document (parts):
  • Declaration page, containing homeowner information: name, address, family members, etc

Homeowners Insurance Perils

• Open Perils:
  • The best form, covering most perils.

Homeowners Insurance Coverage and Payout

• Two types of coverage:
  • ACV (Actual Cash Value):
    • Default coverage.
    • $ACV = RCV - Depreciation$
  • RCV (Replacement Cash Value):
    • Must opt into RCV, costs approximately 20% more than ACV.
    • Depreciation is not considered.
• Properly Insured vs. Underinsured (with RCV):
  • To receive 100% of the loss amount for a primary residence (homeowner), insurance coverage must be >= 80% of the dwelling’s RCV.
• Underinsured (RCV) Formula:
  • If underinsured (< 80% homeowner’s coverage), the insurance company applies a formula to determine reimbursement amount, which will also factor in the deductible.

Homeowners Insurance Calculation Example

• Given:
  • Replacement cost = $400,000$
  • Insurance carried = $300,000$
  • 80% minimum coverage required
  • Loss = $100,000$
  • Deductible = $250$

Automobile Insurance

• Personal Auto Policy (PAP):
  • Covers liability, medical payments, and damage.
  • The owner of the vehicle, not the driver, is the insured (includes resident family members).
• Other Terms:
  • Collision:
    • Covers inanimate objects while auto is moving.
  • Other-than-collision (Comprehensive):
    • Covers animate objects.
  • Uninsured Motorist (UM):
    • Covers damage to the insured’s auto by an uninsured motorist.
• PAP Exclusions:
  • Intentional damage.
  • Rental use.
  • Business use.
• PAP Pricing Factors:
  • Type of car, age of drivers, previous accidents, and driving violations record.

Liability Insurance

• Protects you personally against having to pay for losses to others
  • 3rd party liabilities occur through personal injuries and property damage to others (caused by you).
  • Extend to your home and you + family members
• Basic liability insurance purchased within homeowners’ and auto insurance policies
• Additional liability coverage purchased through a separate umbrella liability insurance policy

Umbrella Liability Insurance

• A broadly diversified grouping of property and liability coverages
• Provides excess liability coverage on home and auto.
• Covers personal injury liability, slander, and defamation.
• Coverage typically ranges from $1$ million to $10$ million.
• Premiums are relatively inexpensive.
• Does not pay until basic liability insurance policy pays first.

Health Insurance

• Health insurance pays for medical expenses (illness or accident).
• The majority of Americans receive medical coverage via their employer or government.
• Healthcare expenses for Americans have changed dramatically in recent decades.
• Corporations were able to shift the financial burden to individuals.
• Relieved from having to provide a single, comprehensive health insurance plan (BC/BS), corporations began offering several options based on cost and quality.
• All medical coverage includes:
  • Basic medical expense
    • Nonsurgical costs (in or out of the hospital).
    • Hospital costs such as room, board, and ancillary services.
    • Surgeon’s costs (in or out of the hospital).
  • Major medical expenses
    • Used for expensive care; each plan has varying deductible and participation requirements.
• Types of Providers:
  • Health Maintenance Organizations (HMOs):
    • Provides a full range of medical services for a flat fee.
    • Primary care physicians are used as "gatekeepers".
  • Preferred Provider Organizations (PPO):
    • Unlike HMOs, primary care physicians are not used as “gatekeepers” whose approval is needed in order to be reimbursed for additional service.
  • Point of Service Systems (POS):
    • Patients can choose either POS or non-POS healthcare providers.
  • Blue Cross Blue Shield (BC/BS):
    • A traditional provider granted nonprofit status by individual states.
    • Before the 70’s, it was common for companies to pay the full amount for employee medical bills; today, BC/BS competes with other provider types.
  • Individual, non-group health insurance policies:
    • Individuals independently choose hospitalization, surgeries, ongoing medical expenditures cost/quality options.

Health Insurance Calculations

• Maximum-Out-of-Pocket (MOOP):
  • $MOOP = Deductible + Insured's portion of the coinsurance (capped)$
• Example 1:
  • Family health coverage terms:
    • $250$ deductible
    • 80/20 co-pay
    • $5,000$ MOOP
  • Daughter has $4,900$ in medical expenses for a broken arm:
    • Family pays the first $250$ (deductible).
    • Insurance company pays 80% of $4,650$, which is $3,720$.
    • Family pays the balance due, 20% of $4,650$, which is $930$.
    • Total out-of-pocket cost = $1,180$ ($250$ deductible + $930$ co-insurance).
• Example 2:
  • Medical expenses are $24,900$
    • Renn’s pay $250$ deductible
    • Insurance pays 80% ($24,650 * 0.8 = 19,720$)
    • MOOP met: $250 + 4,930 = 5,180$ (exceeds $5,000$ MOOP)
    • Therefore Insured pays only $5,000 (250 + 4,750)$
    • Insurance pays remainder of $19,900 (24,900 - 5,000)$
• Stop-Loss Limit:
  • The maximum amount of expenses after the deductible paid by the insured.
  • $Stop-loss limit = (MOOP - Deductible) / Insured Coinsurance$
  • Calculation:
    • $29,500$ of expenses, $5,000$ MOOP, $250$ deductible and 80% coinsurance = stop-loss limit of $23,750$
    • Numerator: $5,000 - 250 = 4,750$
    • Denominator: 20% (Insured Coinsurance %)
    • Solution: $4,750 / 0.20 = 23,750$
    • • $23,750$ of medical expenses after payment of the deductible will bring the family to the MOOP limit
    • After the MOOP limit is reached, the insurance company pays 100% of medical expenses

COBRA

• COBRA (Consolidated Omnibus Budget Reconciliation Act of 1986):
  • Applies to employers with group plans covering 20+ employees.
  • Requires employees to be allowed to continue their group health insurance coverage if coverage was lost for certain reasons.
    *

Disability Insurance

• Provides benefits when unable to work due to accident or illness.
• Two forms:
  • Short-term disability (up to two years).
  • Long-term disability (covers longer periods, up to age 65).
• Key Definitions of Disability Types:
  • "Own occupation"
    • Unable to work current job (Best definition).
  • "Any occupation"
    • Unable to work any job (Broader, worst definition).
• Elimination Period:
  • The time before disability payments begin (e.g., 3-6 months).
• Residual Benefit
  • A partial payment when you have returned to your job but with a shorter work week and reduced income.
• Preexisting Condition
  • Will not pay out benefits for illnesses or injury that occurred within a period of time before the policy was activated.
• Rehabilitation Benefit
  • Reimbursement for rehabilitation that helps a person get back into the workforce more quickly.
• Due to insurance company concerns about potential worker incentives to profit from illnesses, most coverage of disability policies is limited to 60% of income.

Long-Term Care Insurance

• Long-term care insurance reimburses expenses incurred when unable to perform basic activities of daily living.

Government Insurance

• Establishes a minimum quality of life for all citizens.
• Employers and employees fund social insurance payments through mandatory payroll withholding.
• Principal government insurance programs:
  • Social Security
  • Worker’s Compensation
  • Disability Payments
  • Unemployment Insurance

Worker’s Compensation

• A "no-fault" insurance that provides income to people injured on the job.
• Individual businesses are required to participate.
• Regulated by the states.

Unemployment Insurance

• Provides payments when terminated from previous job.
• Organized by the federal government, managed by the states, and funded by individual businesses.
• Benefit amount varies by state (fixed sum or percentage of income).
• Typically lasts 24-26 weeks, managed at the State level (Federal not involved)
• Will not qualify if fired for misconduct.

Medicare

• People aged 65+ are eligible for Medicare (earlier if they have end-stage renal disease or ALS).
• Must be covered by Social Security
• Parts of Medicare:
  • Part A:
    • Covers hospital care; typically free.
  • Part B:
    • Covers doctor’s charges; costs approximately $164.60$/month (2024).
  • Part C:
    • Medicare Advantage Plan (extra coverage); pays additional expenses when basic Medicare ends; premium varies by plan.
  • Part D:
    • Covers prescription drugs; premium varies by plan.

Medicaid

• For low-income Americans, pays 100% of basic medical coverage.
• Run by individual states (with federal and state funds combined).
• Also covers younger people who don’t qualify for Medicare.

Social Security - Disability Insurance

• Pays disability income to people unable to work for 2+ years.
• Uses “any occupation” disability definition (worst form).
• Elimination period is five months (benefits begin in month six).

Social Security - Survivor’s Benefits

• Know the survivor types (e.g., surviving spouse (married or divorced) + dependents).

Chapter Summary

• Insurance is most suitable when loss frequency is low but severity is high.
• Insurance is separated into property and liability, life and health, and government social insurance.
• Property and liability insurance involves protection of real and personal property, while liability protects against losses to others.
• Property insurance includes home, personal possessions, auto, liability, and umbrella insurance.
• Life and health insurance protects human assets of household members against loss.
• Personal insurance includes life, disability, health, and long-term care.
• Government insurance includes Worker’s Compensation, Medicare, Medicaid, unemployment, and Social Security.