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TYPES OF INSURANCE
What is an insurance policy?
An insurance policy is a contract that establishes a binding legal relationship that is regulated by both the common law and legislation. In other words, in some situations the law has been derived from precedents established in courts; in other situations the contract is specifically regulated by laws passed by Congress. There is also regulation by independent statutory authorities.
The insurance company is known as the "insurer"; the person who holds the policy is known as the "insured".
Consumer insurance is usually either General insurance or Life insurance.
Transfer of risk.
The basis for insurance is "transfer of risk".
This means that the insurer agrees to compensate you if you suffer a loss. Without the insurance you would have to pay for that loss yourself. Obviously this contract is made on the basis that the insurance company calculates the risk that you, or the total number of people buying insurance, will cost more in payouts than what is received in premiums. This is determined by the use of statistics and the information you disclose on your application for insurance.
Home contents. It can either be "defined event" i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire; or "accidental loss or damage" i.e. all accidental loss with some exclusions.
Motor vehicle. It can either be "comprehensive" i.e. it covers any damage to your car as well as damage to the other car or another person's property; "third party property" i.e. it covers damage caused by your car to another person's property. This type of insurance will not cover you for the cost of repairs to your own car; "third party fire and theft i.e. it covers damage partly for damage caused by your car to another person's property, and restricted cover for damage to your car cause by theft or fire.
Income protection. With this type of insurance the insurer agrees to pay you a specified amount of money, usually in monthly payments, in the event that you become disabled and unable to work. Along the same lines you an purchase "trauma insurance" to cover a medical trauma such as a heart attack.
This is a contract where the insurance company is bound to pay an agreed sum on the death of the person who is insured.
Some life insurance policies are more in the nature of an investment product, where the company takes your premiums and invests them to add value to the policy.
Using a broker.
Under the California law, an insurance broker doing business within the state must be licensed and registered by the Department of Insurance. This establishes standards that ensure:
their professional identity is truthful;
they do not try to pressure you into a policy you don't want;
they follow certain accounting practices that protect your premiums;
disputes will be handled in an appropriate manner.
Types of coverage.
Make sure you understand the types of cover that you will receive from the policy. For instance, home insurance can either be:
defined event i.e. the policy covers loss or damage from a list of "defined" events, e.g. storm or fire;
accidental loss or damage i.e. all accidental loss with some exclusions.
Just because a defined event is covered in your policy is not a guarantee that you will be covered no matter how (or why) the event took place. This partly depends on the way the events are described in the policy, and any exclusions that are made in the policy regarding the circumstances of the event. Therefore it is always important to carefully read the policy.
Accidental loss or damage policies cover all accidental losses, but it will nevertheless be subject to stated exclusions.
|Term Life Insurance|
Term is sold in a variety of forms and for a variety of purposes. The most common type is Level Term. This form has a level (or constant) death benefit and a level premium for a specified number of years. The most common are 1, 5, 10, 20, and 30 year terms. Decreasing Term is another version of term insurance. It is generally sold with a level premium and a decreasing death benefit. A variation of decreasing term is Mortgage Life Insurance. This is designed to decrease at the rate in which a mortgage balance decreases. Mortgage Life is typically offered as a rider in connection with a cash value policy.
Advantages/Disadvantages of Term Insurance
Term insurance is ideal for families where protection is needed, but a minimum outlay of funds is necessary. Term also works well as a supplement to cash value insurance. Another common purpose of term insurance is to purchase it as protection against debts such as mortgages, auto loans or education loans.
On the negative side, term insurance provides only temporary protection, and there may come a time when an insured has no protection after the term policy ends.
|Whole Life Insurance|
There are several variations of Whole life. The most common are Modified Premium and Graded Premium. These policies are used when whole life protection is needed, but can't be afforded. Modified Premium policies typically have a lower fixed premium for the first 3 or 5 year period, at which point premiums increase. Modified policies work well for individuals that expect to improve their financial condition. Graded Premium policies are similar, except the premium increases each year for the first 5 years, and then becomes fixed after that. Another common version of whole life is Limited-Pay. These policies are a variation that make it possible to stop premium payments at the end of a specified time period without a reduction in the death benefit. In other words, the policy becomes fully paid prior to age 100. The most common examples of this are 10 Payment Life, 20 Payment Life, or Life Paid up at 65.
|Variable Life Insurance|
|Universal Life Insurance|
Another form of Universal life is Variable Universal Life. Variable Universal life combines the growth potential of stocks with a guaranteed death benefit. This type of policy allows premiums to be paid, reduced, or skipped at any time, and the contract will not lapse as long as sufficient cash value exists. The cash value fund can be split between different investment mediums such as stock, money market, and bond funds.
The key to any form of Universal Life is that it's interest-sensitive and allows for an adjustable death benefit.
Lastly, It is important to note that there is always a risk of needing to pay additional premiums to keep the policy in force, depending upon the premium payment history, interest rates or sub-account returns. Variable products are sold by prospectus which provides detailed information about fees and expenses. Performance of variable products will fluctuate with changes in market conditions and may lose value.
There are five types of Insurance that may be included in a group insurance plan.
Term Disability Insurance (also known as weekly income, WI, STD)
Term Disability Insurance (LTD)
|Burial / Final Expense Life Insurance|
This type of policy is ideal where the primary concern is the payment of final expenses such as:
Aside from the simple application process this type of insurance features:
Types of Final Expense Insurance
Immediate Full Death Benefits are generally available to qualifying applicants when no serious or immediate health concerns are presented.
Graded Death Benefits are available when serious health concerns are presented. Graded plans provide limited benefits during the first few years of the policy.
Guaranteed Issue Benefit Plans may also be available to you if your health makes you ineligible for for the standard or graded burial insurance products. These are available regardless of health and provide a graded benefit that provides a full death benefit after three years of policy payments and limited benefits before that.
Typical Payment Plans Available
A Level Pay Plan calls for premiums to be paid for the life of the policy.
A 10 Pay Plan calls for premiums to be paid for 10 years.
A Single Pay Plan requires only one premium payment.
10 pay and single pay plans will often include an annual growth rate on the death benefit.
|Survivorship Life Insurance|
Since estate taxes are based upon the total current value of all assets (liquid or not), Survivorship Life Insurance can protect family estates such as real estate, property, family farms and other hard assets from liquidation.
Survivorship Life Insurance is designed to protect larger estates, generally $5 Million or greater.
There are two major benefits that derive from this for last-to-die life insurance policies.
1. Because there is less of a risk involved for the insurer when the death benefit is paid after the death of two people, the cost of the policy (the premium) is less.
2. Because there is less financial risk for the insurer, those with medical or other impairments that would normally be rated (or possibly declined) can get approved depending upon the health of the other applicant.
Essentially the mortality risk is spread over two lives resulting in lower policy costs. Survivorship life insurance can be less costly and easier to qualify for than other types of life insurance.
Planning and Survivorship Life Insurance
To safely create a last to die policy, the policy should be owned by a third party (typically a trustee).
The ultimate goal of estate planning is to acquire and preserve someone's assets past death. This is goal is to be pursued after several major factors are decided:
are the beneficiaries?
There are two major common ways to start the estate planning process. Either the creation of a will or the creation of a trust. Both are designed to determine who is the beneficiary of specific assets. But the similarities end there. For more information of trusts or wills, contact a lawyer or certified accountant.
Taxes Imposed on the Transfer of Assets
There are three taxes imposed on the assets of the deceased: estate tax, gift tax, and generation skipping transfer tax.
Gift tax is a tax that is imposed during the lifetime of the giver. Unlimited gifts may be given to a spouse or to charity without tax. And gifts of less than $10,000 per year may be given without taxation. The tax rate on gift taxes ranges from 37% to 60%. But an applicable exclusion is satisfied before taxes are required. The applicable exclusion is a specific amount of money depending upon the year. Currently in the year 2000, the excludable amount is approximately $675,000. This amount will rise each year until it reaches $1 million in 2006.
Estate tax is one that is imposed upon death, but in the event of a married couple it is not imposed until the death of both parties. The estate taxes are based upon the total current value of all assets (liquid or not) after all appropriate expenses and appropriate asset transfers.
The Generation-Skipping Transfer Tax is imposed both at death and during the lifetime of an individual. This tax is at 55%. A decedent (the person transferring assets) has a lifetime excludable gift amount of $1,010,000. This tax and exclusion is applied to gifts that are for grandchildren or relatives further down the family tree (i.e.. great grandchildren). Transferring assets to the skip generation that are greater than the allocated amount may also be subjected to an estate tax if the gift is at death.
|Long Term Care Insurance|
Although people are generally living longer, many are requiring assistance in their later years. Long Term Care services can be provided in your home, in an assisted living facility or in a nursing home. In many cases the family is no longer able to provide such care around the clock. Family members may not live nearby, they may have other pressing family commitments, or simply cannot get the time off work or away from the home.
It is very likely that someone you know needs help with the activities that many of us take for granted while we are still able to perform them - eating, bathing, dressing, etc. According to the Health Insurance Association of America, 48.6% of people age 65 and older may spend some time in a nursing home and 71.8% of people age 65 and older may use some form of home health care. Additionally, less than 2% of nursing home costs are paid by Medi-Cal (Medicare in other states) with the national average nursing home cost somewhere in the neighborhood of $40,000 per year.
The greatest difficulty with Long Term Care is the lack of preparation for the costs incurred when someone you love requires assistance. Some people can pay the bill out of pocket, others will qualify for Medicaid (welfare), but most of us will fall somewhere in the middle. We have worked hard all our lives and now we can lose everything to a nursing home.
A Long Term Care Insurance Policy can help protect your assets from the rising cost of care, allowing you to remain financially and socially independent. Long Term Care can help secure not only your financial future, but also that of your loved ones.
|Individual Medical Health Insurance|
If your employer does not offer group insurance, or if the insurance offered is very limited, you can buy an individual policy. Typically available are fee-for-service, HMO, PPO, or POS protection. As individual plans may not offer benefits as broad as those in group plans, it is wise to consider available options carefully and fully understand the policy being presented.
Fee-for-Service (Indemnity) Health Insurance: This is the traditional kind of health care policy. Insurance companies pay fees for the services provided to the insured. This type of health insurance offers the freedom to choose doctors and hospitals. One can choose any doctor they wish and change doctors at any time. These plans also allow the insured to use any hospital in any part of the country. Generally a yearly deductible is charged and a percentage of costs above the deductible are covered. An example might include a $250.00 deductible and 80% coverage once the deductible is reached.
HMO (Health Maintenance Organization) Coverage: These are essentially prepaid health plans. In exchange for a monthly premium, the HMO provides comprehensive care for the insured, including doctors' visits, hospital stays, emergency care, surgery, lab tests, x-rays, and therapy. Care is provided either directly in its own group practice or through doctors and other health care professionals under contract. Generally, the choice of doctors and hospitals is limited to those that have agreements with the HMO. Although, exceptions can be made in emergencies or when medically necessary.
PPO (Preferred Provider Organization) Coverage: A cross between traditional fee-for-service and an HMO. Like an HMO, there are a specific doctors and hospitals to choose from. In a PPO, though, it is possible to use doctors who are not part of the plan and still receive some coverage. This type of plan is well suited for individuals who want an HMO style prepaid plan, but want to use a doctor that is not part of the network. As with HMO's, these plans are geared towards preventative care and include a broad range of services.
POS (Point-of-Service) Coverage: A Point-of-Service medical plan is basically a combination of a PPO and an HMO. Like the other types of managed care, POS plans are established to provide lower cost medical care to those that remain in the network. Assume for a moment that POS's are structured identically to PPO medical plans. The major difference between a POS and PPO plan is that the Point-of-Service plan makes use of a Primary Care Physician. With the POS plans, if you seek medical care outside of the network, you will be responsible for full payment. On the other hand, if your Primary Care Physician gives a referral for you to see a specialist outside of the network, the insurer will pick up most of the cost. As with HMO plans, POS plans typically include preventive care and health improvement programs.
Disability insurance exists to replace income in the event of total or in some cases partial disability, due to accident or illness.
The variations in policies come in the form of waiting (elimination) periods and length of coverage. The waiting period is the amount of time you must wait before benefits begin. Typical waiting periods include 30 days, 3 months, 6 months and 1 year. This is equivalent to a deductible. The length of coverage can vary from 2 years, 5 years, to age 65 or in some cases lifetime.
The best definition of disability for the purposes of disability insurance would include the inability to perform the duties of one's occupation. Disability insurance protects against this loss of income in the event of this inability.
Age, occupation, waiting period, coverage amounts and coverage length all contribute to the determination of policy costs.
|Medi-Cal / Medicare Supplemental Health Insurance|
Part A of Medicare is automatically available to all persons over the age of 65 that are entitled to receive Social Security or Railroad Retirement benefits. Elderly not covered by Social Security may elect to join Medicare Part A if they pay a monthly premium. Part A covers inpatient hospital services for a maximum of 90 days for each benefit period. The benefit period is the time period during which benefits are received starting on the day of admittance and ending 60 days after being released.
Benefits are payable directly to the hospital or medical provider. An annual deductible must be satisfied. A second daily deductible must be satisfied while in a hospital or extended care facility from the 61st to 90th day of treatment. Benefits under Part A include prescription drugs while hospitalized. Skilled nursing, hospice and post-hospital home health care are provided beyond hospitalization if deemed medically necessary.
Part B (Supplementary Medical Insurance) is a voluntary medical insurance plan. Individuals pay a monthly premium, deductible, and 20 percent of the medical expenses. The remaining 80 percent is paid by Part B. Part B only covers charges for physicians, surgeons, and other health services. Part B does not cover eye and hearing exams, foot care, immunizations, or physical exams.
There are ten government regulated policy types. These standardized policies are labeled Plan A to Plan J. The difference between these plans is based upon there levels of coverage. The state in which you live determines which plans are available in your state.
Medigap policies cover charges not covered for hospitalization between the 61st to 90th day of treatment. These policies are also required to cover a minimum of 20 percent of eligible expenses of Part B.
Medicare Supplement policies may not exclude pre-existing conditions.
of Medicare Supplements
If you are considering this type of coverage, please take the time to review The Official U.S. Government Site for Medicare Information.
Cancer insurance policies act to supplement existing health plans and can offer the following benefits. It should be noted however that individual policies may differ greatly and benefits are ONLY paid in the event of an occurrence of this disease:
Deductibles and Co-Insurance. Sometimes a "full coverage" major medical policy has as much as a 20% to 40% co-payment. As medical bills reach into the thousands of dollars, these out-of-pocket costs may rise well beyond anyone's expectations.
Lost Income either because a wage earner is sick, or the sickness of a spouse takes the wage earner away from his/her livelihood in order to provide care.
Housekeeping Expenses when the homemaker is ill.
Long Distance Telephone Calls to stay in touch with relatives and friends.
Special Diets needed and ordered by a physician.
Special Clothes and Prostheses Wigs, hairpieces and breast prostheses, for example.
Transportation Costs to out-of-town specialists and healthcare facilities, as well as the cost and inconvenience of repetitive in-town visits for care and treatment.
Meals and Lodging away from home in conjunction with the treatment. This expense is not just incurred by the patient, but by other members of the family as well.
Hospital Room and Board Benefit. A daily benefit for each day of Hospital confinement for the treatment of Cancer.
Surgery and Anesthesia Benefit
Skin Cancer Benefit for the diagnoses and surgical removal of Skin Cancer.
Diagnosis Tests Benefit for diagnostic tests which are performed to detect, support or confirm a positive diagnosis of Cancer.
Additional Surgical Opinions Benefit for a second opinion when the recommended treatment of an Insured's Cancer is a surgical procedure. If the second opinion differs from the first, a third opinion may also be covered.
Attending Physician Benefit for all personal visits by your attending Physicians, other than a surgeon, while confined to a Hospital.
Special Nursing Benefit for each day of special nursing services by a full-time private duty R.N. or L.P.N. while Hospital confined when required and authorized by your attending Physician.
Drugs and Medicine Benefit for drugs and medicines prescribed by your Physician for the treatment of Cancer while you are confined in a Hospital.
Special Drug Benefit for drugs and medicines prescribed by your Physician for side effects or complications related to or resulting from radiation or chemotherapy treatments.
Radiation Therapy and Chemotherapy Benefit for one or more teleradiotherapy or chemical treatments prescribed by a Physician for the treatment of Cancer. This includes x-ray radiation, radium and cesium implants, cobalt, hormone therapy and chemotherapy drugs. As well, charges for consultations, physical examinations, laboratory tests and diagnostic tests relating to chemotherapy or radiation therapy are generally covered.
Wig and Hairpiece Benefit for wigs and hairpieces if an Insured suffers hair loss as a result of chemotherapy or radiation therapy for the treatment of Cancer.
Investigational Cancer Treatment for Investigational treatment. The treatment normally must be approved by the U.S. Food and Drug Administration for Phase II or Phase III testing and endorsed by either the National Cancer Institute or the American Cancer Society for Investigational studies.
Bone Marrow Donor Expense Benefit for expenses incurred by the donor: Covered charges may include Hospital and Physician services directly related to the transplant, the cost for round trip transportation by commercial aircraft, bus or train to the city where the transplant is performed, and expenses for meals and lodging when the donor is asked to remain near the Hospital after the transplant for the possible donation of additional blood components.
Blood and Plasma Benefit for blood or plasma, which includes the charges for the transfusion, administration, crossmatching, typing and processing.
Ambulance Benefit for charges made by a professional ambulance company for ground transportation to or from a Hospital where an Insured is admitted as a patient for the treatment of Cancer.
Patient Transportation Benefit for commercial transportation (aircraft, bus or train) from home to and from the nearest Hospital
Patient Lodging Benefit for the cost of a hotel or motel room if an Insured is required to go to a Treatment Facility for the treatment of Cancer which is more than 50 miles from home and, though not confined to the Treatment Facility, must remain away from home overnight.
Family Member Transportation and Lodging Benefit for transporting one adult member of the Insured's immediate family by commercial aircraft, bus or train to the Hospital where confined. Also covers the cost of a hotel or motel room for the family member.
Convalescent Care Facility Benefit for each day charges are incurred while an Insured is required by the attending physician to be confined in a Convalescent Care Facility.
Home Health Care Benefit if such services are prescribed by your Physician and not provided by a relative.
Speech and Physical Therapy Benefit for speech therapy or physical therapy.
Prosthesis Benefits for each prosthetic device including, if applicable, the surgical implantation thereof.
Durable Equipment Benefit for either the rental or purchase of durable medical equipment, such as hospital beds, wheelchairs, respirators, etc.
Hospice Benefit for Hospice services when a Physician determines Cancer treatments are no longer beneficial and life expectancy is 6 months or less.
Government Hospital Confinement Benefit. When an Insured is confined in a U.S. Government Hospital for the treatment of Cancer, and not legally obligated to pay for such confinement, cash indemnity is paid.
Waiver of Premium. If the Insured becomes disabled from Cancer, premiums may be waived.
Prior Cancer Patients if an insured family member has had "Internal Cancer", they may still qualify if they have been treatment-free for a minimum of only five years. Limitations and Exclusions often apply.
Depending on your policy certain conditions may apply:
Subject to Change
First Occurrence Rider
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