It’s very complicated, and many people are overwhelmed and annoyed with the process. Here’s an explanation of health insurance, and how it got to be the dominant delivery vehicle for health care in America.
Why You Need Health Insurance
Health insurance is necessary for Americans to pay for the high cost of health care. You need it unless you are very wealthy, over 65, or very poor. The very wealthy can afford the cost of even extraordinary emergency or chronic medical care. Those over 65 have paid into Medicare. The very poor can qualify for Medicaid.
Everyone else must either purchase health insurance or risk medical bankruptcy. Since it is so common, many people have lost sight of its underlying purpose. It’s just like insurance for your car, home, or apartment. It’s supposed to protect your life savings from the devastating costs of a major accident, medical emergency, or a chronic disease.
But, unlike other insurance, health insurance makes it possible for you to get that health care when you need it. If you don’t have car insurance, you can take the bus until you can afford to get your car fixed. If you break your leg, you can’t splint it yourself until you save up enough to go to the doctor.
How to Choose Health Insurance
Health insurance companies provide lots of choices. But before you select a plan, you’ve got to wade through various combinations of deductibles, copayments, coinsurance, and premiums.
Monthly premiums. Like auto or homeowners insurance, you pay this even if you never make a claim. That provides the cash flow so insurance companies can pay their day-to-day expenses.
The deductible. That’s what you pay before the insurance company contributes a dime. Deductibles can range anywhere from $500 a year to $10,000 a year or more. The lower deductibles are only available from company-sponsored plans. They are annual, which means you start over on January 1 of each year.
A copayment for each visit. A typical copay is $20 for a doctor visit, $50 for a hospital visit, and $10 to $40 for each prescription. You pay 100 percent for the visit until the deductible is met.
Coinsurance. That’s a percent you pay for procedures, like surgeries, or hospital stays. If your doctor visits you in the hospital, you might pay a copayment for the visit and coinsurance for the hospitalization.
Why do insurance companies charge deductibles, copays, and coinsurance? They want to keep you from running to the doctor for every sniffle. They were worried that, if health care were 100 percent free, their costs would skyrocket. The Affordable Care Act said these out-of-pocket costs can’t exceed a maximum of $6,600 for individuals, or $13,200 for a family. After that, the insurance company pays 100 percent.
For example, you might be willing to pay a higher monthly premium for a lower coinsurance percent and/or deductible. That would make sense if you have a chronic disease, like diabetes, and know you’ll be in to see the doctor frequently.
On the other hand, people who are healthy might want the lowest premium possible and a higher deductible. They are willing to take the chance of paying more for health care because they believe that chance is small. The lower the deductible, the higher the premium, co-pay, or co-insurance. As health care costs have grown, more people have opted for higher-deductible plans just to keep their monthly premiums affordable. Obamacare has not been able to correct this underlying flaw of the health insurance system.
Why America Relies on Health Insurance to Pay for Medical Care
Before World War II, most Americans had no health insurance. The policies that existed only covered the cost of the hospital room and board. After the war, the federal government instituted a wage freeze to curb inflation. But that meant companies couldn’t give raises to get the best employees. Instead, they offered benefits including health insurance.
In 1954, the Internal Revenue Service made health insurance premiums non-taxable. That made an additional dollar of health insurance more valuable than a dollar of taxable salary. The Tax Policy Center estimates that this tax break alone increases the U.S. deficit by $250 billion a year. But politicians aren’t likely to get re-elected if they suggest removing it.
That’s especially true because this tax break is like providing a government insurance subsidy for the upper-middle classes and the wealthy. The Tax Policy Center found that the average benefit of the health insurance tax break was about $281 for a household in the 15 percent tax bracket. But the benefit is $374 for those in the 25 percent tax bracket.
Alternatives to Health Insurance
Many countries have adopted universal health care. That’s where the government pays for health care, just like it pays for education and defense. It’s like expanding Medicare or Medicaid to everyone. When the French or Germans go to the doctor or the hospital, the government picks up most or all of the bill. The downside is that it takes a long time to see a specialist or receive a non-emergency operation. On the other hand, no one has to worry about dying from a disease because they can’t afford treatment.
When Hillarycare tried to implement universal health care in America, the medical profession and health insurance companies defeated it. Obamacare was initially presented as universal health care. But the insurance companies changed it to one that relied on their products.
An alternative to health insurance is self-pay. If people paid for their own health care, they’d bargain on price to get the best deal. That would lower the cost of health care overall. They could take out loans for expensive procedures, like they do a car or a house. They would take better care of their health to avoid preventable diseases like diabetes.
Health insurance is not cheap, and it can be tempting to go without coverage, especially if you never get sick. With the expensive monthly cost and out-of-pocket expenses, you may be wondering how much you really need coverage.
Many people in their 20s may feel they are healthy enough to skip out on health insurance. When you rarely see a doctor, and especially if things are tight financially, it may seem like a good idea to cut the health insurance expense completely from your budget.
You can pay for medical expenses as you go instead of worrying about the insurance premiums and co-payments on the way. However, this could be very difficult if you have a serious illness, an accident, or an ongoing health issue because the costs can become very large, very quickly. This is why it’s essential for everyone to always have some form of health insurance.
Navigating health insurance coverage is a monumental task. Consumers generally have no say in which services are rendered, which services are covered, and how much they will ultimately be responsible for paying. It is not an uncommon scenario that a doctor requests a service, the patient follows the doctor’s orders, insurance pays only a portion or none at all, and the patient is left holding the bag—and the bill.
Other common scenarios: A patient calls the doctor to ask for the price of a particular test or treatment, only to be told the price is unknown. Or a plan participant calls their health insurer to ask for the customary fee for a service—to determine how much of it will be covered—only to be told “it depends.” No one would go into the local electronics store and buy a TV without being told the price, but in medical care, this is basically what patients are expected to do.
To be fair, health insurance companies, traditionally known as the gatekeepers to healthcare, have recognized this and in recent years have tried to improve price transparency. Despite these efforts, there are many pitfalls associated with health insurance coverage. Learning how to navigate around these should make for a more educated healthcare consumer. Here are the services that most insurers decline and a look at how you can get things covered that may initially be denied.
Health insurance typically covers most doctor and hospital visits, prescription drugs, wellness care, and medical devices.
Most health insurance will not cover elective or cosmetic procedures, beauty treatments, off-label drug use, or brand-new technologies.
If health coverage is denied, policyholders can appeal for exceptions or allowances based on an individual’s situation and prognosis.
Medicare: The Roadmap
Medicare provides the most insight into covered benefits for consumers. The Medicare system is a federally run health insurance system granted primarily to U.S. citizens age 65 and older. In general, the basis for all health insurance benefit design is the Medicare system. Many commercial health insurance plans model basic benefits after those benefits granted to Medicare recipients.
The focus is on health and wellness rather than sickness; annual physical exams are not fully covered by Medicare and treatment for severe ailments also usually require a co-pay or coinsurance payment. After the basic plan design is set for commercial health insurance, other benefits are added depending on the requirements of the plan’s sponsor—for example, an employer.
To understand the basics of what is covered under the Medicare plan, you can visit its website. Medicare is not an “early adopter” system; therefore, most new technologies are typically not covered at all—or not covered as robustly as other, more time-tested technologies. An example is drug-eluting stents vs. bare-metal stents in cardiac procedures or ceramic hip replacements versus traditional metal ones. It is much easier to obtain coverage for proven procedures rather than those that could potentially be deemed as “test procedures.” Similarly, covered lab tests are often lagging the newest technology; an example is the ThinPrep pap test.
Services Usually Not Covered
Although each benefit plan is different, depending on the sponsor’s needs, and depending on state regulations (each state has its own insurance commissioner), there are services that are typically not covered by most health insurance plans.
Many services that improve someone’s exterior appearance, such as plastic surgery and some dermatological procedures, are often not covered by typical plans. Interestingly, because consumers elect to have these procedures, there is great price transparency for them. A consumer who wants laser hair removal can call any number of providers and each one will be able to immediately quote a price.
These costs usually aren’t covered by health insurance, although health insurers are required to pay for all the testing required to make an infertility diagnosis. However, this is one of the treatment areas that differ among states.
Prescription drugs are tested and approved for specific disorders, such as autoimmune diseases. At times, these drugs can be prescribed for disorders not listed on the “label.” In some cases, the insurance company may reject paying for these off-label uses.
New technology in products or services
Covering these costs often happens slowly, particularly if the technology does not demonstrate added benefit for the increased costs. Medical companies are tasked with proving that a new drug, product, or test provides a measurable benefit to the consumer such that the cost will improve mortality or morbidity rates (basically, save lives or reduce ill health). Since Medicare is not an early adopter of new technology, other insurance plans generally follow suit and wait for more data before including it in the covered benefits.
What’s Your Recourse?
Although there are services not typically covered, there are “special cases” in which insurance companies do make exceptions and cover these services. However, in many instances where services are not covered, there are several other courses of action that consumers can take.
Get coverage for new technology
In cases where a new technology provides additional benefits vs. the older technology, consumers try several things to get the insurance company to pay. Many insurance companies require doctors to “prove” why the costlier procedure or product is more beneficial. Additionally, an insurance company may pay a specific amount for a procedure and the patient can pay the difference to get the new technology—in other words, partial coverage is available. The first step in this process is to discuss the coverage with the insurance company, determine what will be covered, and have an agreement with the physician for the total cost and what will be required to be paid by you.
Get coverage for new drugs
Many new drugs or services introduced in the market undergo trials to test additional benefits or uses. Consumers can try to get into one of the trials and get the service or product as part of the trial. However, although each trial is designed differently, many have a group of participants who receive a “placebo,” a fake treatment, so you are not guaranteed the drug or service. Your physician should be able to help you learn of any trials available as the Food and Drug Administration (FDA) requires the listing of drug trials.
Purchase an insurance plan rider
Health insurance companies provide the option of insured persons to purchase a rider, an added policy feature, for a specific covered benefit. However, these riders can be costly and may not available for purchase for all treatments.
Appeal a denial
Covered persons can contest a denial by an insurance company. Each insurance company is required to provide an insured person with the procedure required to appeal. In addition, if the appeals process results in another denial, the insured consumer can appeal to the state insurance commissioner for a review of the case. The process can be somewhat lengthy but is often without cost to the insured person.
Managed care plans have rules regarding the use of in-network vs. out-of-network care that must be followed in order to ensure that services are covered.
Other Insurance Pitfalls
Some doctors’ offices will help consumers navigate through the insurance maze to determine coverage. However, as the consumer, it’s always wise to speak directly with the insurance company to validate that a procedure is covered. Frustratingly, insurance companies will sometimes decline to speak with an insured member and speak only with a physician’s office. But persistence generally pays off.
There are many other pitfalls of insurance coverage consumers need to be aware of. Some of the most common are:
Pre-approval: Many insurance plans require pre-approval or prior authorization for certain healthcare services, such as surgeries or hospital stays. You or your doctor must contact the insurer before you receive care to get authorization; if you don’t, the service may not be covered by your insurance.
In-network vs. out-of-network: Many insurance plans, such as health maintenance organizations (HMOs), are designed with in-network doctors and facilities. These in-network providers often have a contract negotiated with the insurance company to pay an agreed-upon price for various services. It’s also important to ensure that all components for a procedure are covered. Check, for example, that not only a surgeon and the hospital are in-network, but also the anesthesiologist. And make sure tests are sent to an in-network or preferred lab.
Prescription drug costs: The cost and coverage of prescription drugs vary, depending on a plan’s formulary. The formulary, typically found on a health insurer’s website, details cheaper drugs via their tier status (prices go up from tier 1 to tier 3—and sometimes tier 4), substitutes, or generic versions of the drugs. Also, some specialty drugs, such as injectable drugs, may require additional pre-approval before an insurance company will pay for them.
The Bottom Line
Understanding and working within the guidelines of health insurance is complex. Many companies provide members with access to a vast amount of information on secure websites. This information can help members select a doctor or facility, review the drug formulary, and learn other key information. But to understand what is a covered benefit, having a live discussion with an insurance representative is the best course of action. As higher percentages of healthcare costs are being pushed to insurance plan members, more and more of the “shopping” decision should also be made by members.
Insurance for Diabetics
Having good health insurance coverage is important. Especially if you have diabetes. The Centers for Disease Control and Prevention (CDC) estimates that medical expenses for people with diabetes are 2.3 times higher than people without diabetes. So finding good health insurance is key to managing and treating this chronic disease.
Luckily, the Affordable Care Act, has given diabetics greater access to cheaper, preventative health care plans, including Medicare and Medicaid, which have made it easier to get consistent treatment and support for managing Type 2 diabetes conditions and preventing the disease altogether.
Here are some tips to get the best coverage, and what to look for when evaluating plans for diabetes.
Where to Get Health Insurance if You Have Diabetes?
Diabetes should not prevent you from getting good health insurance coverage available in health care marketplace. You cannot be denied coverage due to a pre-existing condition like diabetes.
As a diabetic, you will need to research the best health insurance options and prices. Some places where you can check for coverage are:
Diabetics (and pre-diabetics) who want to buy health insurance or change marketplace plans must wait for the annual open enrollment period in the fall to sign up for the best coverage options available.
If you have been recently diagnosed with diabetes, then you may want to take some time to review your health insurance plan to see if it covers essential supplies like test strips, meters and insulin, as well as any other medications and educational resources that will help you manage, prevent, and treat diabetes.
Policyholders with changes in personal situations—including job loss, child birth, or marriage—may qualify for the special enrollment period. Medicaid and CHIP programs are also available throughout the year (you will need to check requirements since they change from state to state). And, if you missed the open enrollment deadline, and don’t qualify for Medicaid or CHIP, you can look into short-term health plans sold outside the marketplace, which may be available throughout the year.
When contacting the marketplace, if you need help understanding your options, you can request the assistance of a “Navigator” who may be able to provide you with free assistance to understand your options and coverages.
Tips to Get the Best Health Insurance for Diabetics
When looking at your health insurance plan and shopping for the best options, be sure and ask about the coverage that’s included for:
Diabetes supplies coverage
Prescription drug coverage and limitations
Counseling or preventative care services available in your plan
What your co-pay or health insurance deductible is
There are many categories of supplies and services. Consider making a checklist when comparing different health insurance plans. You may also want to know more about:
Labs (you may find this under the section of coverage for “lab-testing”)
Look up the definitions and coverages in the “durable medical equipment” section of your policy. This may list information on medical devices and testing supplies. However, all the information may not be under this section, which is why it is important to ask about the coverages specifically before committing to a policy.
In-network or out-of-network coverage where applicable
Prescription Drug Assistance for People With Diabetes
In addition to using your health insurance to help cover costs of your prescription drugs, many pharmaceutical companies also offer deals on the cost of prescription drugs themselves. Ask your pharmacist about discount plans or rebates for prescriptions. And check other pharmacies to see if they have better deals with manufacturers.
Diabetics should also check their monthly insurance premiums, copay and coinsurance rate, and make sure that preferred doctors are in-network, and that specific drugs are covered.
Save Money by Coordinating Benefits With Your Spouse
Diabetics can also maximize health insurance coverage by coordinating health insurance with their spouse to combine the benefits of two plans and reduce out of pocket costs. The way the coordination of benefits works, one plan can be designated as the primary health insurance, and the other will act as a secondary insurance.
The Bottom Line
Understanding your medical bills, finding the best prices, and trying to cut down on prescription drug costs can be complicated in the best of circumstances. But when you have additional expenses due to diabetes, this can be overwhelming.
According to the American Diabetes Association, people diagnosed with diabetes average $16,750 in medical costs per year. Approximately $9,600 of those costs are diabetes-related.
So whether you have family members with diabetes, or have diabetes yourself, taking the time to evaluate your health insurance coverage will help you get the best coverage, and save money to avoid unnecessary medical debt.
Everyone who drives needs car insurance. In fact, most states require it by law. When you buy car insurance, you are buying what is called a policy. Your policy is based on a variety of factors including what kind of car you drive as well as what kind of insurance you want. Auto insurance policies are actually a package of different types of insurance coverage.
The first step in understanding an auto insurance policy is to learn the various types of coverage insurance companies offer. Some of this coverage may be required by your state and some of the coverage may be optional.
Liability – This coverage pays for accidental bodily injury and property damages to others. Injury damages include medical expenses, pain and suffering and lost wages. Property damage includes damaged property and automobiles. This coverage also pays defense and court costs. State laws determine how much liability coverage you must purchase, but you can always get more coverage than your state requires.
Collision – This coverage pays for damages to your vehicle caused by collision with another vehicle or object.
Comprehensive – This coverage pays for loss or damage to the insured vehicle that doesn’t occur in an auto accident. The types of damages comprehensive insurance covers include loss caused by fire, wind, hail, flood, vandalism or theft.
Medical Coverage – Pays medical expenses regardless of fault when the expenses are caused by an auto accident.
PIP – Personal Injury Protection (PIP) is required in some states. This coverage pays medical expenses for the insured driver, regardless of fault, for treatment due to an auto accident.
Uninsured Motorist – Pays your car’s damages when an auto accident is caused by a driver who doesn’t have liability insurance.
Underinsured Motorist – Pays your car’s damages when an auto accident is caused by someone who has insufficient liability insurance.
Rental Reimbursement – This type of coverage will pay for a rental car if your car is damaged due to an auto accident. Often this coverage has a daily allowance for a rental car.
Many insurance policies combine a number of these types of coverage. The first step in choosing the insurance you want for your car is to know the laws in your state. This will tell you the minimum insurance you need for your car. It’s good to keep in mind that, just because your state may not require extensive insurance, extra coverage may be worth the expense. After all, no one wants to be stuck with thousands of dollars worth of bills because of an auto accident.
Now, let’s take a look at how to determine your insurance needs.
Just because your state requires a minimum amount of insurance doesn’t mean that’s exactly what you should purchase. In fact, most motorists purchase more coverage than their state requires so that they are covered for a variety of problems — not simply a fender bender. In order to better determine your auto insurance needs, consider these five guidelines:
Know Your State Laws
Remember that forty-seven states require that you purchase liability insurance. Liability insurance is what pays for bodily injury and property damage that you cause another driver. Fifteen states including Florida, Maryland, Michigan, Massachusetts, New York and New Jersey also require that you buy Personal Injury Protection (PIP). This coverage pays for your medical expenses and lost wages in the event of an auto accident. Your insurance minimum will most likely be determined by state law, but many people are encouraged to purchase more than is required.
Know Your Options
There are a lot of car insurance options; but knowing what you most likely will need is the key to making sure you are appropriately covered. Do you want coverage for a rental car if your car is damaged? Do you want an extended warranty to pay for parts and labor if your car breaks down? If your car is leased, you will probably need gap insurance which pays for the difference between what your insurer pays and what you owe on your lease if the car is completely totaled.
Know How Much Money You Want to Spend
If you know your state laws and have examined your personal needs, now you can put together the different pieces of auto insurance coverage in one total policy. The first piece of the policy is almost always liability insurance. If you only have minimum liability coverage and you injure someone, their attorney can go after your personal assets. So, you need to know your assets and what you can afford to lose in the event of an accident. Many insurers feel that minimum liability is a gamble. In fact, that is why it is often only a little more money for more protection. After all, if you do get into an accident, it is much better for the insurance company to be responsible than for you to be personally responsible. Remember to run through various scenarios such as if I totaled someone else’s car, will my insurance cover it? How much will I have to pay out of my own pocket? The answers to these types of questions will determine what coverage makes you feel most confident should an accident happen.
Know Your Vehicle
If your car was totaled, would you be able to afford to replace it? If not, you will want comprehensive and collision coverage. The decision to buy this coverage is usually based on the value of your car. Guidelines usually suggest that if your car is worth less than $2,000, it won’t be worth it to buy comprehensive and collision. If you own a $50,000 car though, it would most certainly be worth it to pay an extra $200 annually or so to insure that your car will be replaced if you get in a serious accident.
Know About Your Other Insurance
Many people don’t realize that other types of insurance including health insurance and homeowners insurance may pay for damages due to an auto accident. For instance, if you have comprehensive health coverage, you probably won’t need more than the minimum required Personal Injury Protection (PIP). Make sure you know what insurance coverage you already have so that you don’t purchase unnecessary coverage.
The best way to figure out your own auto insurance needs is to examine potential policies and know how much you are willing to gamble. For instance, it may not be worth it to you to purchase collision insurance if your car is not incredibly valuable and would therefore cost less to fix than to keep insured. Auto insurance is simply about how much you are willing to pay out of your own pocket versus how much you want the insurance company to cover. Once you decide this, you’re all set to purchase your auto insurance policy.
There are several factors that affect the price of auto insurance. Of course, prices vary by company and you should compare prices thoroughly before you purchase a policy. The first thing that affects your policy’s price is, of course, what kind of car you drive. For instance, a sports car costs more to insure than a family sedan. If you purchase a vehicle that has a high theft rate, your coverage will probably be more expensive. Essentially, though, your coverage will be based on the value of your car.
Another factor that affects auto insurance costs is where you live. If you live in an area where there is a high occurrence of accidents or vandalism, insurance will cost more money. For instance, since more cars are damaged in urban areas than in rural areas, you will probably pay more for insurance if you live in a city.
How often you drive will also affect your insurance costs. The more you drive, the higher the chances you will be an accident. Drivers who have long-distance commutes will pay more than people who live near their workplace. Meanwhile, if you only use your car on weekends, your insurance rates should be lower than someone who commutes to work daily.
The final factors that affect the price of auto insurance have to do with who you are. Your age, sex, marital status and driving record are all taken into account when you buy an insurance policy. Accident rates are higher for drivers under the age of 25, so if you are young, expect to pay a little more. Also, accident rates are higher for young males and single males. It doesn’t seem fair, but if you are an unmarried 19-year-old male, your insurance rates will definitely be affected. If your driving record is impeccable, though, your rates will be lower. Obviously, drivers who are prone to traffic violations or accidents will have to pay more for insurance than safe drivers.
If these cost factors are beginning to scare you, don’t worry. There are several ways to keep your insurance rates down.
There are four main factors that can keep auto insurance rates down. See if you fall into any of the following categories. If you do, you may be able to save money on your car insurance regardless of the value of your automobile.
If you are looking to buy a car, consider buying a car that “looks good” to insurance companies. For instance, insurance companies know what kinds of cars are prone to problems. They also know what kinds of cars are most often stolen. If you haven’t purchased your car yet, find out what cars make this “good list” among auto insurers.
Most insurance companies offer discounts for a variety of reasons – for example, good students, having more than one car insured and accident-free driving are all worth a discount. Ask insurance companies about specific discounts that may be available to you.
Consider carpooling or using public transportation to get to work. The less you use your car, the less your insurance will cost you.
Finally, drive carefully! Insurance companies are not happy to insure accident-prone drivers, so the safer you drive, the less you will have to pay for auto insurance.
Remember, don’t be afraid to ask your insurance company about any discounts they offer – it could save you a little cash.
Purchasing auto insurance is not simply about the value of your car or how often you get into accidents, it is also about how much money you are willing to pay for your coverage. All auto insurance policies have a deductible. The deductible is the part of your policy that you are responsible for paying. Auto insurance policies don’t simply take care of all necessary expenses. You are required to pay for some of the damages, but the amount depends on your policy. Deductibles vary by state, but are most often in amounts of $100, $250, $500 or $1,000. For example, if you are in an accident that causes $2,500 worth of damage and your deductible is $500, you are required to pay the $500 and the insurance company will take care of the remaining $2,000.
When deciding what insurance policy you want to purchase, choosing a deductible is an important step. After all, you will have to pay the deductible for each and every situation in which you require your insurance company to cover damages. Deciding how much you are willing to pay and how often you think you will need to make an insurance claim will help you decide what deductible amount is right for you. In addition, the premium you pay, or the price of your total coverage annually, can be lowered by choosing a higher deductible. In other words, if you are willing to pay higher out-of-pocket costs, you can lower the total cost of your insurance.
Purchasing an auto insurance policy doesn’t have to be confusing. You want a policy to take care of your expenses in the event of accident, theft, vandalism or most any other instance in which there is damage to your own or someone else’s vehicle. By knowing what your state requires, what your needs are, what discounts you qualify for and how much coverage you want for your car, you will be able to choose the right policy.
For more information on car insurance and related topics, check out the links on the following page.
AUTO INSURANCE GLOSSARY
Deductible – The amount an insured person must pay before the insurance company pays the remainder of each covered loss, up to the policy limits.
Multi-Car discount – A discount offered by some insurance companies for those with more than one vehicle insured on the same policy.
No-Fault Insurance – Many states have enacted auto accident laws permitting auto accident victims to collect directly from their own insurance companies for medical and hospital expenses regardless of who was at fault in the accident. Although there are many legal variations of no-fault insurance, most states still allow people to sue the party at fault if the amount of damages is above a certain state-determined amount.
Personal Auto Policy – The most common auto insurance policy sold today. Often referred to as “PAP,” this policy is written in simple wording and provides coverage for liability, medical payments, uninsured/underinsured motorist coverage, and physical damage protection
Split Limit – Any insurance coverage with separately stated limits for different types of coverage.
Term – The length of time for which a policy is in effect.
Usage – This refers to the primary function or purpose of your vehicle. For example, if you primarily drive your car to and from work, the usage is considered “commute.”
Life is one big question mark: Will you be happy? Will you find love? Will you star in a reality TV show? Who knows? The only thing we can be sure of in life is that someday it will end. When, where and how are yet to be played out.
Your hope is that you die old and wealthy, able to leave your children enough money in your will to give them a head start on a successful life. But things don’t always work out that way. You could cross the street tomorrow and get run over by a pack of wild Segways.
Sure, it’s a morbid thought, but it makes you wonder how your family would get by without you. Would they have enough money to keep the house? Could the kids pay their own way through college? Would your wife have to cash in your stamp collection?
Life insurance should really be called “death insurance.” Like other types of insurance, life insurance is protection against the unknown. When you buy life insurance, you’re paying for the peace of mind that your family will be taken care of in the event of your sudden demise. Life insurance is the life jacket in the fishing boat, the air bag in the car. You hope to never have to use it, but it’s nice to know it’s there.
Some people call life insurance gambling. They think that you’re throwing away a bunch of money on the off chance that you’ll die young. But when life insurance is handled correctly, it isn’t gambling at all. It’s simply part of a larger economic plan whose goal is the financial security of your family.
So what is the best type of life insurance to buy and how much coverage do you need? If you don’t have any kids, do you even need life insurance? Keep reading to find the answers to these questions and more!
People buy life insurance to provide money for their families if they die young. When you buy a life insurance policy, you pay a monthly, quarterly or annual premium for the term of the policy. The term can be as short as one year or as long as a lifetime. If you die within the term of your policy, your beneficiary will receive a fixed amount of money.
The earliest records of life insurance come from ancient Rome, where burial clubs pooled money among the poor to pay for members’ funerals [source: Imber]. Beginning in the Middle Ages, life insurance was dominated by fraternal and religious organizations, labor guilds, and mutual life insurance companies. Similar to credit unions, mutual life insurance companies are owned by the members, who share in any profits. In the late 17th century, astronomer Edmond Halley (yes, the comet guy) came up with the first actuarial tables for calculating the risk of insuring an individual based on mortality statistics [source: Warren]. The higher the risk, the higher the premium.
Risk calculation is still a big part of the life insurance business. When you apply for a life insurance policy, you’ll be asked to fill out a full medical history (including your family medical history). You’ll also be asked questions about your lifestyle and hobbies, your credit history, your driving record and your travel habits [source: SmartMoney.com]. All of this information is used by insurance actuaries to figure out how much they should charge you for a life insurance policy, or if they should deny you a policy altogether.
The most important factors that affect the price of life insurance premiums are age, sex and pre-existing medical conditions. Older people will generally pay more for a life insurance policy, as will men. Heart conditions, high blood pressure, mental illness, or a strong family history of heart disease or cancer will raise your insurance premiums. Insurance companies also offer higher rates to people who participate in “dangerous” hobbies like skydiving or scuba diving. Smokers can expect to pay rates that are twice as high as non-smokers [source: SmartMoney.com].
To collect on a life insurance policy, a surviving family member must fill out an official claim. Usually, he or she will also have to provide a certified death certificate that states the date, location and cause of death. In some cases, he or she will also be asked for original copies of the insurance policy. Once approved, the claim is settled with one lump sum payment to the person indicated in the policy as the beneficiary.
Unfortunately, life insurance claims can also be denied. Many life insurance policies don’t cover suicide. If an insurance company suspects that a claim is fraudulent, it will investigate it fully. If it finds that the claimant lied about the cause of death, or that the policyholder neglected to mention pre-existing medical conditions or dangerous hobbies, it could deny payment.
But does everyone need life insurance? And what are the best times to buy a policy? Read on to learn more
Not everyone needs life insurance. The general rule is that you only need life insurance if you have dependents. Typically, dependents are children who still live at home or have yet to graduate from college. But a dependent could be anyone who is financially dependent on you, like a spouse, sibling or an aging parent.
Life insurance is generally designed for younger, working people with families. Here’s why: Life insurance is meant to replace your “value” to your family once you’re gone. For a working parent, a big part of that value is your salary. If you die, you’ll want your family to receive enough money to replace your salary for at least the next five to seven years [source: Money.com].
Even if you’re a stay-at-home parent, you still have financial value to your family. Let’s say you care for two small children. If you die, then your spouse will need to keep working, which means the kids will need a nanny or day care. You might not need a huge life insurance policy, but you can buy a policy that fits the financial needs of your family.
Some people buy life insurance policies when they get married, particularly if the insured person makes considerably more money that the spouse, or if either the insured or the spouse have other financial dependents, like parents or siblings. Most people buy life insurance when they get pregnant with their first child.
Once you’ve reached retirement age, there’s less of a need for life insurance. Now your children are most likely financially independent and you’re already living on retirement savings and investment income. One reason for an older person to keep a life insurance policy is to provide extra money for his or her spouse to cover unexpected medical and long-term care expenses later in life.
Some older people hold onto life insurance policies as a way to pay for “end of life” expenses like the cost of settling an estate. But the most basic reason for retaining a life insurance policy later in life is also the oldest reason: to cover the cost of your funeral and burial.
Another reason to buy life insurance to is to pay for a particular expense. If you buy a home, it’s common to sign up for a 30-year mortgage. But what if you die in 10 years? There are special life insurance policies that are tied directly to mortgages, decreasing in value as you continue to pay off the mortgage debt.
A less common reason to buy life insurance has to do with business rather than family. Let’s say you’re a partner in a small business and the success of the business relies significantly on your ability to bring in clients and money. Some people buy life insurance policies that name their business partner as the beneficiary. This chunk of cash could help the business stay afloat while they learn to get along without you.
So now you have a better idea of who needs life insurance. But what type of life insurance policy should you buy? Are they strictly for emergencies or can they also be reliable investment tools? We’ll talk about all of the different types of life insurance in the next section.
The most basic type of life insurance is term life insurance. Term life insurance policies cover the policyholder for a set number of years, anywhere from 1 to 30. For younger, healthy people, term life insurance is the least expensive option. You pay relatively low rates for a fixed number of years with a high level of coverage.
Something to consider if you choose term life is that the premium is only fixed for the length of the policy. If the policy expires and you want to renew, you’ll pay a higher premium because you’re older now, and maybe less healthy. Term life policies have no cash value of their own. They don’t accrue interest and you can’t borrow money against them. Basically, they’re “pure” insurance products. If you don’t die, you can’t collect.
All of the other types of life insurance fall under the heading of permanent life insurance. As the name implies, the policy is good from the day you buy it until the day you die, no matter when you die. Permanent life policies can either have a fixed or flexible premium.
The biggest difference between term and permanent life policies is that permanent policies include a cash value component. This means that the insurance company invests your premium payments to build up cash reserves in your account. The advantage of permanent life is that you aren’t taxed on investment earnings until you cash in the policy, and you can borrow from your cash reserves tax-free. The disadvantage is that premiums are much higher than term life policies and investment performance can be volatile.
There are several different types of permanent life policies:
Whole Life is the most basic permanent life insurance policy with a fixed premium. It has a savings component that earns cash value, but the policyholder has no control over how or where the money is invested.
Universal Life allows the policyholder to shift funds between the insurance and savings components of the policy, even using savings to make premium payments. Premium rates are also flexible.
Variable Life gives the policyholder control over where his or her savings are invested (stocks, bonds, mutual funds, etc.). The rate of return on investments not only affects the cash value of the policy, but increases or decreases the amount of the final death benefit. Premiums with this policy are fixed.
Universal Variable Life combines the flexibility of universal life with the investment control of variable life. Premiums are flexible and the amount of the final death benefit and cash value depend on the performance of investments.
So how much life insurance do you really need? And for how long do you need it? Find out in the next section.
HOW LIFE INSURANCE COMPANIES MAKE MONEY
At first, it doesn’t make any sense. How can a life insurance company make money if I pay $1,000 a year for 60 years ($60,000), and after I die they pay my wife $500,000? Don’t worry about the insurance companies. They’ve done their math.
First of all, insurance companies know that relatively few people actually cash in on their life insurance policies. Even people who sign up for permanent life insurance often decide to cancel the policy later in life. If you cancel a policy, you’re only entitled to the cash value component of the policy minus a steep early termination fee.
Most importantly, insurance companies don’t simply stick your premium payments in the bank. They invest all of that money in stocks, bonds and other interest-bearing accounts. When the markets plummet, insurance companies take a hit, but with billions of dollars in earnings each quarter, they’re doing just fine [source: Seeking Alpha].
Life insurance is just one part of a larger financial plan. How much life insurance you buy depends on the specific financial needs and circumstances of your family. How many kids do you have? Do you plan on paying for their college education? How big is your mortgage? What other debts do you have?
The trick is to strike a balance between being over-insured and under-insured. Paying too much in premiums can be just as damaging to your overall financial plan as paying too little [source: California Department of Insurance].
The easiest way to think about life insurance is as income replacement. The first step is to figure out exactly how much income you provide to your family. This is not simply your salary. You have to subtract income tax and the amount of money that you spend on personal expenses like clothing, food, travel, memberships, etc. What’s left is the real amount of money that you contribute to the family.
The next step is to figure out how long you’re going to need to replace your income. As a general rule, you only need life insurance until your dependent children are out of the house or until your retirement savings kick in. So if you’re 30 years old, you might want a policy that covers you for the next 30 years. Take your adjusted annual income and multiply it by 30 years. That’s the amount of coverage you need. This amount is also called the face value or death benefit of a life insurance policy.
But remember that the amount of life insurance you buy needs to fit within your budget. There’s no point in buying a policy with a high face value if you can’t afford the premium payments. At some point, you’ll default on your payments and the policy will be canceled.
If you can afford to pay a higher premium, though, you should think about purchasing a plan that will cover major life expenses like paying for your kids’ college education and covering the mortgage. Then there are other possible expenses, like taking care of aging parents or childcare costs if you’re the primary caregiver for the children.
If you start adding it all up, it may seem like a lot of money. But once again, you need to strike a balance. If your life insurance premiums prevent you from paying back high interest debt like credit cards, then you’re paying too much. For most people, the idea of life insurance isn’t to set up your family for life, but to help them get through the first five to 10 years after your tragic loss. That’s why some experts fall back on the old life insurance rule of thumb: Buy enough to replace your salary for five to seven years.
So where should you buy life insurance anyway? From a pushy door-to-door insurance salesperson? And how do you avoid paying for something you really don’t need? Read our life insurance shopping tips in the next section.
The first life insurance shopping tip is to buy when you’re young and healthy. But don’t buy insurance too young. Wait until you have your first dependent. Young, healthy people pay much lower premiums, so look for a policy that has a fixed premium for the length of the policy.
Now what about those pesky life insurance salespeople? Insurance salespeople, like car salespeople, get a bad rap because their income depends on commissions. Naturally, it’s in the salesperson’s best interest to leave out any bothersome details that might prevent you from buying the most expensive product. That said, a good insurance salesperson can help tailor a policy that’s exactly right for your needs. But it certainly pays to be an educated consumer.
Think hard before you buy a permanent life insurance policy. Insurance salespeople push whole life and other cash-value policies because they’re big moneymakers for the insurance company and for the salesperson. If you buy a permanent life policy, as much as 80 percent of your first year of premium payments will go straight to the salesperson’s commission. With a term life policy, he or she’ll only get 10 percent [source: Money.com].
The truth is that most people don’t need permanent life insurance policies. They only need to replace their income until they’ve reached retirement age or their dependents are old enough to take care of themselves.
Insurance agents try to sell permanent life policies as investment vehicles and important cash reserves for low-interest loans. The problem with this argument is that there are many other tax-deferred investment instruments out there that have lower commissions and greater flexibility than permanent life insurance. IRAs and 401(k)s protect earnings from taxes, charge tiny commissions and allow account holders complete control over their investments. To have that kind of flexibility and control with a permanent life insurance policy, you’d need to buy a universal variable policy, which charges high premiums and high commissions.
The idea of borrowing money from the cash value of your insurance policy also sounds attractive. But first consider your credit history and the likelihood of accruing more debt. If you have a good credit score, you can get low-interest loans from banks and other lenders. And if you default, you won’t eat up your life insurance death benefit (the main reason you bought the policy in the first place). But if you have a bad credit history, and there’s a good chance that you’ll be taking on even more debt, then the interest rates offered by a life insurance policy might be attractive.
Also make sure that you’re aware of the consequences for canceling an existing life insurance policy and buying a new one. Some policies charge expensive early termination fees, and you may be subject to additional “start-up costs” to activate the new policy. If you bought your existing policy when you were young, then you’re surrendering a relatively low fixed premium. Sometimes there are waiting periods before you can access cash reserves in a new policy, and there can also be tax consequences for switching policies. Bottom line: Speak with a representative of your existing company before signing up with a new one.
The Web can be a great resource for shopping for life insurance. Sites like Insure.com let you fill out a questionnaire about your insurance needs and compare prices from many vendors. Look for companies that are highly rated by an independent institution like Standard and Poor’s and A.M. Best [source: Money.com].
For even more information on insurance, financial planning and related topics, investigate the links below.
Bradford, Stacey L. “A Matter of Lifestyle” SmartMoney.com. June 9, 2006 http://www.smartmoney.com/insurance/life/index.cfm?story=20020726
“Buying Life Insurance: What Kind and How Much?” Yahoo! Finance. http://finance.yahoo.com/how-to-guide/insurance/12823
“Consumers: Life Insurance and Annuities.” California Department of Insurance. May 2005. http://www.insurance.ca.gov/0100-consumers/0060-information-guides/0020-life/life-insurance.cfm#Defining%20Your%20Needs
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