Understanding Health Insurance Coverage and Risk Management

Types of Coverage

Basic Health Care Coverage.

• Hospital insurance: Pays for the cost of room and board and other medical expenses while you are in the hospital
• Surgical insurance: Covers the fees associated with the operating surgeon and anesthesiologist
• Medical insurance: Provides payments for general nonsurgical physician care at the office or hospital

Major Medical Coverage. This type of insurance provides protection after limits on basic health care coverage have been exceeded. Most policies have a coinsurance clause with:

• 80% of the covered expenses paid by the insurer
• 20% of the covered expenses paid by the insured

Long-Term Care Coverage. If you are unable to take care of yourself:

• Nursing or rehabilitative care at home
• Stay in a skilled nursing home

Dental Insurance. It typically covers most preventive care costs with coinsurance responsibility on corrective treatments.

Specific Disease and Accident Insurance. This type of insurance only pays under specific circumstances and for certain diseases. Therefore, it is risky coverage to purchase. Typically, it is very high-cost insurance that is inconsistent with financial planning objectives.

Terms of Coverage

• Preexisting conditions clause:
  • Excludes coverage for certain conditions that existed before the policy was issued
  • This clause is a common reason for denying payment.
• Guaranteed renewability:
  • Guarantees coverage up to a specified age upon payment of premiums
• Policy Limits:
  • Limits the payout for a given illness or accident with a lifetime or annual maximum
• Waiver of Premium:
  • Waives your premium should you be unable to work because of illness or injury
• Exclusions:
  • Excludes certain illnesses or injury from coverage
  • For example, it excludes coverage for self-inflicted injuries or injuries covered under workers’ compensation

The importance of Health Insurance Coverage In recent years, the price of medical treatment has risen dramatically. A major illness can easily cost tens of thousands of dollars once you consider hospitalization and medical expenses as well as the loss of income while you recover. Therefore, health insurance helps you pay for the costs associated with both routine (such as doctor's office visits and health care screenings) and major medical care so that your financial accomplishments and plans are not seriously damaged or destroyed.

Fundamental Principles of Insurance

• 1) Principle of pooling resources
• 2) Principle of payment of fortuitous losses
• 3) Principle of risk transfer
• 4) Principle of Indemnity

Risk Management

Risk management involves identifying, evaluating, and determining how to handle your risks.

• Risk reduction is reducing the probability of a loss through preventive action.
• Risk avoidance is reducing or eliminating the risk through behavior modification.
• Risk retention is accepting the risk as the least costly and best course of action.
• Risk transfer is eliminating the probability of loss through the purchase of insurance.

The Terminology of Home Owners’ Policies

• Replacement cost: Coverage will pay the amount needed to replace the old item with a new item with no deduction for depreciation
• Actual cash value: Will pay market value, which is equal to replacement cost less depreciation

What is Your Estate?Gross estate—all your property subject to federal estate taxes at your death, both probate and non-probate. Probate estate—all your property that can be transferred by your will (or intestate laws if you have no valid will). Non-probate estate—your property which passes by means other than your will at your death. A will is a written, legal declaration of a person's wishes concerning the disposition of his/her property upon death.