How much life insurance should you own?

Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings. However, there are other things to consider when determining how much life insurance you need. Important factors include: income sources (and amounts) other than salary/earnings; whether or not you’re married and, if so, your spouse’s earning capacity; the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. Talk to an insurance adviser for a precise calculation of how much life insurance you need.

Should I buy term insurance or cash value life insurance?

Term life insurance pays out in the event of death. Cash value, which is more costly, has a cash amount you can withdraw before death. Which one is for you will depend on your circumstances. First answer an insurance question – how much life insurance should you buy? Then look at the financial aspect – what type of policy should you buy? The amount of life insurance you need may be so large that the only way you can afford it is by buying term insurance, which carries a lower premium than cash value policies. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, you can consider the financial decision – which type of policy to buy. Important factors affecting the financial decision include your income tax bracket, whether the need for life insurance is short-term or long-term (20 years or longer is long-term), and the rate of return on alternative investments. If you view life insurance as an investment, you’ll want to study rates of returns. If it’s protection, then your purchase is a matter of what you can afford and want to spend.

How does mortgage protection term insurance differ from other types of term life insurance?

The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies generally cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit decreases, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage–for example, a 20-year mortgage protection policy might require that premiums be paid over the first 17 years.

How is universal life insurance different from traditional whole life insurance?

Both traditional whole life (WL) and universal life (UL) products are examples of cash-value life insurance. But there are several important differences between them. One relates to product transparency. In UL policies, it’s easy to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other. Another difference is that unlike whole life policies, universal life policy returns were freed from long-term, fixed-rate contracts and replaced with policies whose returns were tied to short-term interest rates and periodically adjusted. After the initial payment, universal life allows you to pay premiums anytime, in virtually any amount, subject to certain minimums and maximums. You can also reduce or increase the amount of the death benefit more easily than under a traditional whole life policy.

Which type of cash value life insurance policy, universal life (UL) or participating whole life (WL), is a “better buy” financially?

There’s no simple answer to this. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one that reveals the most favorable interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value product being offered is UL or WL. You and your adviser should carefully examine the financial aspects of each product under consideration

What are the principal types of medical expense insurance coverage?

Medical expense insurance is broadly classified into two principal types of coverage: base (or basic) plans and major medical plans. Base plans generally consist of either hospital expense coverage, surgical expense coverage, or both. Basic hospital and surgical expense plans generally provide coverage on a first-dollar basis (i.e., no deductible) and provide 100 percent reimbursement of covered expenses, up to a relatively low maximum of $10,000, $25,000, $50,000 or $100,000. Major medical plans, in contrast, apply a deductible to initial expenses, generally ranging from $100 to $500 per calendar year. After the deductible is satisfied, major medical plans typically reimburse 80 percent of eligible expenses up to a relatively high maximum, e.g., $500,000 or $1,000,000. Some major medical plans reimburse eligible expenses at 70 percent; some plans also provide unlimited lifetime benefits. Major medical plans typically cover a broad list of medical expenditures, including hospital expense, surgical expense, physician (non-surgical) expense, private duty nursing, diagnostic X-ray and laboratory services, prescription drug expense, artificial limbs and organs, ambulance services, and many other types of medical expenses when prescribed by a duly licensed physician. Thus, in comparison with basic plans, major medical plans provide much broader coverage, with higher limits, but these plans require the insured to share in the cost of medical care through deductibles and coinsurance (i.e., 20 or 30 percent of eligible expenses above a deductible amount).

Even though major medical plans provide broad coverage, insureds still incur certain “out-of-pocket” costs. What are these costs?

An insured’s “out-of-pocket” costs under major medical expense plans include the deductible, cost-sharing amounts arising from the operation of the coinsurance clause, and medical expenditures that are deemed by the plan to be in excess of “reasonable and customary” charges. Only charges that are “reasonable and customary” for a specific type of service, in a particular location or geographic area, are eligible for reimbursement under medical expense plans. The definition of “reasonable and customary” may vary somewhat from one medical expense plan to another.

What is the coinsurance clause in medical expense plans and how does it work?

Coinsurance, sometimes called “percentage participation,” requires the insured to share in the cost of medical care. Under an 80/20 coinsurance provision, the medical expense plan pays 80 percent of eligible medical charges above any deductible. The insured is required to pay the remaining 20 percent. Other coinsurance arrangements, e.g., 70/30 or 90/10, are sometimes used. In the event of large or catastrophic medical expenses, an insured might suffer severe financial hardship due to the operation of the coinsurance clause. To compensate for this possibility, many major medical expense plans contain a coinsurance cap, or stop-loss limit. This provision places a limit on the insured’s out-of-pocket costs in a given year arising from the operation of the coinsurance clause. The size of the coinsurance cap generally ranges from $2,000 to $3,000, depending on the plan, although limits as low as $1,000 are sometimes used. Once the coinsurance cap has been reached, all eligible expenses above this amount are paid in full, up to the plan’s overall limit of coverage.

What is the difference between coinsurance and copayment?

On occasion, these terms have been used interchangeably. However, it is preferable to define the two terms differently, despite their similarity of purpose. Under a copayment or copay provision, the insured usually is required to pay a set or fixed dollar amount (e.g., $3, $5, or $10) each time a particular medical service is used. Copay provisions are frequently found in medical plans offered by health maintenance organizations (HMOs) where a nominal copayment is applied to each office visit and to each prescription that is filled.

What is a preexisting conditions clause and what is the effect of its inclusion in major medical expense plans?

A preexisting condition is often defined as a medical condition (i.e., an injury or illness) that required treatment during a prescribed period of time, e.g., 3 or 6 months, prior to the insured’s effective date of coverage under the major medical expense plan. Sometimes, a preexisting condition is defined to include medical conditions that were known to the insured, even though no treatment was provided during the prescribed period. A preexisting conditions clause excludes coverage for preexisting conditions for possibly as long as 12 months after the effective date of coverage. Because the definition of a preexisting condition, and the provisions of the clause itself, may differ considerably from one plan to another, it is recommended that newly insured individuals (and prospective insureds) completely familiarize themselves with this policy provision.

How does the medical expense coverage offered by Health Maintenance Organizations (HMOs) differ from the coverage provided under basic and major medical expense plans?

Basic and major medical expense plans are generally classified as indemnity contracts. These plans indemnify, or reimburse, the insured for medical expenses incurred and typically require the completion and filing of claim forms. In addition, these plans usually contain deductible and coinsurance cost sharing provisions and may restrict coverage for certain types of medical care expenditures. Indemnity plans, however, provide the insured with substantial freedom relative to the choice of physician, including whether a primary care physician or a specialist will be seen. In contrast, HMO coverage emphasizes comprehensive (including preventive) care and typically contains very few exclusions, no (or small) deductibles, and nominal copayments. However, there is much less freedom of choice of physician under traditional HMO coverage since the patient is typically required to be under the care of a primary care physician who serves as a “gatekeeper.” In this role the primary care physician determines whether the services of a specialist are needed, in addition to determining what other medical services are required for treatment. Some HMOs today offer a point-of-service option, whereby patients may opt for indemnity type coverage (with a deductible and coinsurance) when they desire medical treatment outside the HMO network.