FIN304

• Risk


  Chance of loss from an event that cannot be entirely controlled
• Emergency savings


  At least six months of expenses set aside to cover costs of unexpected expenses
• Insurance


  A financial product purchased by many people facing a similar risk to protect against the risk of larger losses
• Insurance is managed by risk
• Policy


  A contract between the insurance company and the insured that states the exact terms of the policy
• Experts say that buying insurance is buying financial security
• Coverage


  The risks covered and amount of money paid for losses under an insurance policy
• Policyholder


  Person who owns the insurance policy
• Premium


  Money paid to purchase the policy
• How insurance works


  1. 100 people in a health insurance group

  2. 1% chance any one could get sick and require $10,000 in medical care

  3. Each person pays $100 into a "pool" to cover the medical costs of the person who gets sick

  4. 99 people do not collect anything, but gain peace of mind and protection against a large loss
• Benefits of insurance


  • Payments received from an insurance policy can far exceed the premiums paid
  • Provides financial security and peace of mind
• The best outcome is to have insurance but never collect on it
• Types of Insurance


  • Long-term Care
  • Health
  • Disability
  • Life
  • Property & Liability
• Payments received from an insurance policy

  Can far exceed the premiums paid
• Insurance


  Provides financial security and peace of mind
• Types of Insurance


  • Long-term Care
  • Health
  • Disability
  • Life
  • Property & Liability
• Claim


  A formal request to an insurance company asking for a payment when the policyholder has an accident, illness or injury
• Deductible


  The out-of-pocket money paid by the policyholder before an insurance company will cover the remaining costs attributed to the loss
• Co-insurance


  Requires the insured individual to pay a fixed percentage of the loss after the deductible has been paid
• The Insurance Process


  1. Event occurs resulting in loss

  2. Policyholder makes claim to insurance organization

  3. Insurance organization determines if event is covered by policy

  4. If so, policyholder pays a deductible

  5. Remaining amount owed is paid by co-insurance (if applicable)
• Even with insurance, Louise still needs funds to pay the deductible and co-insurance
• Carlos' property and liability insurance policy

  • $500 deductible
  • 0% co-insurance
• Carlos has a property and liability insurance policy with a $500 deductible and 0% co-insurance
• Carlos' car costs $3,288
• Carlos pays $500
• Carlos' insurance organization pays $2,788
• Pros and cons of each health insurance policy

  • Current Policy: Premium amount/month $300, Deductible amount $200, Co-insurance amount 20% owed by policyholder, 80% owed by insurance organization
  • New Policy: Premium amount/month $200, Deductible amount $2000, Co-insurance amount 0% owed by policyholder, 100% owed by insurance organization
• Deductibles and co-insurance


  Place some of the loss on the policyholder to reduce the problem of moral hazard
• Dollars paid from an insurance policy are not intended to make a person better off than before the loss happened
• Sources of insurance

  • Individual
  • Employer
  • Government
• Employer-provided insurance


  • Insurance premiums paid by employer and employee
  • No income taxes paid on the in-kind income
• Employer provided insurance


  Insurance premiums paid by the employer
• Employee benefits


  Products or services that add extra value for employees beyond earned wages
• In-kind income


  The donation of a product or service in place of cash
• Government programs


  • Provide basic insurance as a part of the social safety net to protect citizens from economic hardship
  • Many programs require a work history and employer provided participation to be eligible
  • Can address specific catastrophes
• Government insurance programs


  • Social Security
  • Medicare
  • Medicaid
  • Unemployment insurance
  • Worker's compensation
• Health insurance


  Provides money to pay for health care
• Disability insurance


  Payment to replace earnings during times when workers cannot work due to illness or injury
• Long-term care insurance


  Payment for extended nursing care when a person cannot live independently (but doesn't need to be hospitalized)
• Why are both disability and long-term care insurance important?

  They provide payment when a person cannot work or live independently