Hi. In this section we're going to talk a little bit about different types of insurance products that we'll commonly use to manage risk. Remember we talked about risk management and that insurance was a form of risk sharing and risk transfer. So we're going to explore some of the common mechanisms that we use to help us in our family. The first is going to be protection on ourselves, and that's going to be protecting our earnings power. And this is disability insurance planning. In fact, many of us are more likely to be unable to work for a meaningful amount of time during our working years than most other problems we might have, even more so than dying. So disability insurance is about protecting our on-going earning power during our working years. So some of the basic elements are, is what is disability insurance? Well, to put it bluntly disability insurance really focuses on providing periodic payments, often in the form of a monthly benefit in the event that we become injured or unable to work because of illness as well. This can be for accidents or for accidents and illness, however it's usually not just for illness. So, we'll kind of find the nature of these policies being as such. Most of us tend to get our disability insurance through our employers, but there is the possibility to get also individual insurance through private insurance companies, of course. So usually what we say, is that disability insurance is because we're unable to pursue an occupation. And there are the definitions of what an occupation is, any occupation, your own occupation, can become more and more complex, give, given the different types of policies. And then with disability insurance, one of the interesting things is that rather than having a deductible, the deductible, is really in the form of elimination period. The amount of time that your either injury or illness occurs, before which you can of course receive your benefits. This can be any as low as 30 days up to 90 days, 180 days, and again, the longer your elimination period, typically the lower your premium all things going to be equal. So when we think about disability insurance, so, trying to put this into perspective, the probability of disability at most ages before retirement is greater than the probability of death. Disability then can be sort of one of the interesting things because it could be partial, it could be total. It could be permanent for that matter. And so again, permanent disability can be almost as financially devastating as the death of a breadwinner in a family situation. And again, one of the other types of things we think about is that if this person is a breadwinner, then the income they were bringing in to not just for themselves, but to support their family, is also going to be lost, and further complicates our assessment of how much insurance is needed. And the other side is we're not always going to have an accident at work. So when we say well our employer can take care of that if we get hurt. That type of worker's compensation while being part of this picture is really only applicable when the injury happens at work. So what about short term versus long term disability? Well short term disability is going to usually cover about 60% of a worker's wages for up to two years of an injury or illness. Long term disability starts after that point, after that two year marker, if you will. And is actually going to replace a higher amount, usually 70 to 80% of their pre-disability income, of course. And the distinction, right? Obviously, there's going to be differences in cost. But the other side of it, too, is thinking about the nature of the family, whose involved, how long someone has until retirement. So really trying to decide whether or not to take one or both of these products. So, how much do we need? Well, again, here, the interesting thing is with life insurances, we'll see, it really has a lot to do with how much the family needs. But in disability insurance, we're not only anticipating what the family needed from the income but we're also thinking about how much the breadwinner themselves need. And since they're still around, not only do they have ongoing personal expenses, but they may even also have additional expenses in the form of healthcare costs, rehabilitation costs and other expenses related to. So the income needs can then become pronounced, and we really have to look at this as a monthly need. How much spending do we need to have versus what income is coming in. And we're going to find that when we talk about replacing income through disability or life insurance, we're always looking at what is the ongoing need that the family has for spending and what resources are going to still be in the picture. So for example, if we're thinking of an individual and we say how much income do they need from disability insurance should something happen to them. We not only consider any savings they might have, but more importantly we consider, is there a spouse, and does the spouse have ongoing income that would be part of what's funding those expenses? Someone may be eligible for social security disability benefits as well, and that would kick in after the first fall, five months if someone is deemed to qualify for social security disability benefits. So do we need disability insurance, right? We tend to follow this basic decision tree, then. Taking a look and saying what do we need to do. again, are we more concerned about short term and long term? So, short term policies, do we have enough vacation days to cover up for the first few months? Do we have sick leave? How much is available to us there? So we'll start going through the decision tree and saying do we have short term needs? Do we have long term needs? So long term needs are going to be things related to, again, do we have long term insurance, how much time do we have until retirement, is it a lot more than two years, is it four or five years. Trying to put all of that into perspective there. People can say, well, how do we anticipate whether or not we'll qualify for Social Security? The truth is, you won't know. We don't know what type of injury or illness is going to occur to us, unfortunately, until it does. So it's impossible for us to anticipate absolutely, will we qualify for Social Security Disability benefits? But we'd certainly want to consider that we would apply for them and hopefully obtain them over time. So again, as we kind of walk further and further through the decision tree, again, do we have enough resources? Do we have enough savings? In the short term, in the long term? We may have a enough savings for example to support ourselves for a year or two. From a 401k or other types of savings plans, but we may not have enough to take us all the way until what we had hoped would be retirement. Another side of that is do you want to use your retirement resources in the event of disability? If we use them, there'll be nothing left at that time, either. So this can be a tricky picture and that's why we try and walk you through a decision process to think about short term verses long term needs. Now lets talk about life insurance then for a few moments. Life insurance is similar, we are concerned about replacing someone's income potential. The biggest different is, with life insurance, that person is no longer in the equation after the event. So life insurance is much more about protecting the families ongoing longevity. Protecting their ongoing consumption needs than it is for protecting the individual. So, when we think about then life insurance theres two major types we're going to talk about. The first is going to be term insurance, the second is going to be this lifetime protection. So term insurance, right, and we've often heard this phrase that we buy term, that we invest the difference. Term insurance is typically going to be for fixed amounts of time, it's a pure mortality risk in the sense that all we're really doing is protecting against the fact that we die during that particular time period. It could be one year, it could be five years, it could be ten years. Term insurance can vary. So the premium just goes towards the insurance, and as such, the premium on term insurance is typically lower than lifetime insurance, or what we might think of as whole life and the various other policies. So it can vary length in coverage, and we pay a regular premium for that. So many times term insurance is provided to us through an employer, but we can also obtain it on the private markets as well. Now, lifetime protection, when we think of those types of policies, there's going to be a form of mortality risk, like term insurance. But there's also going to be some form of savings component as well and the premium then is split between what we paid towards the, the life risk or the mortality risk and then to the savings component itself. So as I said the premium will be a little higher as a result. You'll pay this premium forever or until you've paid up enough into it. That you're no longer required to keep making premium payments. Now the interesting thing is that, that cash value and that savings value can eventually become an asset to a family in a time of emergency or of course you know maybe something someone uses to even supplement retirement income down the road but there's a whole set of tax rules of course that'll be associated with that too. So do we need life insurance? Well again, we've got our fancy decision tree here that we can look at. But first of all, let's talk about scenarios that suggest the need for life insurance. So, do we have any dependents that really need our income for ongoing needs. So if something happens to us, are there people that still were depending upon our earnings potential. This could be a spouse. Who, right, was, who we were supporting. This could be children, minors. Or even older family members that were also helping out. Would we like to plan for future expenses. So even if our children, for example, are older, getting ready to finish high school. We did, we want to help them out with college? Were we going to pay as we went during college? Which means, if we're not there, whose going to pay those college bills for them? It's not to say this is what every family has to decide, but these are the considerations we want someone to go through. again, do we need to cover any types of long term care expenses for another person? This could be a dependent family member who may be suffering from any type of illness, either mental in nature or physical in nature. But someone who requires ongoing caregiving. Do we have outstanding debts that we'd really like to wipe out with respect to the family? That's again another piece of the puzzle there that we'd like to have. If we have a substantial mortgage that our surviving spouse would have to struggle to pay on their own income. We might for example consider the amount of the mortgage when we're planning our life insurance needs. Do we need to cover any types of future cases that we might have, estate taxes, inheritance taxes that may come up for family depending upon the size of the wealth that we're leaving behind, of course. And again, we don't currently cover any final expenses. So in other words, we haven't paid for our funerals already. We haven't paid for our plots or any of those other last expenses, which the younger we are the less likely it is that we've done anything about that yet. But on the other hand, those things aren't free so leaving something behind for the family can be beneficial, of course, as well. And then there can be other factors, too. The benefits from the work, savings, other assets, and insurance is not going to be enough to cover those costs. And then lastly, any special needs circumstances simply may have arisen. So as we think about insurance, right? Do we need, do we have dependents? That's one of the first questions that we ask. Right, is there something that you're going to need ongoing support for? Kind of continuing to walk all the way down through the line to get a sense of whether or not you need a particular type of insurance policy or not. Now, if we, one of the tricks that we add onto this decision tree of course is the simple fact that saying, well, do we also need to increase our savings? Do we need to increase our overall level of assets? And that's going to be part of the equation too as we start deciding yes, we need life insurance, more importantly than what type of life insurance product do we want to benefit from. So there's different techniques for this, and we're going to find that if we're working with a financial advisor or an insurance salesperson. We often recommend, we do consider and consult a professional for these. There's just simply different techniques that are going to exist. The human value approach focuses really on the income side of things. How much income is being lost, how much income are we trying to replace? Capital needs analysis, on the other hand, focuses more on meeting a family's economic needs. And so that's going to be something else we consider, too. So these are these main types of approaches and then within those two there's other considerations we make, whether or not we account for inflation, whether or not we want to account for having an inheritance amount left over, whether or not we need to have a build up of other types of savings that we need to have, which this insurance would go towards. So, the need then, actually very fine methods. So depending upon whether or not you use human value of capital needs analysis, you will not arrive at the same answer for how much insurance a family needs to have. So the first thing to know is that in certain circumstances, different methods are going to make more sense. The younger we are, the less capital needs we may understand. We might be thinking more about income replacement. The older we get, the more we'll have clearly defined responsibilities, and identified preferences. Then we're going to be potentially looking at other types of techniques for assessing this. Often times an advisor will use, multiple methods to estimate life insurance. And really kind of triangulate in and say, where are we really falling in? What's the range of expectable insurance based upon the different techniques, that might be employed in exploring life insurance need. Obviously a really hot topic is health insurance, as well. Another important piece. And make sure to check out the video link. So, just to kind of point out a few of these there, right. In general, because of increasing healthcare expenses over many, many years now, we've looked to see that one of the solutions has been this managed care organization. This is really a big type of issue in terms of how it affected how we pay for insurance, and even how insurance, and even how medical decisions are going to reflect in terms of whether or not we go with certain diagnostic procedures or not. So the major types of managed care organizations, HMOs help make those organizations. Preferred provider organizations PPOs. And of course there's still some point of service plans that are available out there as well. So a few key things. The Affordable Care Act right was a game changer on some of this. Number one is that for many individuals there's now an individual mandate. So when we say why spend time talking about health insurance. It's because in general it's a requirement, one of the big challenges that people face were those with pre-existing condition. So for example if you were diabetic and changing jobs, in the past you might've had a challenge then, for your new insurance to pick up expenses related to your diabetes condition. Simply because of that pre-existing clause,. Pre-existing conditions are now no longer a factor. And of course now there's insurance exchanges available for different states so we can go out, price, and look at our different options, even if an employer doesn't provide health care insurance for us. And if we happen to be of lower income or limited resources, there's going to be subsidies available to us. The ACA has a lot of details associated with it but I really wanted to point out these in advance and we've got some read, some adjusted readings on websites to follow up and look and see for more details about the ACA itself. So what type of health insurance do we potentially want? Well some simple questions here too. Do we frequently use medical services? Well yes. OK, well, do we travel a lot? Well, if we do then we might need things like even a point of sale option for us, where networks are not a big issue. If on the other hand we don't travel too frequently, not to say we don't travel at all, then something like an HMO may be a good fit for us having a good cost associated with it. again, a few other types of things too. If we don't frequently use medical services, or not, do we require lower cost health care plans? So in other words, its cost a big factor for us there. Well again if it is, then we might think about something like an HMO plan, which may have a higher deductible, but have a lower premium associated with it. Remember, high deductible insurance, almost typically refer means that we're going to have a lower premium as a result of it. If we're less concerned with that, right, then we might say that we prefer to choose our own physician. Well, if we're not as concerned with having our own physicians, right, then again we might be looking for simple options, HMOs or P, or point of sale plans. If we prefer to really have our own selection, then we might be looking at more traditional plans, PPOs and such like that, too. So again, the decision tree can just help us to think about it, especially if we're going on the health care marketplace where we might have choices. Oftentimes through our employer-provided plans, there may just be one to two choices, anyways. So it's really trying to look at that fit and say, which one of these plans is best for me, assuming there's a choice. So looking at the two more common ones, an HMO and a PPO. HMOs are pretty restricted in some ways. PPOs are a little more flexible, and pretty popular in that regard. With HMOs we have to stay in our network, and we have to pick a primary care physician, who's typically going to be a gatekeeper for us. For PPO's they're simply in and out of network benefits, different costs associated with the same procedures or services based on whether or not someone's part of that preferred provider organization. again, as I mentioned before, the primary care physician in the HMO is a gatekeeper, meaning that if we want to see a specialist, we're going to need a referral for that from our primary care physician. With a PPO, those types of referrals aren't always a requirement at all, and so we can make a choice to go see a particular individual. Again, with HMOs, these are typically going to be copay driven without really a major deductible, whereas PPOs are going to be deductible driven and often times then have a co-insurance percentage above the deductible. So in other words you might pay the first $500 out of pocket of health care expenses for the year, and then pay 20% of health care expenses above and beyond that. HMOs then are going to have lower upfront costs and premiums typically PPOs because of the greater flexibility generally have higher premiums. But again. You're going to need to compare these. These are not absolutes, they're simply generalities. Now, we've talked a lot about protecting ourselves. We've talked about protecting our income, and we've talked about protecting, of course, our health our, our ability to earn income. Now, we're going to talk a little bit about our stuff. So, our stuff, right,. Some common things we want to think about if we're young and renting, or even older and renting, renter's insurance. So this is something that's really about protecting our stuff. Renter's insurance is not going to protect the dwelling that we're in, but it is going to protect the contents that way, so our possessions, and it's also going to protect us against accidents or injuries that may occur in our place that we're renting. That again, we would potentially be financially responsible for. The old, famous, someone slips on your kids rollerskate and hurts themselves. We're legally responsible then, potentially, for their medical expenses. That liability insurance is still part of renter's insurance policy. If you're a student in college, for example, then your renter's insurance may actually be bundled in with your parents' homeowners insurance policy. So that's worth checking out because it can save everybody a little bit of money. And renter's insurance is pretty inexpensive depending on the level of coverage. Between $100 and $200 a year, which is pretty cost effective when we look at sort of, what it does provide for us in the nature of protection. Homeowner's insurance is a little more involved, then. Number one, the first component, is the property. So we look at things like the dwelling, the residential structure that we're talking about. Other structures then for example, this could be a garage that might be detached or sheds or other things that may be included, these are typically going to be limited to 10% of the dwelling value. Personal property, the things within the house of course. Are going to be limited to 50% of the dwelling value. And all those values are based on the actual cash value, in other words, what is that item worth today. We think of that as being the effect of depreciation. And we'll also even have things like the loss of use. If, for example, there's damage done to our property, we'll eventually be able to go back in it. But in the mean time we have to have some other let, residents in an extended stay type of facility. Then, we'll see that those living expenses, that rent that we have to pay somewhere else for a temporary period, is also covered under most homeowners policies and the result. And again, limited to 20% of the value of the dwelling. So these are some of the interesting types of major pa, elements called Section 1 of the homeowners insurance. But there's another section to homeowners policies. Section 2 is this personal liability component that we talked about. So the injury for which you're legally liable, this is oftentimes limited to simply $100,000, so it's not based on the value of the home. But, again, based sort of on a typical value. Some people will get up to $300,000 of liability on section two and again, we could say what's the difference? The premium. So, and again, this is for damage caused by them or the property. There can also be medical payments built into this as a component too, and so this is again, going to be for things related to specific injuries that happen, it's not for the family member or the residents in particular. And it's again as a result of bodily injury from the insured, a pet, or a property. So again, we go back to thinking about, our cat bite example from the first presentation for this class, and realize that something as simple as that cat bite was covered under this home owners policy itself. What types of things does homeowner's policies protect? On a basic level, things like fire, smoke, explosions, volcanic eruption. Vehicles, aircraft, lightning, windstorm, hail. Vandalism, malicious mischief, which is always fun to say. Rioting and theft. You can also get Broad Named Perils as a form of coverage, slightly higher premium. This will include specific items like falling objects or heavy objects. And again, whether or not this makes sense for you to get on has a lot to do with where you live, the environment in which your house exists, and really whether or not some of these perils are there. Remember back to our concept of adverse selection, though. Some of these perils are going to cost us more money to have protection against because they're too likely to happen to us given where we live. So, we can get endorsements for these as well. And these are going to be add on, upping the premium cost of course. And this allows for things that we might want in addition. So an example, replacement cost rather than depreciative cost for personal property. All risks for personal property, not just the ones that are typical or namely. Inflation protection, again the fact that things are going to increase in value and we may not only want to protect against replacement value, but we want to account for the fact that something we got 20 years ago cost more nowadays than it did then. Potentially earthquake protection as well, but again if you live near a fault line chances are the cost of such an endorsement would be too high and you would be better off simply saving that money. Sewer backup, business pursuits, if you run a business out of the home for example that's not personal use so it changes the game a little bit for us. And even things like water crafts if you happen to have a boat or other type of vehicle associated with it, like of course a Sea-doo. So, following any type of loss, and we've talked about this again for other policies, this is true for homeowners as well. If something happens, say a pipe bursts in the house. You've got to notify the insurer as quickly as possible. Most of them have a 24-hour line if you need to report to them immediately. You need to actually then protect the property from further damage. So in other words, if something falls on your roof and puts a hole in the roof, we need to put a tarp up there. Prevent any additional water damage or other damage from coming in. Because the initial protection may have been covered, but that secondary damage that's happening is because nobody put a band aid on the problem. So the expectation that you would put a band aid on the roof, for lack of a better example, is something you would want to remember to do too. And also that we prepare and inventory and file written proof of what was missing. So it's always good. This is why when we talk about record keeping, having a balance sheet that records things for it, assets that have specific value, we want to make sure we have that documented; appraised values whenever possible for jewelry or other items. We want to make sure we've got all of that done. Once an agreement has been met, the insurer then has 60 days to furnish payment. And this is just because they have to put it through the processes, put it through some reviews, someone may come out and inspect the property as well, you'll have a lot of these things coming as part of the process. But typically again, within two months they're expected to make a payment for this of course or provide some sort of other explanation. So again, do we own a home? Yes or no? If we don't own a home, right, then do we own a condominium? Well if we do, then we potentially want the condominium specific policies. So when we talk about HO policies, there's a whole subset of HO policies that are out there based upon the type of dwelling we have. So, for example, this, this HO6 policy here, would cover things like the liability in other elements. If we don't own a condominium. Then, do we rent an apartment? And if we do, then we potentially want to look at the homeowner's policy that's often referred to as renter's insurance again. If we do own a home, then we want to start thinking about, well, what do we want to have with it? It is a older home, a historic home. And if it is then that draws us to a specific policy that deals with homes that have unique values associated with them. If we're just have sort of a typical modern day traditional home that takes us in a different direction. So we walk through this process, this decision tree. Right in general the question is not so much. Do we need home owner's or renter's insurance? That's typically yes. But the question we're asking is which type of policy. And so this decision tree is really mean to help us to understand which policy, which HO policy is really the one for us. Auto insurance, and again, this is very simple in the sense that if we are driving, we should have some sort of protection for us and for those around us, of course, as well. So there's three major types of loss with auto injuries. Cost to repair or replace a damaged or stolen vehicle, liability for injuries to people inside our vehicle and liability to injuries to people outside of our vehicle. So in any case, right, we might be running into these challenges or these lawsuits. So, what's covered, with bodily injury, legal expenses, medical expenses, and lost wages as a result of injury. We might, we'll also se that these limits are expressed as a per person, per accident type of quote for us, and we'll take a look and see what that quote looks like. Medical payments, a little different. These are different from bodily injury. That was people in the other car. This is for people in your car. So still for medical costs resulting from the injury. Also usually no fault. And you're covered for yourself or family that's riding in someone elses car as well. So, medical payments is really about the policy holders themselves, bodily injuries to the people that we might have done injury to who are not covered by our policy, of course. And then property damage. Financial loss from damage done to other properties in your vehicle. This could be someone's mailbox. This could be someone's car, of course. Any type of physical property. Collision covers damage done to your car regardless of fault. Many states have a no fault provision now where fault is sort of irrelevant. Everybody's going to get paid and the insurance companies will work it out afterwards. That process is often referred to as subrogation. And that means that an insurance company that you've authorized has the right to sue on your behalf to recoup financial loss from someone else who might be at fault. So in other words, the insurance company might sue the other insurance company. This is all typically limited to the retail value of the car. And one way we know that's determined all the way back from talking about financial record keeping, is Kelly's Blue Book. So we talked about those coverage limits again being expressed as a simply quote, 50 in this case is the per person bodily injury limit, so in this case $50,000. The second number is per occurrence bodily injury limit, so per person. It could be more then one person hurt, so we'll typically see the second number as a multiple of the first one, in this case $50,000. And then $100,000 for the per occurrence bodily injury. The third is the property damage per occurrence limit, in this case $25,000. Now, medical payments are not in this particular set of quotes. And when we look at these three numbers across right here, medical payments would be something that's listed on the policy but not included, included in that three-number quote. So that's typically five thousand dollars per person per occurrence, but again you might pay for more depending on the type of policy that you're most interested in. So, some additional provisions we might have. Uninsured motorist, if someone's right is going to cover bodily injuries and property. Underinsured motorists. In other words, right, that they don't have the state minimum requirements, and, ergo, right, our insurance is going to pick up the difference between the two. And no-fault insurance is more common nowadays. Driver collects medical payments, lost wages, and injury costs from their own insurance. With comprehensive insurance. This includes collision, non-collision related damage. Probably not going to cover stereos, especially if they're installed after factory. It may, you may add on coverage for towing. But bear in mind if you have things like triple A services or other things that you're already paying for. Why add on, why take on this expense if you already have tow service and other things through other plans that you might have. So again we don't need to pick up everything that we can on a particular insurance policy. Even though someone may tell us it's a good idea, if you already have the protection from something else, you already have the protection from something else. How expensive is it? Well again it's going to be based on a few factors, your age, your gender, your marital status. These are all things that affect how pricy we are because it somehow affects the likelihood of how good of a driver we are. Poor driving record, so if we've demonstrated that we've gotten into a lot of accidents or caused a lot of accidents. The type of coverage we want, and how much of a deductible we want is clearly going to be a factor. The type of car you have, and of course where you live, the rating territory. If you live in a place that's high congestion, high traffic, versus a place with much more dense sparsely populated, again may affect the difference too for how much your insurance is going to cost, all other things equal, so who's covered? You or any family member, even when you're renting. Any person driving a covered car, and organizations responsible for your conduct, or the conduct of the driver. So, these are different places that will be covered. What isn't? Intentional acts. So right, you know, people who use their cars as a weapon, not going to matter, not going to be covered by insurance. Bodily injury to an employee, not going to be covered. That's a private or a business policy that people would expect you to have rather than personal auto-insurance. Commercial use, if you're hauling things for a cost. If you're charging for those services, again, that's going to be something where your personal insurance won't kick in. And of course, it goes without saying, if you've stolen a car, the insurance is not going to cover that, as well. So let's recap, then for just a moment. Insurance as we mentioned before, is a process of risk transfer and risk sharing with an insurance company. We pay them them a fee in return they provide an overlayerable, layer of protection for us so that we're able to make sure that we can have these potential catastrophic expenses to our household to ourselves to our family, met. We can look at protection for our earnings potential. For our overall health and well being. And of course, for our stuff as well. So, tune in next time, we'll be talking about investments.
