Basics
Station 6 - Protecting yourself:
Health insurance ||
Life insurance ||
Living wills
Health insurance
What is the purpose of health insurance?
Health insurance protects you from the high cost of medical care by
providing coverage for specific health care services. Although you
generally pay a monthly deductibles and either co-payments or co-
insurance, the cost for insurance is far less than medical care would
be if paid fully out-of-pocket.
What are the major types of health insurance policies?
There are three umbrella types of health insurance: consumer-
directed, fee for service (often known as "traditional" or "indemnity"
plans) and managed care. These types of plans cover medical, surgical
and hospital expenses and depending on the plan, may cover
prescription drugs, dental and behavioral/mental health coverage.
Fee for service plans mean the doctor or other health care
professional will be paid a fee for each health care service provided
to the patient. Patients can see the doctor of their choice and the
claim is filed by either the health care professional or the patient.
Managed care plans provide coverage for comprehensive health services
to their members and offer financial incentives in the form of lower
out-of-pocket costs to patients who use doctors participating in a
network. More than half of all Americans have some kind of managed
care plan - the three types include health maintenance organizations
(HMOs), preferred provider organizations (PPOs) and point-of-service
(POS) plans.
What is an HMO?
An HMO is a type of managed care health insurance plan that allows you
to receive care through a network of participating doctors and
hospitals. Generally, you select a primary care physician who
coordinates your care and refers you to specialists when needed. Out-
of-network care is generally not covered under an HMO plan, unless the
member requires care that is not available in the existing network.
What is a PPO?
A PPO is a type of managed care health insurance plan that combines
features of a fee-for-service plan and an HMO. In a PPO, members who
seek care within the network of participating doctors and hospitals
pay lower out-of-pocket costs. Members can also seek care from
nonparticipating doctors and hospitals, but pay a higher portion of
the cost of care.
What is a consumer-directed health insurance plan?
Also referred to as "consumer-driven," or "consumer choice," this type
of health plan gives members more choice and flexibility in making
health benefits decisions and more control over their health benefits
dollars. These plans often include a health fund or account for
covered medical expenses. Depending on the type of fund or account,
unused dollars may be rolled over annually to cover medical expenses
in subsequent years for the duration of the members' enrollment in the
plan. There are several types of consumer-directed plans, including
Health Savings Accounts (HSAs), Health Reimbursement Arrangements
(HRAs) and Flexible Spending Accounts (FSAs).
What is a health insurance premium?
A premium is the fee you and/or your employer pay to your insurance
company to purchase a health insurance plan. This can be paid on a
monthly, quarterly or annual basis.
How does a health insurance deductible work?
A deductible is the amount that you must pay for covered services in a
specified time period in accordance with your plan before the plan
will pay benefits. A member of a high-deductible health plan, for
example, might be required to pay for the first $1,000 of medical care
prior to receiving coverage under the terms of his/her benefits plan.
What is a co-payment?
A co-payment is the specified dollar amount or percentage required to
be paid by you or on your behalf in connection with benefits. For
example, most HMO plans have co-payments in place for certain services
such as doctor's visits, prescription drugs, hospital stays, etc.
What are out-of-pocket costs?
Out-of-pocket costs include premiums co-payments, deductibles, co-
insurance or other fees that you are required to pay outside of your
health benefits plan.
How do I pick a health insurance plan?
If you have a choice of plans through your employer or you are
purchasing your own coverage, it's important to understand your
choices and pick the plan that is right for you and your family.
There are several questions to ask yourself when reviewing health
insurance plan options:
* How affordable is the cost of care?
* How much are monthly premiums?
* How much are the deductibles?
* Are the co-payments or co-insurance flat fees or percentages of
service fees?
* What out-of-pocket expenses have to be paid before the plan begins
reimbursement?
* How does the reimbursement process work?
* What is the cost of out-of-network care?
Does the plan cover the services that I may use? For example:
* Doctors, hospitals, laboratories and other health care professionals
in the network.
* Out-of-network care
* Treatments for pre-existing medical conditions or chronic
conditions
* Prescription drugs
What is the quality of the health insurance plan? Research factors of
the plan such as:
* Ratings of the plan by independent government and non-government
organizations
* Accreditation from groups like the National Committee for Quality
Assurance (NCQA) or the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO)
* Patient complaints
* Member drop-out rates for the plan
* Other patient experiences with the plan
* Doctor experiences with the plan
What if my employer doesn't offer health insurance?
Employer-subsidized group coverage is generally less expensive than
anything you can get on your own. But, if your employer doesn't offer
health insurance, or if you are unemployed, you should consider
purchasing an individual health insurance policy.
Do You Need Life Insurance?
Life insurance has long been a part of estate planning in the United
States. Although life insurance does not need to be a part of every
person's estate plan, it can be useful, especially for parents of
young children and those who support a spouse or a disabled adult or
child.
In addition to helping to support dependents, life insurance can help
provide immediate cash at death. Insurance proceeds are a handy source
of cash to pay the deceased's debts, funeral expenses, and income or
estate taxes.
People who have no minor children or financially strapped dependents
may not need life insurance. Below you'll find questions to ask
yourself to help evaluate your life insurance needs. If you decide to
purchase insurance, you should know exactly why you are buying it, and
choose the best type of policy for your needs. And, of course, you
should buy no more than you need.
Long-Term Needs
To determine whether it makes sense for you to buy insurance to
provide financial help for family members over the long term, consider
these questions:
How many people depend on your earning capacity? If the answer is
"none," you probably don't need life insurance.
How much money would your dependents need for living expenses? One way
to determine this amount is to look at the earned income that you
bring to your dependents on a regular basis. From that amount,
subtract the worth of property they would inherit from you and any
amounts that will be available from public sources or private
insurance plans that already provide coverage. Social Security
survivors and dependents benefits will probably be available, and you
may also be covered by union or management pensions or a group life
insurance plan. Also subtract any other likely sources of income, such
as the help reasonably affluent grandparents would provide for your
children in case of disaster.
How long would it take for your dependents to be come self-sufficient?
If your children are almost out of college, they may not need much
additional income. If they're younger, remember that dependent spouses
caring for young children can usually return to work at some point,
and some kids may get at least partial scholarships.
Once you perform this exercise, you may find that your dependents may
need little additional income from life insurance. But if you have
young children, you may find that it makes sense to buy an affordable
amount of life insurance.
Short-Term Needs
Now, assess whether you need life insurance for short-term needs:
What assets will be available to take care of your dependents'
immediate financial needs? You might leave some money in joint or pay-
on-death bank accounts, or place marketable stocks in joint tenancy or
register them on beneficiary (transfer-on-death) forms.
After you die, how long will it be before your property is turned over
to your inheritors? If most of your property will avoid probate,
there's usually little need for insurance for short-term expenses,
unless you have no bank accounts, securities, or other cash assets. By
contrast, if the bulk of your property is transferred by will, and
therefore will be tied up in probate for months, your family and other
inheritors may need the ready cash insurance can provide. While a
probate court will usually promptly authorize a family allowance or
otherwise allow a spouse or other inheritor access to estate funds, it
can still be nice to have insurance proceeds available.
Will your estate owe substantial debts and taxes after your death?
Lawyers and financial advisors call cash and assets that can quickly
be converted to cash "liquid." If your estate has almost all "non-
liquid" assets (real estate, collectibles, a share in a small
business, jewelry), there may be a significant financial loss if these
assets must be sold quickly to raise cash to pay bills, as opposed to
what they could be sold for later if there had been enough liquid
money from insurance or other sources to meet all pressing bills.
Obviously, if your estate has significant funds in bank accounts or
marketable securities, you won't need insurance for this purpose.
Fortunately, federal estate taxes aren't due until nine months after
death, so cash to pay them doesn't have to be raised immediately.
Avoid Probate and Estate Taxes on Life Insurance
The proceeds of a life insurance policy are not subject to probate
unless you name your estate as the beneficiary of the policy. If
anyone else, including a trust, is the beneficiary of the policy, the
proceeds are not included in the probate estate, and can be quickly
transferred to survivors with little red tape, cost, or delay.
Except when your estate will have no ready cash to pay anticipated
debts and taxes, there is no sound reason for naming your estate,
rather than a person, as the beneficiary of your life insurance
policy.
Avoiding estate taxes. If you own your insurance policy at the time
you die, the proceeds are included in your taxable estate. If your
estate is large enough to face estate tax liability (at least over $2
million), your life insurance proceeds will be subject to estate tax.
On the other hand, if you don't legally own your life insurance
policy, the proceeds are excluded from your taxable estate. This can
significantly reduce your death tax liability.
Business Needs
If you are the sole owner of a business, how much cash will it need
when you die? Do you want, and expect, that some of your inheritors
will continue the business? If so, do you think there will be enough
cash flow for them to successfully maintain the business? You may need
insurance proceeds to cover any cash flow shortage of the business.
Will there be liquid funds to pay estate taxes?
If your inheritors won't continue the business, the questions are
different: How much is your death likely to affect the value of the
business? Will there be enough cash to keep the business alive until
it is sold?
Living wills
Living wills are not really wills at all. Instead, a living will
(which also may be known as a healthcare directive or directive to
physicians) is a document that expresses a person's desires and
preferences about medical treatment in case he or she becomes unable
to communicate these instructions during terminal illness or permanent
unconsciousness. The first living wills helped people who wanted a
natural death unattended by artificial life support and other advanced
medical techniques. As these documents became more popular and widely
available under local laws, they came to include other health care
concerns such as tube feeding, resuscitation, and organ donation.
While living wills are allowed in all states, they sometimes must
follow certain formalities to be effective. If valid, a living will
binds health care providers to its instructions.
What Can a Living Will Cover?
Many people believe that living wills only direct health care
providers to withhold treatment. While many choose to issue that type
of instruction, a living will also allows a person to ask for all
available treatment options and medical techniques, or to choose some
medical options and reject others. Because a living will involves
complicated medical issues, consultation with a doctor may help
clarify different treatment types and assist the patient in making
living will decisions. Some people do not complete living wills
because they worry doctors could let them die when there is still a
chance for recovery. However, a living will cannot take effect legally
unless the patient is medically determined to be in a permanent
vegetative state or terminally ill, and therefore unable to
communicate medical preferences.
Living Will vs. Durable Power of Attorney
A durable power of attorney can perform some of the functions of a
living will. This document gives an attorney-in-fact legal power to
make health care decisions for someone who cannot make those decisions
him or herself. A durable power of attorney differs from a living will
in that it may direct the attorney-in-fact to carry out the living
will's instructions or it may allow the attorney-in-fact to use his or
her own judgment. The living will itself also can specify a proxy to
help enforce its terms. A durable power of attorney may be used
whenever the individual granting the power cannot make his or her own
health care decisions; it does not depend on terminal illness or
permanent unconsciousness to become effective. Most estate planning
attorneys recommend both documents to cover all situations.
Without a living will or durable power of attorney, family members may
end up arguing over what treatments should or should not be provided.
Doctors will only consult family members on health care decisions; if
a person prefers that a friend or unmarried partner participate in his
or her health care decisions, a living will and durable power of
attorney enable that person to have a say.
Choosing an Attorney-In-Fact
The person chosen as the attorney-in-fact or proxy for health care
decisions should be a trusted individual who is comfortable discussing
health care issues. Because this person may need to argue the
patient's case with doctors or family members, or even go to court, an
assertive and diplomatic individual may be preferred. The
representative should be well aware of the choices made in the
relevant documents, and should support those instructions. It is also
useful to enlist the cooperation of friends, relatives, and health
care providers by giving them executed copies of the document for
their reference, should the need arise.
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