Introduction: Life – unfortunately – isn’t perfect. Insurance is designed to serve as a backup when things do go wrong, and in this section we’ll look at the concept of insurance in addition to the different types available.
5.1 – The Concept of Insurance
In life, it’s important to manage your risks. Insurance is a risk management tool, allowing you to protect yourself from serious financial loss when life takes a negative turn. In exchange for coverage from the insurance company, a consumer pays a premium. The higher the risk is for the company, the higher the premium. If an incident covered by the insurance policy occurs, the company covers the expense minus a deductible, which is a set amount detailed in the insurance policy that the insured person must pay. Typically the lower the premium, the higher the deductible. In addition, most insurance plans have a coverage limit, which is the maximum an insurance company will pay.
5.2 – Health Insurance
The recent national debate over healthcare has pushed health insurance to the forefront of American society. While the United States does not currently provide universal healthcare, most first-world nations do. This is done in different ways, from requiring residents to have health insurance to having the government cover the costs of healthcare in what is called single-payer healthcare. The Affordable Care Act enacted under President Barack Obama required US citizens to obtain healthcare, but offered an alternative fee for those who chose not to. Many US States, such as Massachusetts, previously had a similar system before the Affordable Care Act became law.
Medical insurance is important because the costs of healthcare can often be crippling. According to the New York Times, a simple IV fluid bag in a hospital can cost over $130, while the cost of a day in the hospital averages over $4,000. There are five types of health insurance plans that we’ll cover here. The following information is from healthcare.gov, which has great information about the American healthcare system.
The first is a Health Maintenance Organization, or HMO. A HMO delivers all health services through a network of healthcare providers and facilities, meaning that you have little freedom to choose your doctor, but on the flip-side, have to fill out minimal paperwork. With an HMO you get a primary care doctor but need a referral for specialist doctors. In addition to the premium and deductible, you’ll need to pay a co-pay, which is a specified amount for every time a service occurs. For example, you may have a co-pay of $20 for each time you visit your doctor.
The second is a Preferred Provider Organization, or PPO. Under a PPO, you do not need a referral for specialist doctors and can visit out of network healthcare providers, but you’ll pay more. If the doctor you want to visit charges more than others in the area, you may be responsible for making up the difference.
Third is a Exclusive Provider Organization, or EPO. This is similar to an PPO, in that you don’t need a referral for specialist doctors, but you cannot visit doctors outside of your network.
Fourth is are Point of Service plans, or POS plans. This blends features of an HMO and a PPO. You have a primary care doctor and need a referral, but can also go out of network if you are okay with potentially paying a bit more.
Finally is a High-Deductible Health Plan, or HDHP. With a HDHP you’ll have a super low premium, but a super high deductible. Your spending per year within this plan is typically capped, making it the most costly plan in the case of a medical emergency. A HDHP can be a form of HMO, PPO, or POS.
5.3 Auto Insurance
While there is no federal law mandating auto insurance, almost every state requires automobile drivers to have at least some form of auto insurance. Under the large umbrella of auto insurance, there are five main types.
First is liability coverage, which covers you in the case that you are deemed to be at fault for an accident. It covers both property (car) damaged and any potential medical costs resulting from the accident. It is important to note that liability coverage covers the cost of the other driver’s costs stemming from the accident, not yours, hence the term “liability.”
Under collision coverage, an insurance company will pay for damages done to your car that occur in an collision, regardless of if the accident was your fault or not. Similarly, under comprehensive coverage, an insurance company will pay for damages done to your car in non-collision scenarios, for example, weather damage.
Personal Injury Protection is an add-on to auto insurance coverage, and has the insurance company pay the medical bills, and sometimes lost wages, for those in the insurance holder’s car, regardless of who is at fault. Finally is gap insurance, which is another add-on to auto insurance coverage.
5.4 Life Insurance
Fast forward thirty years, and you’re supporting a family and children. What would happen if an accident were to occur, resulting in the loss of you, and your income? Life insurance is designed to protect from the potential financial loss from an unexpected death. The policyholder pays a premium, typically the healthier and younger a person is, the lower the premium, and assigns a beneficiary to receive a payment in the case of death.
There are two forms of life insurance, term life, and whole life. With term life insurance, you purchase life insurance for a fixed number of years, and if you die in this term, your beneficiary gets paid. If you die after the term, the beneficiary does not get paid. The cheapest form of life insurance, term life insurance holders pay premiums at the beginning of the year, and level-premium insurance is a form of term life insurance in which the premium remains the same throughout your plan. Term life insurance can be turned into whole life insurance with convertible term insurance.
With whole life insurance your beneficiary gets paid regardless of when you die, provided that you are still paying the premiums. Whole life insurance is more expensive than term life insurance, but it gains a cash value that you can borrow against and pays cash dividends to policy holders.
5.5 Government Programs
The government has numerous programs designed to provide a support and a safety net for Americans. The most notable of these programs is social security, which is a federal program of insurance and benefits created under FDR operated by the federal government’s Social Security Administration. While you’re working, you pay into social security via the Federal Insurance Contributions Act (FICA) tax. Then, when you reach 62, retired workers receive a monthly payment from the government. A program within program is Supplemental Social Security Income which provides income for elderly Americans with little to no current income. While this program is called social security, it is actually funded from tax revenues from the Treasury Department rather rather than the federal government’s social security fund.
Additionally, the government has two programs designed to provide healthcare for Americans, medicare, and medicaid. You can tell the difference between the two programs by the programs suffixes. Medicare helps provide healthcare for elderly Americans. In order to qualify, one must either be over 65 and have been a US citizen or permanent resident for at least 5 years, be disabled and collecting social security for at least two years, have ALS, or be in need of a kidney transplant. Medicare has different parts within the program, each of which covers different medical expenses. Part A covers hospital based expenses, while Part B covers more general medical expenses. You can learn more about these parts and add-ons to Medicare here. Medicare is funded by FICA payroll taxes and the Social Security Administration. Medicaid, on the other hand, is designed to provide healthcare aid for low-income or disabled Americans, and is funded by both the federal and state governments. Because medicaid programs are state based, qualifications and benefits vary from state to state.
If you’ve been laid off by your employer and you aren’t at fault, you may qualify for unemployment insurance. Unemployment insurance is a state-based program that provides a small amount of income to those who have been recently faultlessly laid off. While the states run the programs, the Department of Labor monitors each state’s program to ensure that it meets federal standards.
There are also two government programs which provide support to employees that have been injured on the job. The Black Lung Benefits Act provides monthly benefits and payment to former coal miners who obtained black lung disease as a result from working in the mines, and are now totally disabled. A program required by state governments are workers’ compensation benefits, which are purchased by employers to cover the costs of workplace injuries. Under these benefits, an employee cannot sue his or her employer as a result of an injury, but receives modest injury care, replacement income, and compensation for any long-term injuries.
Conclusion: With the national focus on health insurance, insurance is more relevant than ever. That said, it’s crucial that you’re aware of the diverse and wide-ranging world of insurance, as it impacts almost every part of your daily life.
Resources and External Links:
Healthcare.gov – Health Insurance Plans
Medicaid.gov – Coverage by State
Benefits.gov – Full List of Social Security Benefits