the insurance buying guide: a practical method for figuring out how much-and what kind of-insurance

title:TheInsuranceBuyingGuide:APracticalMethodforFiguringOutHowMuch--andWhatKindOf--InsuranceYouNeed

author:publisher: SilverLakePublishing

isbn10|asin: 1563431459printisbn13: 9781563431456ebookisbn13: 9780585044187

language: English

subject

Insurance--UnitedStates--Purchasing,Insurance,Automobile--UnitedStates--Purchasing,Homeowner'sinsurance--UnitedStates--Purchasing,Insurance,Life--UnitedStates--Purchasing,Insurance--Purchasing.

publicationdate: 1999lcc: HG8531.I571999eb

ddc: 368

subject:

Insurance--UnitedStates--Purchasing,Insurance,Automobile--UnitedStates--Purchasing,Homeowner'sinsurance--UnitedStates--Purchasing,Insurance,Life--UnitedStates--Purchasing,Insurance--Purchasing.

TheInsuranceBuyingGuideAPracticalMethodforFiguringOutHowMuchand

WhatKindofInsuranceYouNeed

bytheSilverLakeEditors

SILVERLAKEPUBLISHINGLOSANGELES,CALIFORNIA

Pageii

SilverLakePublishing2025HyperionAvenueLosAngeles,CA90027

ForalistofotherpublicationsorformoreinformationfromSilverLakePublishing,pleasecall(888)663-3091.

Allrightsreserved.Nopartofthisbookmaybereproduced,storedinaretrievalsystemortranscribedinanyformorbyanymeans(electronic,mechanical,photocopying,recordingorotherwise)withoutthepriorwrittenpermissionofSilverLakePublishing.

LibraryofCongressCatalogNumber:pending

TheSilverLakeEditorsTheInsuranceBuyingGuideAPracticalMethodforFiguringOutHowMuchandWhatKindofInsuranceYouNeedIncludesindexPages:392

ISBN:1-56343-145-9

PrintedintheUnitedStatesofAmerica.

Pageiii

ACKNOWLEDGMENTSTheSilverLakeEditorswouldliketothankthefollowingorganizationsforassistanceofferedinresearchinginformationthatappearsthisbook:TheInsuranceInformationInstitute,theNationalConsumers'League,theRiskandInsuranceManagementSocietyandMetLife.TheOfficesofInsuranceCommissionerinseveralstatesCalifornia,Indiana,NewJersey,TexasandWashingtonalsohelpedconsiderably.Finally,wewouldalsoliketothankSueElliottSinkforhercriticalcontributiontotheproject.

TheInsuranceBuyingGuideispartofSilverLakePublishing'sconsumerinsurancereferenceseries.Thisbook,usedwithWhatDoYouMeanIt'sNotCovered?andGetYourClaimPaid,takesthesmartconsumerthroughtheentireprocessofbuyingandusingpersonal-linesinsurance.

Whiletheinformationandstatisticsinthisbookwillhelpyouunderstandhowtobuypersonal-linesinsuranceinacost-effectivemanner,nobookcananalyzeaperson'sspecificlegalpositionandinsuranceneeds.Thisbookshouldnotbeusedinplaceofqualifiedprofessionaladvice.

TheSilverLakeEditorswelcomefeedbackfromourreaders.Ifyouhaveacommentorsuggestiononthecontentanddeliveryyouseeinthisbook,pleasefeelfreetocallSilverLakePublishingat888.663.3091ore-mailateditors@silverlakepub.com.Welookforwardtohearingfromyou.

JAMESWALSH,PUBLISHERSIVERLAKEPUBLISHINGJANUARY,1999

TABLEOFCONTENTSIntroduction:WhatYouNeedtoKnow 1

GettingAround

Chapter1:What'sCoveredbyPersonalAutoPolicies 7

Chapter2:HowtoCalculateYourNeeds 39

Chapter3:ComparisonShoppingforCarInsurance 51

Chapter4:InsuringBoatsandPersonalWatercraft 73

Chapter5:InsuringRVs,ATVsandOtherToys. 91

ProtectingYourHome

Chapter6:TheBasicsofHomeownersInsurance 113

Chapter7:GettingtheHomeownersInsuranceYouNeed 151

Chapter8:InsuranceforHard-to-InsureHomes 181

Chapter9:CoverageforRenters,CondominiumOwners&OccasionalLandlords

SoSueMe

Chapter10:PersonalLiabilityPolicies 209

Health&DisabilityInsurance

Chapter11:HealthInsurance. 223

Chapter12:Long-TermCareInsurance 251

Chapter13:DisabilityIncomeInsurance 285

InsuringYourLife

Chapter14:TheDifferentKindsofLifeInsurance 317

Chapter15:DealingwithLifeInsuranceSalesTactics 341

Chapter16:LifeInsurance,AnnuitiesandRetirementPlanning

Conclusion:WhoYouAreandtheInsuranceYouNeed. 373

Appendix:ContactsforConsumers 377

Index 387

INTRODUCTIONWHATYOUNEEDTOKNOWReadingthisbookcanmakeyoupopular.Inanarrowkindofway.

Tellsomeoneyouknowthatyou'rereadingabookaboutthedifferentkindsofinsuranceyouneedandhowtogetthebestcoverageforyourmoney.Thatpersonwillprobablystartaskingyouquestionsasifyou'resomelong-lostexpert."DoIhavetherightkindofcarinsurance?""Youknow,Igotacalllastweekfromthisguytryingtosellmetermlife...."

You'llknowhowdoctorsandlawyersfeelatbadcocktailpartieswhenthey'reswarmedbypeoplewhowantfreeadvice.

Peopleknowtheyneedinsurance.Theyjustaren'tsurewhatkindtobuy,orhowmuch,orfromwhom.Andtheydon'twanttobecomeexperts.Theywanttoknowwhatit'sgoingtocoverandwhatitisn'tandhowmuchit'sgoingtocost.

Andtheydon'twanttocallaninsuranceagentorsalespersontoaskforadvice.Thisisbecausemanypeopletrustinsuranceagentsonlyslightlymorethantheytrustusedcardealers.Withsomuchmediaattentionintheearly1990sfocusedonunfairsalespractices,it'snowonder.

Thisisnottosaythatallagentsareouttoripyouoff.Butinsuranceisabusinessdrivenbyinformation.Theinsurancecompaniesandtheiragentshaveplentyofinformationonyoubothspecificsaboutwhoyouarefromtheinformationthatyouprovideinyourapplication,andgeneraltrendsaboutthekindofpersonyouarethattheykeepintheirdatabases.Youneedtoleveltheplayingfieldbyknowingalittleaboutthem.

Therightkindofinsurancewillprotectyouandyourfinancesifyougetintoacaraccident,ifsomeonefallsandishurtatyourhome,ifyouneedemergencysurgeryorifyou'redisabledandoutofworkforanextendedpe-

riodoftime.Insurancealsocanprotectyouifyoumisjudgeadockwhenyou'reoutonyourboat,ifyouneedtostayinanursinghomeorifyoudieyoung,leavingyourspousewithsmallchildrentoraiseandamortgagetopay.

Theimportantthingistogettherightkindofinsurancetosuityourneedsandtogettherightamountofit.Thisbookwillhelpyoufigureoutthesethingsforyourself,thankstoplentyofeasy-to-understanddescriptionsofthekindsofcoverageinsurancecompaniesofferandworksheetsthatwillhelpyoucalculateyourinsuranceneeds.

Thebookwillalsogiveyouthetoolstomakesureyou'redealingwithasolidcompanyonethatwillbearoundwhenyouneedtomakeaclaimandcollectmoney.

Itwillhelpyousavemoneytoo,withtipsforcuttingyourpremiumcostsandchartstohelpyoucompareinsurancecompanies.

AFewBasicConcepts

Beforeyoudiveintothedetailsofhomeownersorpersonalumbrellaliabilitycoverage,let'sestablishafewbasics.

First,insuranceisdesignedtomakealosswhole.Inthesimplestterms,alossoccurswhenthingsyouownaredestroyedorreducedinvalue.Ifyourhouseburnstotheground,insurancewillpaytorebuildit.Theideaistopayforyouractuallosseswithoutallowingyoutomakemoney.Thisiswhataninsurermeansbymakingthelosswhole.

Inaddition,it'simportanttonotethataninsurancepolicyisalegallybindingcontractbetweentwoparties.Onepartyistheinsuredpersonyouandtheotheristheinsurancecompany.

Asistruewithallcontracts,aninsurancepolicydescribestherightsandobligationsofeachparty.Inaddition,thepolicyidentifieshow

muchyoumustpaytoreceivethoserights.Thisamountisknownasthepremium.Thepolicyidentifieshowmuchtheinsurancecompanyisobligatedtopay,ifcertaineventsshouldoccur.Themaximumamountaninsurancecompanywillhavetopayisthelimitofinsurance.

TheDetailsofComparisonShopping

Insuranceiscomplicated.Itmixessomestandard,regulatedfactorswithsomecompletelyunregulatedones.Theresultscanbe....interesting.Pricesforthesamekindofinsurancecoveragecanvarywidelyfromcompanyto

company.Anddifferentcompaniesmayofferslightlyorradicallydifferentcoverage.So,it'simportanttoshoparoundbeforeyoubuyinsurance.

Butjustsaying"shoparound"isn'tenough.Notonlyisinsuranceasaproductcomplicated,thewaysinwhichit'ssoldarealsocomplicated.

Whenyoupurchaseinsurance,youcanbuyitfromacaptiveagent,whoworksforonlyoneinsurancecompany.Youalsocanbuyitdirectlyfromtheinsurancecompany.Oryoucanbuyitfromanindependentagentthatis,anagentwhosellspoliciesforseveraldifferentcompanies.Often,workingwithanindependentagentcanmaketheshoppingprocesseasier,byallowingyoutocompareseveraldifferentcompanies'policiesatonetime.Workingwithmorethanoneindependentagentcangiveyouaccesstoevenmorepoliciesandallowyoutocomparetheagents,aswell.

Usingmorethanoneagentisthesameasgettingquotesdirectlyfrommorethanoneinsurancecompany.Virtuallyallagentsworkoncommission,sotheycanbequitepersistent.Butdon'tbuyinsuranceforthewrongreasonsliketomakeasalespersonshutupandgoaway.

Thebestwaytofindagoodagentandagoodinsurancecompanyisbyaskingaround.Ifyourfriends,familyandco-workersaresatisfiedwiththeirinsurance,they'lltellyou.Ifthey'renot,they'lltellyouevenmore.AgrowingnumberofusergroupsontheInternetfocusoninsuranceprosandcons.

Askingaroundbeforeyoustartcallingagentsanddirect-saleinsurancecompaniescansaveyoualotoftimeandaggravation.Italsowillhelpyoufindaninsurancecompanythatchargesfairrates,processesclaimsquicklyandpayswhenyouexpectitto.

Agoodinsuranceagentorcustomerservicerepresentativeshould:

answeryourquestionsquicklyandcourteously;

explainyourpolicythoroughlybeforeyoupayforit;

contactyouperiodicallytoseeifyouneedtochangeorupdateyourcoverage;and

helpyouwheneveryouneedtofileaclaim.

FYI:Brokersalsosellinsurance.Theyareslightlydifferentfromagents,though.Agentshaveanagreementwithoneormoreinsurancecompaniestoselltheirproducts.Brokersarenotappointedbyinsurancecompanies.Theyshopfororbrokerinsuranceamongmanycompanies.Theystillreceiveacommissionforeachsale,buttheycanbemoreattunedtoyourneedsbecause

theydonotworkforaparticularinsurancecompany.However,somebrokersalsomaychargeyouafeeforservicesrendered.Forthisreason,youmaynotwanttoworkwiththem,exceptforlargepoliciesandspecialsituations.

WordsofWisdomfromtheFrontLines

Mostofuswanttotrustotherpeople.Butalotofotherwisesmartpeoplehavegottenburnedbybeingtootrustingwhenitcomestoinsurance.

Nomatterhowmuchyoutrustyouragentorbroker,youprobablydon'tknoweveryonewhoworksinhisorheroffice.So,neversignablankinsuranceapplicationorablankinsuranceform.Thisislikesigningablankcheck.Andit'samorecommonproblemthanmostpeople...includingmostinsurancepeople...realize.

Don'texpectyouragenttofillintheapplicationforyouortofillitincorrectly.Readovertheapplicationcarefullybeforeitissubmittedtotheinsurancecompany.Incorrectinformationontheapplicationcanmeanmorethanjustasimplemistake.Itcanbeawayfortheinsurancecompanytoavoidhavingtopayaclaimdowntheline.

Besuretogetanypromisesanagentmakesinwritingespeciallyiftheyhavetodowithhowmuchsomethingwillcostorearninthefuture.Ifanagentwon'tputastatementaboutfuturecosts,benefitsorvalueinwriting,itmaybetimetofindanotheragent.Ifanagentshowsyouaproposal,getacopyofit,aswell,soyoucanstudyitathomeatyourleisureandkeepitforyourrecordsifyoudecidetopurchasethecoverage.

Also,getcopiesofeverythingyousignandreceiptsforanypaymentyoumake.Evenifyou'renotthemostorganizedpersoninthewolrd,makeafolderorfile...orbox...thatcontainsallofyourinsurance

informationapplications,policies,back-upinformation.It'scriticaltohavethestuff.Hangontoyouroldpoliciesforatleastthreetofouryears.Sometimes,aclaimorotherissuemaycomeuplongaftertheunderlyingincidentoccurredorlongafterapolicyhasexpired.Also,trytopaybycheckorcreditcard.Ifyoupayincash,youmaynothaveproofthatapaymentwasmade.

Mostpeoplewouldrathersitinadentist'schairthanreadaninsurancepolicy.Butitisveryimportanttoreadapolicythoroughly,tobesurethatyougottheamountofcoverageyouwant,withoutanysurpriseexclusionsorlimitations.

ThisbookwilltellyouexactlywhattolookforandwhattolookoutforsoInsuranceSpeakwon'treadlikelegalmumbo-jumbo.

Itisalsoimportanttoreadthepolicyassoonasitarrives.Manypoliciesincludeafreelookperiod(rangingfrom10to30daysafterdelivery),duringwhichyoucancancelthepolicywithoutpayingapenalty.

Remembertocheckyourcoverageregularlyonceayearisusuallysufficienttobesureitstillmeetsyourneeds.Ifthecostofbuildingahomeinyourneighborhoodhasgoneup,youprobablyneedtoincreaseyourhomeownerscoverage.Ifyou'veboughtanewcar,youwillneedtoupdateyourautopolicy.Andifyourchildrenaregrownandyourhouseispaidoff,youprobablydon'tneedtocarryasmuchlifeinsuranceasyoudidbefore.

Example:Yousellausedcartosomeone,whosellsittosomeoneelse.Thecurrentownersuesyou,yearslater,claimingthatyouillegallydisconnectedanairbag.You'llneedtohaveyourliabilityinsurancepolicyhandy,sothatyoucangetbackintouchwiththeinsurancecompany.

InsuranceIsaBusiness

It'simportanttorememberthatinsuranceisabusiness.Somepeoplemaythinkofinsuranceasaservicethathelpspeopleintimesofneed,insurancecompaniesoperatetoproduceaprofit.Therefore,theywanttocollectmoreinpremiumsthantheypayoutinclaims.

Ifallofaninsurancecompany's"insureds"filedclaimsatthesametime,thecompanywouldgobankrupt.Fortunately,theoddsofthishappeningareincrediblyslim.Toimprovetheirodds,insurerswillmakesomekindsofinsurance(suchasearthquakeinsuranceinCaliforniaandhomeownersinsuranceinpartsofFloridaandotherhurricane-proneareas)veryhardtogetorveryexpensive.

Ifyoufilealotofclaims,yourinsurancecompanyisgoingtoraise

yourratesnottopunishyou,buttomakesureitcanstillearnaprofit.Becauseclaimsoftenleadtohigherrates,itisimportanttoavoidfilingsmallclaims.

We'llshowyoumorewaystosavemoneyinthefollowingchapters.Andwe'llshowyouhowtodecipherthejargoninsuranceagentslovetouse.Eventhoughinsuranceiscomplicated,afewbasictoolsandguidelinescancutthroughmostofthedifficulty.

GETTINGAROUND

Chapter1What'sCoveredbyPersonalAutoPoliciesEverystateintheU.S.hasalawrequiringpeoplewhodrivetohaveaminimumlevelofautoinsurance.But,evenifthelawdidn'trequireit,you'dprobablystillwanttohavesomeautocoverage.Drivingacarortruckisriskybusiness.(Andthatdoesn'teventouchonthedangerofdrivingamotorcycle.)Eachyear,morethan21millionmotorvehicleaccidentsoccuronournation'sroadways,accordingtotheNationalSafetyCouncil.

Eventhesafestcarortruckdriverrunssomeriskofgettinginanaccident.Thismeansyou'llneedsomeformofinsurancetocoverthecostofrepairstoyourcaraswellastheotherperson'scarandinjuries,ifyouwereatfault.Thentherearemedicalbills.There'salsothechancethatyou'llbesuedforcausingpainandsufferingifsomeoneisinjuredinanaccidentandyouareatfault.

Anotherissuetoconsider:It'slikelythatyouorsomeoneyouknowhashadacarstolen.AccordingtotheInsuranceInformationInstitute,nearly1.5millionvehicleswerereportedstolenintheUnitedStatesin1995.

Thefactthatyouaren'twildaboutyourcardoesn'tmeanthatthievesaren't.So-called''chopshops"haveaparticularpenchantforcommonplacevehiclesthatareseveralyearsold,sincetheycanresellthepartstorepairshopsatatidyprofit.Andthentherearethe"exporters,"whostealcarsandreselltheminothercountries.

Inotherwords,yourvehicleisatrisk,evenwhenit'sparked.Whenit'smoving,allofyourpossessionsarealsoatrisk.Thekeytoprotectingyourselffromtheserisksisto"transfer"themtosomeone

elseandthewaytodothatistobuyinsurance.Ittransferstheriskfromyoutotheinsurancecompanyforasmallfee,ofcourse.

TheBasics

Whatkindofcarinsuranceisthere?There'sthekindyou'rerequiredbylawtohaveinyourstate.Andthere'sthekindyou'reprobablygoingtowant,eventhoughitisn'tmandatory.

Tostartthingsoffwiththesimplestmatters,themandatoryautoinsurancecoveragesinmoststatesinclude:

Bodilyinjuryliability.Ifyouinjuresomeoneinacaraccident,thiscoveragepaysthatperson'smedicalandrehabilitationexpenses,andanydamagesforwhichheorshemaysueyou.Inmoststates,youmustbuycoverageofatleast$15,000/$30,000(the$15,000paysforinjuriestooneperson;the$30,000isthetotalavailableperaccident).

Acaveat:Legallymandatedcoverageminimumsdon'talways...don'tusually...provideenoughprotectiontoshieldamiddle-classpersonadequatelyfromauto-relatedliabilities.Limitsashighas$100,000/$300,000areeasilyavailablefrommostinsurancecompaniesandmakethemostsenseformostpeoplewithassetstoprotect.

Propertydamageliability.Ifyou'reatfaultinanaccidentandyoudamagesomeone'sproperty,thiscoveragepaystofixit.Inmoststates,youmustbuy$5,000worthofcoverage.Manystandardpoliciesincludeahigherlimitoften$25,000.(Ofcourse,ifyoutotalanewMercedes,you'llneedmore.)

Medicalbenefits.Thiscoveragepaysmedicalbillsforyouandotherscoveredonyourpolicy,nomatterwhowasatfaultintheaccident.Inmoststates,youmustbuyatleast$5,000worthofcoverage.Thetypicaldriverbuys$10,000.However,ifyouhavehealthinsurance,youmaynotneedit.

Inadditiontothemandatorycoverages,therearevariouscoveragesthatarenotmandatedbylaw...butwhichprotectyoufromcommonrisks.Thesecoverages,whichmostpeoplebuywithoutthinkingmuchabout,include:

Collision.It'sallwellandgoodtopaytofixsomeoneelse'scar,butthiscoveragewillpaytofixyours.Likemedicalbenefits,it'sano-faultcoverage.(Inotherwords,itpaysregardlessofwhowasatfault.)

Ifyou'refinancingacarpurchase,mostlenderswillrequireyoutobuycollisioncoverage.Insurancecompaniesusuallywillgiveyoua$500deductible,unlessyourequestanotheramount.Thehigheryourdeductible,theloweryourpremium.

Comprehensive.Thiscoveragepaysfortheft,aswellasdamagetoyourcarfrom"hazards,"includingfire,flood,vandalismorstrikingananimal.Again,mostlendersrequireyoutobuythiscoverageifyou'refinancingyourcar,andyoualsocansetyourdeductibleforthiscoverage.

Uninsured/underinsuredmotorist.Ifyou'reinjuredinanaccidentandthepersonwhohitsyoudoesn'thaveenoughinsuranceoranyinsuranceyou'llbegladyouhavethiscoverage.Itwillpayforyourlossesanddamages,includingyourmedicalbills,lostwagesandpainandsuffering.Itusuallymakessensetopurchasethesamelevelofthiscoveragethatyouhaveforbodilyinjuryliability.

ButWait,There'sMore

Inadditiontothesetypicalcomponentsofacarinsurancepolicy,thereareafewspecialoptionsthatyoumaywanttoaddtocustomizeyourinsurancetosuityourneeds,butnotallinsurancecompaniesofferthem,sobesuretoask.Theseinclude:

Extraordinarymedicalbenefits.Ifyourmedicalandrehabilitationexpensesexceedthelimitsonyourpolicy,thiscoveragekicksinandpaysupto$1million.

Funeralbenefit.Ifyouorafamilymemberdieinanautoaccident,thiscoveragepaysupto$2,500.Thecostisnominal.Nationwide,forinstance,charges40centsperyearfor$1,500worthofcoverage(althoughitcostsconsiderablymoretobeburiedinmostpartsoftheUnitedStates).

Gapinsurance.Thiscoveragepaysthedifferencebetweenwhatyouoweonacarandwhattheactualvaluesisintheeventthatthevalueislowerthanthepayoffifthecarisstolenortotalled.Thiscoveragehasbecomemorecommonsinceleasingcarshasbecomemorepopular.

Incomeloss.Ifinjuriesfromanaccidentkeepyoufromworking,thiscoveragepaystheamountofyourtake-homepay.

Paymentswillusuallylastonlyalimitedtime.Buttheyaremadewithoutregardtowhetheryouhaveotherdisabilityinsurancecoveragealthoughanyotherdisabilityinsuranceyouhavewillprobablynotkickinuntilthiscoverageends.

Rentalcarreplacement.Thiscoveragepaysasetamount(usuallyabout$15perday,toamaximumof$450)forarentalcarifyourcarisbeingrepairedbecauseofanaccident.

Towingandlaborcosts.Thiscoveragepaysfortowingandroadservice,suchasjump-startingyourcarorchangingaflattire.Itcanbeusedanytimeyourcarbreaksdown,notjustwhenit'sinvolvedinanaccident.Thiscoverageshouldn'tcostverymuchusuallylessthan$5ayear.

Stacking.Thiscoverageallowsyoutomultiplytheamountofuninsuredorunderinsuredmotoristcoverageyouhavebythenumberofvehiclesonyourpolicyorbythenumberofvehiclesinyourhousehold,iftheyarecoveredunderseparatepolicies.Becausepeoplesometimesabusestackingtoinflateclaims,somestatesdon'tallowthispracticeandeventheonesthatdoaddanumberofprovisions.

Throughoutthischapter,wewillconsiderthevarioustypesofautoinsuranceindetail.

WhatTheySay,WhatTheyMean

Aswe'veseenbefore,insurancecompaniesarenotoriouslyfondofjargon.Here'swhattheyreallymean,startingatthebeginningofaninsurancepolicy,withtheDeclarationsPage.

TheDeclarationsPagecontainsalotofthespecificinformationrelatingtoaparticularpolicyandpolicyholder.Itincludesthenamesofthepeoplecoveredbythepolicy,thedatesit'sineffectandthe

vehiclescovered.

Apolicyisineffectbeginningontheeffectivedate.Whencoverageunderapolicystops,thepolicyhasexpiredthus,thedateonwhichcoverageendsiscalledtheexpirationdate.

Akeythingtonote:Thetimeofdaythatappearsalongwiththeeffectivedateandexpirationdate.Thispinpointstheexacttimeatwhichcoveragebeginsandends.(Ifyourpolicystartsatmidnight,andyougetinanaccidentat11:55p.m.youwon'tbecovered.)

TheDeclarationsPagealsowillmentionanyspecifickindsofcoverageaddedtoordroppedfromastandardpolicy.Thesearecalledendorsements.However,moredetailontheendorsementsusuallywillappearelsewhereinyourpolicy.

AftertheDeclarationsPage,thenextplacetolookforbasicinformationisthedefinitionssectionofthestandardpolicy.Here'saquicktranslationofthemostimportanttermsfoundthere.

Loss,asusedinaninsurancepolicy,doesnotgenerallymeanmisplacement.Lossmeansadirectfinanciallossofvalueasaresultofsituationsthatarecoveredbythepolicy.

CoveredautoisusedthroughoutthepolicytorefertothespecificcarorcarslistedontheDeclarationsPage.Acarhastobelistedusuallybyvehicleidentificationnumberinordertobeconsidereda"coveredauto."(Thisiswhyit'simportanttoactuallyreadtheDeclarationsPagetobesurealltheautosyouthinkarecoveredreallyare.)

Thephrasenon-ownedautoisanewadditiontosomepolicyformswritten.Itrelatestocoverageforcarsyou'veborrowedorrented.(Leasedcarsusuallyaretreatedasifyouownthem.)

Acollisiondoesnothavetoinvolvesmashingintosomethingdamagecausedbytheupsetoroverturnofacoveredautoisconsideredcollisiondamage.Andcollisionsdon'tnecessarilyinvolvemultiplecarsifyouhitabridgeoratreeoramailbox,that'sconsideredacollision,too.

However,hittingananimalorbirdisnotconsideredacollision,accordingtostandardpolicies,andthedamagewouldbecoveredonlyifotherthancollision(OTC,alsoknownascomprehensive)coveragehasbeenpurchased.

Thereareafewotherkeyphrasesyou'llneedtoknow,tobeableto

speakthelanguageofcarinsurancefluently.

Forstarters,you'llneedtoknowthatthephrasecoveredautoappliestoseveralsetsofcircumstances.Ifyousellacarandbuyareplacementvehicleduringthepolicyperiod,thereplacementisautomaticallyacoveredautoforliabilitypurposesuntiltheendofthepolicyperiod.However,physicaldamagecoveragewillapplytonewlyacquiredvehicles(whethertheyarereplacementcarsoradditionalvehicles)onlyifyourequestthecoveragewithin30days.Thereason:Physicaldamageratesandpremiumsaremoredepen-

dentuponthevalueofthevehiclethanareratesandpremiumsforothercoverageslike,say,liability.(Whileyoumaythinkabeat-up1977ToyotaposesagreaterliabilitythreatthananewBentley,insurancecompaniesdon'tseeitquitethatway.)

Anothergoodtermtoknowisliberalization.Theliberalizationclausestatesthatiftheinsurancecompanymakesachangetoitsstandardpolicyformthatprovidesbroadercoveragewithoutapremiumcharge(forexample,ifitdropsapolicyexclusion),thatchangeautomaticallywillapplytoyourpolicyonthedatethechangegoesintoeffectinyourstate.Thisclauseisgoodforyou,andit'sgoodforinsurancecompanies,too,sinceiteliminatestheneedtomailoutendorsementstoeverysinglepolicyholderwhenthereisnochangeinpremiums.

Andthenthere'stheC-word:cancellation.Inmoststates,thereasonsforwhichaninsurancecompanyispermittedtocancelapolicyarelimitedbythestate'sinsurancedepartmentandthelawbutonlyifthepolicyhasbeenineffectforatleast60daysorisarenewal.

Anothergoodinsurancevocabularywordissubrogation.Tobesubrogatedmeanstobesubstitutedintheplaceofanother.Ininsurancepolicies,asubrogationprovisionsaysthatiftheinsurancecompanyhasmadeapaymentunderthepolicytoyouortoathirdpartyonyourbehalfandifyouhavealegalrighttorecoverthatlossfromyetanotherpartytheinsurancecompanyissubrogatedtoyourright.Thisisanimportantprotectionfortheinsurancecompany:Itmeansthecompanycanrecoupwhatithaspaidouttoprotectyou,ifsomeoneelseisatfault.

Mostpeopledonotpaycashfortheircarsinstead,theyborrowmoneyfromabankorautofinancecompanytomakethepurchase.Untiltheloanispaidoff,boththepurchaserandthelenderhaveafinancialinterestinthecar,whichinsurancecompanieshavedeterminedisaninsurableinterest.Thus,virtuallyallbanksandlendingcompaniescan

makesomestipulationsastothetypeofinsuranceyoucarry(mostrequirethatcoveragefordamagetoyourcarbecarriedonafinancedvehicle)andtheycaninsistthatthey(asthelender)belistedonthepolicyashavinganinsurableinterestinthecar.

HumongousTrucksNeedNotApply

NoteveryvehicleiseligibleforcoverageunderaPersonalAutoPolicy.Thereareownershiprules,usagerulesandrulesthathavetodowiththesizeandshapeofthevehicle.

Let'sbeginwiththeownershiprules.Tobeeligible,avehiclemustbeownedbyoneofthefollowing:

anindividual;

ahusbandandwifewhoareresidentsofthesamehousehold;

twoormorerelativesotherthanahusbandandwife,ortwoormoreunrelatedpeopleinthesamehouseholdaslongasbothnamesarelistedontheregistration(andsomeinsurersmayrefusetoofferthistypeofcoverage.);

afarmfamilyco-partnershiporfarmfamilycorporation.

Aleasedautousuallyistreatedasifitwereowned,andmaybecoveredunderaPersonalAutoPolicy.

Inaddition,onlyprivatepassengervehiclesareeligibleforcoverageunderthePersonalAutoPolicy.Tobeconsideredaprivatepassengerauto,thevehiclemust,havefourwheels.(Three-wheeledMorganswouldbeanexceptiontothisrule,butthey'dprobablybecoveredbyaclassiccarpolicy,anyway.)

Coupes,convertibles,sedansandstationwagonsqualifyasprivatepassengerautosforcoverageunderaPersonalAutoPolicy.Pickuptrucks,paneltrucksandvansalsomaybeconsideredprivatepassengerautosandmaybeeligibleforcoverageiftheysatisfythefollowingrequirements:

theymustbeownedbyinsuredpersons;

theymusthaveaGrossVehicleWeightoflessthan10,000pounds;and

theymustnotbeusedinafreightordeliverybusiness.

So,vans,pickupsandpaneltrucksareeligiblewhenthey'reusedonlyforpersonaltransportation,orusedinfarmingandranching,orusedinanybusinessexceptafreightordeliverybusiness.

However,thesamerestrictiondoesnotapplytootherprivatepassengerautos.Coupes,convertibles,sedansandstationwagonsareeligibleforcoverageaslongastheyarenot:

usedasapublicorliveryconveyanceforpassengersforafee(suchasataxiorlimousineservice);or

rentedtoothers.

Inotherwords,carscanbeusedinafreightordeliverybusiness,butonlyiftheyaretransportingcargo(products,materialsorpackages)nothumansforafee.Thisisaloopholethat'slikelytobeclosedatsomepoint.

Youcanextendyourliability,medicalpayments,uninsuredmotorists,collisionandother-than-collisioncoveragetomotorhomes,motorcycles,golfcarts,etc.Todoso,youmustaddonaMiscellaneousTypeVehicleEndorsement.

InsuringAgainstLiability

Liabilityisprobablythemostimportantkindofautomobileinsurance.Itcoversmoneyowedwhenyoucausebodilyinjurytoanotherpersonordamagetoanotherperson'sproperty.

Technically,liabilitycoverageappliesonlywhenyouarelegallyliableforinjuryordamage.Thefactthatinjuryordamagehasoccurreddoesnotnecessarilymeanthatyou'relegallyliable.(However,provingwhoiseithercompletelyorpartiallyliablecanbeoneofthemosttime-consumingandlegalfee-generatingpartsoftheinsuranceclaimsprocess.)

Ifonedriverisliableforatwo-caraccident,theotherpartymaybeentitledtocompensationforinjuriesordamageorboth.Compensationmaybeintheformofmoneypaidtotheinjuredpartyfortangibledamages(suchasamedicalbillorthecosttorepairadamagedvehicle)and/ormoneypaidforintangibledamages(suchaspainandsuffering).

Theintangiblesaretheonesthatgetyou,financiallyspeaking.Whenyoudamageanothercar,yourliabilityisusuallylimitedtothevalueofthatvehicle.But,ifyouinjureapersoninthatcar,causingapermanentdisabilityorpainandsufferingthatpreventsthatpersonfromearningaliving,courtscanawardmillionsofdollars.That'swhyyouneedliabilityinsurance.

Stateinsurancelawsgenerallyspecifysplitlimits.Forexample,a

statemightrequirethatautomobileownersmaintainliabilityinsuranceinthefollowingamounts:

$15,000perpersonand$30,000peraccidentforclaimsstemmingfrombodilyinjury;and

$10,000peraccidentforclaimsstemmingfrompropertydamage.

Examinethechartthatfollowstodeterminetheminimumliabilitylimitsrequiredinyourstate.

MinimumLevelsofRequiredAutoLiabilityInsuranceThefigureslistedareinthousandsofdollars.(Insurancecompaniesgenerallyabbreviatethecoverageamountsinthisway.)Thefirstnumberisthebodilyinjuryliabilitymaximumforonepersoninjuredinanaccident.Thesecondnumberisthebodilyinjuryliabilitymaximumforallinjuriesinoneaccident.Andthethirdnumberisthepropertydamageliabilitymaximumforoneaccident.State Liability

LimitsState Liability

LimitsAlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareD.C.FloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippi

20/40/1050/100/2515/30/1025/50/1515/30/525/50/1520/40/1015/30/1025/50/1010/20/1015/30/1035/15/1025/50/1520/40/1525/50/1020/40/1525/50/1025/50/1010/20/1020/40/1020/40/1020/40/820/40/1030/60/10

MissouriMontanaNebraskaNevadaNewHampshireNewJerseyNewMexicoNewYorkNorthCarolinaNorthDakotaOhioOklahomaOregonPennsylvaniaRhodeIslandSouthCarolinaSouthDakotaTennesseeTexasUtahVermontVirginiaWashington

25/50/1025/50/1025/50/2515/30/1025/50/2515/30/525/50/1025/50/1025/50/1525/50/2512.5/25/7.510/20/1025/50/1015/30/525/50/2515/30/525/50/2520/50/1020/40/1525/50/1520/40/1025/50/2025/50/1020/40/10

10/20/5 WestVirginiaWisconsinWyoming

25/50/1025/50/20

Source:1997Property/CasualtyFactBook,publishedbytheInsuranceInformationInstitute

It'sgoodtoknowtheminimumrequiredbylaw,butitprobablywon'tmakemuchofadifferenceinyourselectionofcoveragebecauseyou'llprobablywantsubstantiallymore.

Aswe'venotedbefore,mostexpertsrecommendbuyingbodilyinjurycoverageofatleast$100,000perpersonand$300,000peraccident,andpropertydamagecoverageofatleast$25,000.Thesehigherlimitsareimportant:Ifacourtawardssomeonemoremoneythanyourautoinsurancelimits,youarepersonallyresponsibleforthedifference.

Ifyouwanttoprotectyourassetsahouse,investments,akillerstampcollectionintheeventthatyoucauseanaccident,you'llprobablywantcoverageofatleast$100,000/$300,000.

Aspartofyourpropertydamageliabilitycoverage,ifyoudamageanothervehicle,theinsurancecompanyalsowillpayforarentalcarfortheotherdriverwhichisconsideredalossofuseexpense.(Ofcourse,yourinsurancecompanyisnotsogenerouswithyou.Lossofuseisnotpartofyourphysicaldamagecoverage;however,youcanaddonrentalcarcoverageifyoudon'thaveasparecarforasmallfee.)

Theotherbigliabilityconceptisvicariousliability.Likevicariouspleasure,it'snotsomethinginwhichyouparticipated...butitstillaffectsyou.Inthecaseofyourcarinsurance,itmeansliabilitythatappliestoapersonororganizationthatdidnotactuallycausedamageorinjurybutisresponsiblefortheactionsofthepersonwhodidcausethedamageorinjury.Aclassicexample:amemberofyourfamilycausesamulti-caraccidentthatresultsinclaimsagainstyourinsurancepolicyfromtheotherdrivers.

Liabilitycoveragealsomightapplytoinjuriestoapassengerinyourcarbutonlyifyouwerelegallyresponsibleforthepassenger'sinjuriesandthepassengerisnotamemberofyourhousehold.

DefenseCosts

Becausedefendingalawsuitincourtcanbeveryexpensive,paymentoflegaldefensecostsisanimportantpartofliabilityinsurancecoverage.Insomecases,thecostofdefensecanbeasmuchasormorethantheamountultimatelyawardedasdamages.

It'simportanttorememberthattheinsurancecompanypaysunlimiteddefensecostsinanautomotiveliabilitysuitandthesedefensecostsarepaidinadditiontothelimitofliability.

Ifdefensecostswereincludedwithinthelimitofliability,mostofus

wouldhavetopurchasemuchhigherlimitsofinsurancetobeadequatelyprotected.Forexample,ifyouhada$50,000limitofliabilityandtheinsurerdefendedaclaimforwhichyourliabilitywasquestionable,butlostthecaseanywayandincurred$38,000ofexpensesfordefensecosts,therewouldbeonly$12,000ofcoveragelefttopayfordamages.Ifthedamageawardwas$40,000,youwouldthenhavetopay$28,000outofyourownpocket.

Fortunately,carinsurancedoesn'tworkthatway.Thisisvitalforyou,becausethecostofreplacingacar,howeverexpensive,isfinite;thepotentialliabilityriskisnot.

Iftheinsurancecompanydefendsagainstaliabilitysuitandthecourtreachesaverdictagainstyou,andiftheinsurancecompanydelaysmakingthepayment,thecourtmightrequirethatinterestbepaidontheamountofthejudgmentfromthetimeitisentereduntilitispaidoranofferofpaymentismade.Thisinterestispost-judgmentinterestanditdoescounttowardthepolicy'soveralllimitofliability.

Anotherfactorinthelimitsofliability:Mostpolicieswillpayupto$50adayforlossofearnings(butnototherincome)youincurbecauseofattendanceathearingsandtrialsattheinsurancecompany'srequest.Butthisnominalcoveragedoesn'timpactmostlabilitylimitssignificantly.

Bearinmindthattheinsurancecompanyisonlyobligatedtodefendclaimsthatareormaybecoveredbythepolicy.Ithasnodutytodefendorsettleaclaimforinjuryordamagethatisnotcoveredbythepolicy.

Forexample,ifyouarebeingchargedwithdrunkdriving,theinsurancecompanywillnotpayforyourcriminaldefense.

MedicalPayments

Medicalpaymentscoverageisanoptionalpartofautoinsurance.Thecoveragepaysreasonablemedicalexpensesincurredbyyou,membersofyourfamilyandpassengersforbodilyinjuriessustainedwhileridinginyourcar.(Theinsurancecompanywillhaveitsownideasaboutwhatisorisn'treasonable.)

Thiscoveragealsoappliestoyouandyourfamilymemberswhenyou'reridinginanotherautomobile,orifyou'reinjuredaspedestriansbyanautomobile.

Medicalpaymentscoverageallowsimmediatepaymenttoyouorothercoveredpersons,regardlessofwhowasatfaultintheaccident.Bothyouandtheinsurancecompanybenefitfromthisaspectofthecoverage.Aquicksettle-

mentofaclaimformedicalexpensesresultingfromaninjuryisabighelpifyou'repayingthebillsoutofpocket,sinceyoudon'thavetowaitarounduntilallthefinger-pointing(andlawyer-calling)isdone.Theinsurancecompanylikesthisquick-payplan,too,becauseithopespayingyourightawaywillpreventyoufromfilingaliabilityclaimlaterforadditionaldamages.

Thereisonemajorproblemwithsettlingmedicalclaimsimmediately:Youmaynotknowrightawaywhatmedicalexpensesyouwillincurasaresultofanaccident.Sometimes,onetreatmentisrenderedimmediately(suchasthesettingofabrokenbone)andanothertreatmentcomeslater(suchassurgerytoputapininthebrokenboneorphysicaltherapytofollow).Theremaybealongdelaybetweenthefirsttreatmentandthefinaltreatmentforaninjury.

TheInsuringAgreementsectioninmanystandardautopoliciesincludesatimelimitationonexpensescoveredbythemedicalpaymentsinsurance.So,it'sgoodtoknowhowlongthisisespeciallyifyou'rethekindofpersonwhowouldputoffsurgeryforaslongaspossible.

Whilenoonewoulddisputetheusefulnessofmedicalpaymentscoverage,itisoneofthereasonscarinsuranceissoexpensivetoday.That'sbecausemedicalcostshavebeenrisingdramaticallyintheUnitedStates.

Onewayinsurancecompanieshavebeenabletocontrolcostsinthehealthinsurancearenaisbyusingmanaged-careplansorhealthmaintenanceorganizations(HMOs)toadministercare.Theseplanssavetheinsurermoney,essentiallybylimitingpolicyholders'choicesandbymakingcertainexpensiveproceduresmoredifficultorevenimpossibletoobtainundertheinsurancepolicy.

Notsurprisingly,insurancecompanieshavebegunapplyingthesesamecost-savingtechniquestoautoinsurancemedicalpaymentscoverage.

DamagetoYourCar

Youhavetocarryinsurancetocoverdamagetosomebodyelse'scar.Butyoudon'thavetocarryinsurancetocoverdamagetoyourcar.However,mostpeoplewithnewervehicleschoosetogetitandallpeoplewho''co-own"theircarswithabankorleasingcompanyareusuallycontractuallyrequiredtohaveit.

Coveragefordamagetoyourcarisdividedintotwocategories.

Collisioncoveragereferstodirectoraccidentalphysicaldamagetoyourcarastheresultofupset(flippingover)orimpactwithanothervehicleorobject(otherthanananimal).

Thesecondlosscategoryfordamagetoyourcariscalled,aptlyenough,otherthancollisionorOTC.Historically,thishasalsobeenknownascomprehensivecoverage.Itisabroadcategorythatincludesmanytypesofloss.Infact,mosttypesofautoinsuranceclaimsfallunderOTCcoverage.

Collisionpaysfortrafficaccidentdamages,andcomprehensivepaysforothertypesofdamage,suchasfromhailoratreefallingonyourcar.Collisioncoveragetypicallyaccountsforabout30percentoftheannualcostofanautoinsurancepolicy,andcomprehensiveaccountsforabout15percent.

Autopoliciesarealmostalwayswrittenwithhigherdeductiblesforcollisionthanforcomprehensivelosses.So,bytreatinganaccidentwithananimalasanon-collisionloss,theinsurancecompanyhasdoneyouafavor:Itallowsthelowerdeductibletoapply.Why?Becauseinsurancecompaniesknowthatyouwillhavegreateropportunitiestoavoidcontactwithothercarsorobjectsthanwithfree-movingcreaturesthatreactunpredictablytolights,motionandsound.

TheftCoverage

Ifyourcarisstolenanditisn'trecoveredandyouhaveother-than-collisioncoveragetheinsurancecompanywillpayyoutheactualcashvalueofthecar,lessyourdeductible.

Thisactualcashvalueisanimportanttermthatwewillseethroughoutthisbook.Inshort,itmeanstheamountpaidforathingminusthedepreciationwhichhasoccurredduringthetermofownership.Inthecaseofcars,itisoftenusedinterchangiblywiththetermBlueBookvalue.Whatevertheterm,thisisaconservativewaytovalueanassetandonethatdoesn'tguarranteetheassetcanbe

replaced.

Ifyourcarisrecoveredanditwasn'ttotaled,theinsurancecompanywillpaytofixthedamagescausedbythetheft.

However,OTCcoveragewillnotpayforthingsthatwereinbutnotofyourcar.Thisincludescellularphones,tapesandCDs,suitcases,cameras,pursesandhundredsofotheritems.Thegoodnewsisthattheseitemsprobablywillbecoveredbyyourhomeowners(orrenters)insurancepolicy.

EndorsementsandChanges

Sinceaninsurancepolicyisalegalcontract,youoryourinsurancecompanycan'tjusttakeapenandmakechangestothepolicy.Tochangeanyportionofthepolicy(whetheritistheinformationontheDeclarationsPage

oranyofthepolicytermsandconditions),theinsurancecompanymustissueaformthatidentifiesthechangebeingmade.Theformisthenattachedtothepolicy,andthechangebecomesbindingonbothparties.

Formssuchasthisandchangessuchasthisarecalledendorsements.

Additionalformsalsoareattachedtoapolicytoaddoptionalcoveragesthatarenotincludedinthestandardpolicyform.Theseformsmaybeattachedwhenapolicyisfirstissued,oratalaterdate.

Avarietyofendorsementsmaybeusedinconnectionwithanautopolicy.Endorsementsmaydosomethingassimpleascorrectingthemisspellingofyournameorsomethingmorecomplex,suchaschangingtheinsuredvehiclesoraddingacoveragethatisnotmentionedintheoriginalpolicy.

Oneendorsementthathasbecomepopularinrecentyearsistowingandlaborcostcoverage.Whenthecoverageiswritten,alimitofinsuranceandapremiumforsuchanadditionwillbeshownontheDeclarationsPage.

Obviously,thiscoverageappliestowardtowingandlaborcostswhenacoveredautoisdisabled.However,thelaborcostsarecoveredonlywhenthelaborisperformedattheplaceofdisablement(suchasonthesideoftheroadwherethecarstoppedrunningnotlateratagarage).Thiscoverageusuallyiswrittenforaprearranged,limitedamount.

Basedontheirnames,youmightthinkthatwhenyoupurchasebothcollisionandother-than-collisioncoverage,anypossiblelosssituationwouldbecovered.Butyou'dbewrong.Thereareafewexclusionsinthepolicy,whichwe'llgetintolater.Nonetheless,purchasingbothdoesgiveyouextremelybroadcoveragefordirectandaccidentalloss

toinsuredvehicles.

LimitsofLiability

Thetermlimitofliabilityisusedallthetimeininsurancematters.Ithasthesamemeaningaslimitofinsuranceorlimitofcoverage.Youragentorinsurancecompanymayuseanyofthesetermsinterchangeably.

Insurancecompaniesusethetermlimitofliabilitybecausewhenalossoccursthatiscoveredbythepolicy,theybecomelegallyresponsibleforhonoringtheircontractualagreementstopaydamagestoyouortoathirdpartyonyourbehalf.

Inotherwords,theliabilityinquestionbelongstotheinsurancecompanyand,together,youandthecompanysetlimitsonit.

Thelimitofliabilityforanycoverageissimplythemaximumamountofmoneythattheinsurancecompanyislegallyobligatedtopayifacovered

lossoccurs.Ifacoveredlossoccursforlessthanthelimitofliability,theinsurancecompanywillpaytheamountoftheloss,minusanydeductiblethatmayapply.Iftheamountofacoveredlossismorethanthelimitofliability,theinsurancecompanywillpaythelimitofitscoverageandyouareresponsibleforpayinganyadditionalcosts.

If,forsomereason,youchoosetopurchaseorrenewaninsurancepolicythatdoesnotsatisfythefinancialresponsibilitylawofyourstate,thatpolicymustcomewithaclear,writtenwarningthatitdoesnotmeetthelaw.

Youdon'tgettochoosethelimitofliabilityforphysicaldamagecoveragedirectly,becauseitisbasedontheactualcashvalueofthecoveredcar,minusanydeductible.

Animportantpoint:Mostcarsdepreciateinvaluerapidly.Ifyoupaid$20,000foranewcarfiveyearsagoanditistotallydestroyedtoday,itwouldnotbeworthitsoriginalcostnorwoulditbeworththecurrentcostforanewcar.Instead,yourinsurancecompanywouldpaytheactualcashvalue,andyoumightreceive$10,000asasettlement.

Generally,theactualcashvalueofafive-year-oldcarshouldbeenoughforyoutopurchaseanotherfive-year-oldcarofthesame(orsimilar)makeandmodel.

Ifyourcarwasnotatotalloss,thecompanywouldpaywhatitcosttorepairthecarwithmaterialsoflikekindandquality(whichmaymeanusedorsubstituteparts).However,theinsurancecompanydoeshavetheoptionofkeepingallorpartofanydamagedorstolenpropertyandgivingyouacheckforanagreedorappraisedamount.

Thisiswhatpeoplemeanwhentheysayacarhasbeen"totaled."TheinsurancecompanypaysoutthetotalActualCashValue(ACV)ofthecarandtakespossessionofthetitle.Itwillthensellthewreckedcarto

anautosalvagecompany.

Alsobearinmindthatiftheshopdoingtherepairworkdoesadditionaldamagetoyourcar(say,ifitfallsofftheliftorsomeonebacksintoit),theinsurancecompanywillnotpay.You'llhavetogetthemoneyforthoserepairsfromtheshop.

Astandardautopolicywillusuallyincludespecificliabilitylimitsforcertainkindsofcoverage.Oneexample:Ifyouownatrailer,onmostpolicies,themaximumcoverageislimitedto$500.

InterstateTravel

Theoddsarethatyou'regoingtodriveintoanotherstateatsomepoint.Youmayevenworkacrossstatelines.Becauseliabilitylawsvaryfromstatetostate,settlingaclaimcanbecomplicatedifanaccidentoccurswhenyouareoutsideyourhomestate.

That'swhyinsurancecompanieshaveout-of-statecoverageprovisionsinastandardautopolicy.ThestandardPersonalAutoPolicywillautomaticallyprovidetheminimumamountsandtypesofcoverageneededintheotherstate.Forexample,supposeyourhomestatedoesnothaveano-faultautoinsurancelaw,butyouvacationinanotherstatethatrequiresno-faultcoverage.Ifyouhaveanaccidentintheno-faultstate,yourPersonalAutoPolicywillprovidetherequiredno-faultbenefits.

However,mostpersonalautopoliciesdoplacesomerestrictionsonwhereyoudrive.Generally,thepolicyterritoryislimitedtotheUnitedStates,itsterritoriesandpossessions,PuertoRicoandCanada.IfyoudriveintoMexico,youmusthavevalidliabilityinsurancefromaMexicaninsurer.(Ifyoudon'tandyou'reinvolvedinanaccident,youcouldwindupdoingjailtime,havingyourcarimpoundedandsufferingotherpenalties.)

It'saRental

Oneofthemostcommonquestionspeopleaskaboutautoinsuranceis"DoIneedtobuytheinsurancethatcarrentalcompaniesoffer?"

Theanswerusedtobesimple:No.Butstandardautocoveragehasstartedtochangeinthelastfewyearslimitingthecoverageavailablewhenyou'redrivingacaryoudon'town.Now,theanswerisnotsosimple:Usuallynot,butinsomesituations,maybe.

Inthe1990s,standardautoinsurancepoliciesweremodifiedslightly

tolimitcoveragefornon-ownedvehicles(thisisthejargontermthatincludesrentalcarsinitsdefinition).Essentially,thestandardpolicyusedtoprovideblanketcoverageforaninsuredpersondrivinganon-ownedvehicle.Thesedays,somepolicieslimitthecoveragetocertaintypesofnon-businessuseandthenonlyifthereisnootherinsurancecoverageavailable.

Tobesureaboutyourcoverageforrentalcars,readthenon-ownedvehiclesectionofyourpolicy.Ifitincludesweaselwords,findoutifyouremployercoversyouforbusinesstravelunderacorporateliabilitypolicy.Ifnot,callyourinsurancecompanyandaskforanendorsementbroadeningcoveragefornon-ownedvehicles.Thiswilladdafewdollarstoyourpremiumbutitwillbemuchmorecost-effectivethanpayingfortheinsurancethat

rentalcarcompaniesoffer.

Whenyourentacar,youusuallywillbeofferedseveralkindsofcoverage.Themostcommonisacollisiondamagewaiver,orCDW.Somerentalcompaniesusethetermlossdamagewaiver,orLDW,insteadofCDWbuttheprotectionisthesame.

Thiskindofwaiverreleasesyoufromresponsibilityfordamagetotherentalcar,providedyoucomplywiththerentalcontractterms.Ifyoudeclinethecoverageandhaveanaccident,youmaybeheldresponsiblefortheentirevalueofthecar.(Atechnicalpoint:CDWisn't,strictlyspeaking,insurance.It'sanindemnificationagreementbetweenyouandthecarrentalcompany.)

OnecommonproblemisthatCDWagreementsoftencontainlimitationsandloopholesthatrenterscanunwittinglyviolate,voidingthecoverage.Forexample,CDWcanbevoidedifyoudriveonanunpavedroad,orifyouengagein"negligent"drivingandtherentalcompanydefinesnegligent.

CDWusuallyisoverpriced.Itaddedabout$11adaytothecostofrentingacarin1995.However,instateswhererentalcompanieshavetobundlecollisioncoverageintotheadvertisedrentalrate,averageratesareonlyabout$2.50adayhigherthanintherestofthecountry.(Illinoisusedtobeoneofthestatesthatbundledcoverageinrentalcarrates.However,in1997,itchangeditslawstoallowcarrentalcompaniestosellthecoverageagain.Thischangewasmadebecauseofthemoveamongautoinsurerstolimitcoveragefordamagetorentalcars.)

CDWisn'ttheonlyadditionalinsurancecarrentalcompaniesmaytrytosellyou.Otherkindsinclude:

Supplementalliabilityinsurance.UnliketheCDW/LDW,thisoption

protectstherenteragainstpropertydamageorpersonal-injuryclaimsoverandabovethebasicliabilitylimitsprovidedintherentalagreementusuallytheminimumrequiredbystatelaw.

Personal-effectscoverage.Thisprovideslimitedreimbursementforlossofbaggageandotherpersonalpropertyduringtherentalperiod.(Theseitemsprobablyarecoveredbyyourhomeownerspolicy.)

Personalaccidentinsurance.Thisprovideslimitedaccidentaldeathbenefitsfortherenterandoftenpassengers.

Ofthese,supplementalliabilityisthecoveragemostpeopleshouldcon-

sider.Whetherornotyoushouldbuyithasalottodowithwhereyou'rerentingthecar.Insomestates,majorcarrentalcompaniesarebeginningtoshiftprimaryliabilityresponsibilitytorenterswhohavepersonalinsurance.Thatmeans,withoutsupplementarycoverage,youcouldbefacedwithfinancialdisasterifyouaresued.

Ausefulruleofthumb:Iftheclerkattherentaldeskasksforthenameofyourinsurancecompanyandyouhaven'tsecuredbroadnon-ownedautocoverage,youshouldconsidertakingthesupplementalliabilitycoverage.

Coveragealsomaydependonwhetheryouusethecarforbusinessorpleasure,orwhetheryourvehicleathomeisbeingusedinyourabsence.Somepersonalpolicieslimitthenumberofrentaldayscoveredeachyear.Othersapplydeductiblesandlowerliabilitylimitstocollisioncoverageand,therefore,rentalcarcoverage.

Evenwhenyourpersonalautoinsurancedoescoveryouintheeventofaphysicaldamagelosstoarentalcar,itwillusuallybetreatedasexcessovertheinsuranceorothercoveragepurchasedfromthecarrentalcompany.ThismeansthatifyouboughttheCDW,yourinsurancecompanywon'tpayuntiltherentalcarcompany'sobligationistappedout.

Andifyouthinkthecreditcardyouusetorentthecarprovidesallthecoverageyouneed,thinkagain.Insuranceofferedbycreditcardcompaniesistreatedasexcessoverallotherformsofcoverageevenyourpersonalpolicy.

UninsuredMotoristCoverage

Uninsuredmotorist(UM)coverageisdesignedtoprotectyouforbodilyinjurieswhenthoseinjuriesarecausedbyanotherdriverwhoeitherhasnoliabilityinsuranceorhascoveragethatislessthanthe

minimumrequirementsofstatelaw.UMcoveragealsoprotectsyouforbodilyinjurywhencausedbyahit-and-rundriverwhocannotbeidentified.

Uninsuredmotoristsareabiggerriskthanmanypeoplethink.AccordingtotheCaliforniaDepartmentofInsurance,incertainpartsofLosAngelesCounty,fewerthansevenin10drivershaveautoinsurance.Thesamestudyfoundthatalmost28percentofallCaliforniadriversareuninsuredanumberthatseemstoapplytothestateswiththebiggestpopulations.

Eveninstatesthatstrictlyenforceautoinsurancerules,uninsuredmotoristsgotogreatlengthstostayontheroad.Somepurchasetemporaryinsurancetoobtainlicenseandinspectionseals,thendiscontinuetheirpayments.Othersusecounterfeitinsurancecards.

UMcoveragewasconceivedasapartialsolutiontotheproblemcreatedbydriverswhowouldnotorcouldnotobtainliabilityinsurance.ItbenefitsthosewhoarecoveredbyaPersonalAutoPolicyandwhopurchasedUMcoverage.Itdoesnotbenefittheuninsuredmotoristwhoisresponsibleforanaccident.

Inmoststates,UMcoverageappliesonlytobodilyinjury.Onlyahandfulofstatesallowthiscoveragetoapplytopropertydamage.(Inmanystates,propertydamagecausedbyanuninsuredmotoristorahit-and-rundrivercomesunderthedomainofyourcollisioncoverageanimportantpointtoconsiderbeforeyouturndowncollisioncoverage.)

Underinsuredmotoristscoverageisslightlydifferent.Itapplieswhenanotherdriverwhocausesanaccidenthasliabilityinsurance,buttheinsuranceisinadequatetocoverresultinginjuries.

Forexample:Youcarry$50,000ofunderinsuredmotoristscoverage.Anotherdriverswervesontothewrongsideofthestreetandhitsyourcarhead-on.Youneed$45,000tocoveryourinjuries.Theotherdriveronlyhas$30,000ofbodilyinjuryliabilitycoverageandcannotpersonallypaytheadditionaldamages.Theotherdriver'sinsurancecompanywouldpayyou$30,000,andtheunderinsuredmotoristscomponentofyourcoveragewouldpaytheadditional$15,000.

Underinsuredmotoristscoverageisoftenlinkeddirectlywithuninsuredmotoristscoverageinastandardpolicy.Whetherornotthey'relinked,it'susuallyagoodideatopurchasecoveragelimitsinlinewiththeotherpersonalpropertycoverageinthepolicy.

UMcoverageissusceptibletosomestrangelegalrulingsandregulatoryinterpretations.But,ifanything,thisonlymakesitallthemoreimportanttohave.

Anexample:In1994,insurancecompaniesinOhiowereincreasingtheircashreserves(moneystockpiledtopayclaims)inresponsetoadecisionfrom1993thatincreasedtheawardsforinjuriessufferedinautoaccidents.

Thisdecisioneliminatedtheperpersonliabilitylimitsforbodilyinjuryanduninsured/underinsuredmotoristscoverageinwrongfuldeathcases.Italsoexpandedunderinsuredmotoristscoveragetoapplytosituationswhereitdidn'tpreviously.

TheOhioInsuranceInstituteestimatedthatthechangewouldresultinratesdoublingonuninsuredandunderinsuredmotoristscoverage.Manypeopleintheinsuranceindustryworriedthatsuchaspikewouldconvincesomedriverstodropthecoverage.

Withsomethinglike1in4driversnotcarryingautoinsurance,droppingUMcoverageorcarryinginsufficientcoverageisnotagoodidea.

Exclusions

Everyinsurancepolicywillhaveasectiondevotedtoexclusions.Theyhelpshapethecoverageandnarrowitsscopebyspecifyinglossesthatthepolicywon'tpay.

Exclusionsgenerallyareincludedininsurancepoliciestoaccomplishthesefourbroadpurposes:

toclarifytheintentofcoverage;

toremovecoverageforlossesthatshouldbecoveredbyotherformsofinsurance;

toremovecoverageforlossesthatresultfromabove-averageriskfactors,whicharenotanticipatedinaverageratesandpremiums(usuallythistypeofexcludedcoverageisavailableatanadditionalcharge);and

toremovecoverageforcatastrophiclossesthatgenerallyarenotinsurable(althoughcoveragefortheselossesmaybeavailablethroughspecialinsurancepoliciesorgovernmentprograms).

Exclusionsformthebasisofmostofthelegaldisputesthatoccurbetweenpolicyholdersandinsurancecompanies.

TheC-Word

Oneofthemostcommoncomplaintsaboutcarinsurancecompaniesishowquicktheyaretocancelyourpolicyifyouhaveanaccidentorgettoomanytickets.Fortunately,stateregulatorshavetakenagreat

interestinhow,whenandwhyinsurancecompaniescancelpolicies.

In1995,WashingtonstateInsuranceCommissionerDeborahSennannouncedapackageofchangesinprocedureandconsumereducationprogramsintendedtohelppeoplemakesenseoftheirautoinsurance.ThecenterpieceoftheWashingtonpackagewasaproposedlawthatwouldpreventinsurancecompaniesfromcancellingordenyingautocoveragebasedonasingleaccidentperinsureddriverorbecauseofaccidentsthatweren'tthefaultofthepolicyholder.

Insuranceregulatorshearmanyconsumercomplaintsthatinsurancecompaniesarbitrarilyassignpartialblametopolicyholderswhenaccidentsaren'ttheirfault.Afterassigningblamewithoutconsultingthepolicyholder,somecompaniesthencancelthecoverage.

AnotherWashingtonproposalwouldprohibitinsurancecompaniesfromdenyingpeopleautocoveragebecausetheircoveragewaspreviouslycancelledordeniedbyanothercompany.Consumergroupscallthepractice"blacklisting."

Ofcourse,eventhemostprogressivestatesmustallowinsurancecompaniestocancelpoliciesinsomeinstances(afterall,insuranceisabusiness,andinsurersshouldbeallowedtomakeafairprofit).Butstateinsuranceregulationsdoprovideguidelinesconcerningwhenandwhypoliciesmaybecancelled,andhow.Theyusuallyrequiretheinsurertousespecificlanguageandprovideexplanationsandinformationtothepolicyholderaspartofthecancellationnotice.Iftheydon'tcomply,insurancecompaniesoftengetfarmorethanaslaponthehand.

Ifyourcarinsuranceiscancelledornotrenewedwhenitexpiresmakesurethatthecompanygivesyouaclear,writtenexplanationofwhythisishappening.Iftheexplanationdoesn'tcomepromptly...ordoesn'tmakesensewhenitdoescome...contacttheconsumerprotectionbranchofyourstateInsuranceCommissioner'soffice.Havethecancelledornon-renewedpolicyready.Regulatorsliketopursuethesecases.

Stateinsurancedepartmentsalsohaveheardagrowingnumberofpolicyholderscomplainthat,iftheymakeevenasmallclaim,insurancecompanieswillthreatentocanceltheircoverageunlesstheybuyotherinsurancepoliciessuchashomeownersorumbrellaliability

insurance.

InApril1994,thePrudentialInsuranceCompanyofAmericatolditsNewJerseyagentsthatitwouldnotcanceltheautoinsurancepoliciesofpolicyholderswhodidn'tbuyothertypesofinsuranceorhavecleandrivingrecords.PrudentialspokesmanRobertDeFillipposaidthedirectivetotheagentswasareiterationofcurrentpolicy.Butsomeagentsandpolicyholdersclaimedthestatementflewinthefaceoftheirownexperienceswiththecompany.

Theagentsclaimedthatthecompanywasnotrenewingtheautopoliciesofhundredsofcustomers,includingoneswithgoodrecords,butwaswillingtoreconsideriftheypurchasedotherinsurancefromthefirm.Theirclaimswerebuttressedafewmonthslater,whenaPrudentialagentwentpublicwithwhathesaidwasalistof97clientsthatthecompanyhadidentifiedascandidatesforcancellationunlesstheyboughtadditionalpolicies.

Somestatesrequirethataninsurancecompanyofferalternativecoveragewhichusuallycomesatahighercostwheneveritcancelsapolicy.Theinsurancecompanyhastorefundpartofwhateverpremiumyou'vealreadypaid,too.Therefundtypicallyiscalculatedonaproratabasis,whichmeanstherefundisbasedonthetimecoveragewasineffect.

However,therearesituationsinwhichareturnpremiumcomputationisnotbasedonanevendivisionofthepremium,andtheinsurancecompanyisallowedtoretainslightlymorethanaproratashareinordertorecovertheexpensesofissuingthepolicy.Whenapolicyisissued,theinsurancecompanyexpectstorecoveritsadministrativeexpensesforgeneratingthepolicyandkeepingpolicyrecordsoveritsterm.

Whenapolicyiscancelled,theexposuretolossterminatesbutsomeoftheinsurancecompany'sfixedexpensesremainthesame.Itcanrecovertheseexpensesbydeductingaslightpenaltyfromthereturnpremium.Returnpremiumcalculationsthatincludethispenaltyoftenarereferredtoasshort-ratecancellations.Lookcarefullyatthecancellationlanguageinanyautopolicyyoubuy...short-ratecancellationsaresomethingtoavoid.Somecompanieswilltakeoutthelanguageifaskthemtodoso.

Ifyoudecidetocancelapolicy,theinsurancecompanyusuallywillreturnonly90percentoftheprorataportionoftheunearnedpremiumforthefirstpolicyyear(thus,thepenaltyis10percent).Thisappliestoannualpolicies,andtopolicieshavingashorterterm,suchasthreeorsixmonths.

Ifatwo-orthree-yearpolicyiscancelledafterthefirstyear,thefirst-yearpremiumisfullyearned,theinitialexpenseshavebeenrecovered,andtheinsurershouldreturnthefullunearnedpremiumfor

theunexpiredterm.

Havingmentionedblacklisting,weshouldalsomentionredliningthepracticesomeinsurancecompaniesusedtomakeofcancelling,non-renewingorincreasingpremiumsexcessivelyforcarinsuranceinsomeneighborhoods.Theideawasthat,byincreasingthecostofinsurancebeyondwhatwaseconomicallydefensible,thecompanycouldchaseawayunwantedbusiness.(Inthebadolddays,somecompanieswouldliterallydrawredlinesonmapsaroundneighborhoodstheywantedtoavoid.And,frankly,theneighborhoodswereoftenselectedbecauseofthecoloroftheresidents'skin.)

Redliningisillegal.Insurancecompanieshavetodefendtheirratestostateregulators.Butsomeconsumeradvocatesinsistillegaldiscriminatorypracticesstillgoonintheinsuranceindustry.Thatpossibilityhoweverremoteisyetonemorereasontocheckwithatleastthreecompanieswhenshoppingforautoinsurance.

AssignedRisk

Inmoststates,ifnoinsurancecompanywillsellyoucarinsurance,youcanbuycoveragefromastate-runcompanyoranassignedriskplan.Insurancepolicieswrittenbythesealternativemarketstendtobeexpensiveandoffermorelimitedcoveragethanstandardpolicies.

Astate-runinsurancecompanyisexactlywhatitsoundslike.

Anassignedriskplanisacooperativeenterprisethatallinsurancecompaniesdoingbusinessinthestatemustparticipatein.Theplanconstructsapolicy(again,usuallyexpensiveandlimited)thatitwillselltopeoplewhosedrivingrecordsorlocationdisqualifythemfromstandardcoverage.Itthenforcesparticipatinginsurancecompaniestotakeanumberofassignedriskpoliciestypicallyanumberproportionaltotheirmarketshareinthestate.(Bigcompanieshavetotakemore,smallcompaniesfewer.)

State-runcompaniesandassignedriskplansservethesamepurpose,havesimilarstructuresandsharecommonproblemsincludingfairlyfrequentfinancialproblems.

InNewYork,driversinthemainstreammarket(sometimescalledthevoluntaryorcommercialmarket)subsidizetheassignedriskpool.Insurancecompaniesfearthatthepremiumstheycollectfromdriversintheassignedriskpoolwon'toffsettheclaimsthey'llhavetopaybecauseofrisingcoverageminimums.

MichigandriversalsoareforcedtosubsidizeinsurancesoldthroughtheMichiganAutomobileInsurancePlacementFacility(MAIPF).MAIPFwritesthisinsuranceataloss(averagingabout1percentor2percentoftotalpremiums),whichisthenpassedontoprivateinsurancecompanies,whochargeittocustomersasacostofdoingbusiness.

Amoretroublingexample:

Inearly1995,R.TerryHaskins,chiefoperatingofficerofNewJersey'sMarketTransitionFacility(MTF),andMarshallSelikoff,trusteeofthestate'sJointUnderwritingAssociation(JUA),resigned.

TheMTFwasastate-runinsurancecompany.TheJUAwasanassignedriskplan.Moststatesdon'thavebothformsbutNewJerseyhadhadsomanyproblemsthatitneededallthealternativemarketsitcouldfind.

AfewweeksbeforeHaskinsandSelikoffresigned,formerDeputyInsuranceCommissionerJasperJacksonchargedthatthedeficit-riddeninsurancepoolswerepoorlyrun,andsaidthatformerInsuranceCommissionerSamuelFortunatohadrecommendedin1993thatbothmenbefired.

Jacksonsaidthemendidnotproperlyoverseethepaymentofmedicalbillsandsettlementsforaccidentvictimsinsuredbythepools,resultinginmillionsofdollarsinunnecessarylossesforthestate-runoperations.Healsosaidthatmedicalpaymentstoaccidentvictimswereonlypartoftheproblem.HesaidtheMTFsavedabout$80millionin1993alone,afterheandFortunatoinsistedthatHaskinsandhisstaffreviewallclaimsformorethan$5,000.

ThecompaniesadministeringclaimsfiledagainsttheMTFoftenwerepayingaccidentsettlementswithoutattemptingtonegotiatelowerawardswithplaintiffs'insurancecompanies.

TheJUAhadbeenfoundedin1984tocovermotoristswhowereunabletoobtainautoinsuranceintheprivatemarket.Atthetime,insurancecompaniessaidtheycouldnotmakemoneyindenselypopulatedNewJerseyandrefusedtowritepoliciesformanyresidents.TheJUAgrewtoinsure2millionpolicyholdersandranupadebtof$3.6billion.

In1990,GovernorJimFlorioabolishedtheJUAandmandatedthatautoinsurancecompanieswritepoliciesforallmotoristswitheightorfewermotorvehiclepoints.Toeasethetransitionofdriversintotheprivatemarket,FloriocreatedtheMTFtoserveasatemporaryinsurancecompany.LiketheJUA,theMTFdevelopedadebt,whichofficialssaidreached$1.3billionin1994.

ThelastJUApolicyexpiredin1990,andthelastMTFpolicyexpiredin1993.Butthepoolswerestillpayingclaimsfiledbyaccidentvictims.In1994,stateofficialshadtostoppayingclaimsforMTFaccidentvictimsbecausethereservesinthepoolhaddroppedbelow$50million.

Ingeneral,it'sbesttostayawayfromassignedriskinsurance.Ifyouhavenochoice,callthestateagencythatrunstheprogramoralocal

insuranceagentandfindoutwhyyouhavetousetheplan.Askthestateagencywhatyoucandotoimproveyourapplication.Thengetoutoftheassignedriskplanassoonasyoucan.Thisonemovewillsaveyoumoneyandgetyoubettercoverageatthesametime.

No-FaultInsurance

Anotherchoiceyoumayhaveinyourstateiswhetherornottopurchaseno-faultinsurance.

Inmoststates,blameisassignedinanaccident.Thepersonwhoisdeemedatfaultorthatperson'sinsurancecompanyisresponsibleforpayingthecostsincurredbytheotherparty.

However,in1995,13statesusedsomeformofno-faultinsurancesystem.Thesesystemsallhavesimilargoals,buttheytendtodifferwidelyin

practice.

Inallinsurancepolicies,themedicalpaymentsandpropertydamagesectionsofthecollisioncoveragecontainno-faultelementstheywillpay,nomatterwhowasresponsibleforanaccident.

Ifyouoptforno-faultinsurance,youagreetogiveupcertainrightstosueifyouareinanaccident.Inreturn,youreceiveastate-mandatedpremiumdiscount(usuallyatleast15percent).

Beforeyouchooseno-faultcoverage,youshouldunderstandwhatthatdecisioncouldmean.Undertheoption,youagreetorelinquishyourrighttosueforpainandsufferinginthecaseofaminorinjury.Buttherearesomeexceptions:

Youkeeptherighttosue,ifyouareinjuredseriously.

You'reallowedtosuefordamages,regardlessofthetypeofinjury,ifyouarehitbyadrunkdriveroranuninsuredorout-of-statemotorist.

Youretainyourrighttosueforunpaidmedicalbills,lostwagesandout-of-pocketexpenses.

Supportersoftheseprogramssaythatno-faultpromisesquickerpaymentofinsuranceclaims,becausethere'snowaitforinsurancecompaniesorcourtstodecidewhoisatfault.Agrowingnumberofinsurancecompaniesagree,sayingthatno-faultsystemsreducetheircostsandtheresultinghigherautoinsurancepremiumsbylimitingthenumberoflawsuits.That'sabigplusforaninsurancesector,inwhichlegalfeesaccountforasmuchas12percentofpremiumcosts.

Thebasicfactorsthatshapeno-faultprogramsinclude:

Thresholds.Designersofano-faultsystemmustdecidewheninjuriesaresoseverethatapersonshouldbeallowedtosuethedriverwho

wasresponsible.Makethethresholdtoolowandmostpeoplewillgotocourt;makethemtoohighandsomemaynotbefairlycompensated.Mostno-faultproponentsfavoraverbalthresholdthatspellsoutwhichspecificinjuriespermitaninsuredtosue.Thealternativeisamonetarythreshold,whichallowslawsuitsfordamagesaboveaspecifiedamount.

Benefit(orliability)limits.Ano-faultdesigneralsomustdecidewhatmaximumbenefitsaninjuredmotoristcanreceive

underano-faultpolicy.Whilesomesuggestalimitashighas$250,000,theindustryproposalputsthecaponbenefitsat$50,000,whichinsuranceofficialssaycovers97percentofallautoclaims.

Lostcoverageallowances.No-faultcanmeanthatdriverspaymoretomaintaintheircurrentlevelofcoverage.Forinstance,sinceno-faultonlycoversinsuredmotoristsandtheirpassengers,adrivermighthavetobuyaseparateliabilitypolicytocoversuchthingsashittingaparkedcar.

Costcontainment.Low-costpoliciesalsocouldrequiremedicaltreatmentfromamanaged-careprovider.(Medicalexpensestypicallyaccountfor15percentofinsurancepremiumcosts.)

''Pure"No-Fault

Onereasonproponentsofno-faultdefenditsostaunchlyisthatwhentheysay"no-fault,"theygenerallymeanpureno-fault.

Underapureno-faultsystem,virtuallyalllawsuitsrelatedtoautoaccidentsareeliminated.Therighttosueandashotatadamageawardarereplacedbytherighttoguaranteedbenefits.Lawsuitsareretainedonlytopunishconvicteddrunkdriversandothersguiltyofcriminalconduct.Policyholderspaypremiumstoprotectthemselves.Ifthey(ortheirpassengers)areinjured,theyarecompensatedbytheirowninsurersnomatterwhoistoblameforanypartofanaccident.

That'sunlikealiabilitysystem,whichrequirestheresponsibleparty'sinsurertopayformedicalbillsandcarrepairs.

Asyet,thereisnopureno-faultsystemintheUnitedStates.

In1995,theHawaiianstatelegislatureadoptedwhatwouldhavebeenthefirstpureno-faultprogram.ConsumeradvocateRalphNadervisitedHawaiitolendhissupporttotheprogram.Hesaidthata

limitedreformplanbeingconsidered,whichwouldallowlawsuitsafterdamagesexceeded$20,000andofferconsumersachoiceofpolicies,wastoocomplex."Andcomplexityalwaysworkstothebenefitoftheautoinsurancecompanyagainsttheconsumer,"Nadersaid.

Heandothersupportersarguedthat,underpureno-fault,consumerswouldnolongerhavetohopethatthepersonwhohitthemwasrichorwell-insured.Theyalsowouldn'thavetosplitthesettlementswithlawyers.Mostimportantly,theywouldn'thavetosubsidizeuninsuredmotoristswithUMcover-

age.(GettingridoftheneedforUMcoverageisonebenefitofpureno-fault.)

TheCalifornia-basedRANDInstituteestimatedthattheHawaiianpureno-faultinitiativewouldhaveprovideddriverswith$1millioninmedicalandwagelosscoverageforanaverageofhalfwhattheypaidforlessinjurycoverageundertheliabilitysystem.ButgovernorBenCayetanosaiditwouldcostvictimstheirchancetosueforpainandsuffering.Heunveiledhisownplan,whichwouldprovideeverycarownerwith$25,000worthofliabilityinsuranceandlethealthinsurancepayfortraffic-relatedinjuries.

PartialNo-Fault

The1995Hawaiiproposalcameprettyclosetopureno-fault.Butmostoftheno-faultprogramscurrentlyinplacecanbestbecalledpartialno-fault.Theyallowyoutomakeaclaimuptoacertaindollarlimitwithouthavingtodeterminewhocausedanaccident.

AboutthesametimeHawaii'sno-faultproposalwasgettingboggeddowninpolitics,California'sinsurancecommissionerandanumberofconsumeradvocacygroupsproposedapartialno-faultplan.TheprogramthatCommissionerChuckQuackenbushsupportedwouldrequirealldriverstopurchaseabasicpolicywith$15,000inmedicalandlost-wagebenefitsforanannualpremiumof$220formostdrivers.Peopleinjuredinanautomobileaccidentwouldbeentitledtocompensationformedicalbillsandlostwagesuptothe$15,000limit,regardlessofwhocausedanaccident.Ifdamageswentbeyondthatthreshold,theycouldsue.

TheminimumpolicywouldbemandatoryforallCalifornians,withproofofinsurancerequiredforvehicleregistration.ModeledafterNewYork'sno-faultlaw,italsousedaverbalthreshold"seriousorpermanentinjury"todetermineinwhichcaseslitigationcouldbe

pursued.

InNewYork,allautoinsurancepoliciesmustcontain$50,000inno-faultcoverageformedicalexpensesandlostwages.Policiesstillhaveliabilitycoverage,butthatonlybeginsafterthe$50,000no-faultlimithasbeenusedup.

MichiganandNewYorkoftenarecitedashavinggoodexperienceswithno-fault.GeorgiaandConnecticut,whichrepealedno-faultinthe1990s,oftenarecitedashavinghadbadexperienceswiththesystem.

Someconsumeradvocateswhosupportno-faultreformsarguethattriallawyergroupsspendalotofmoneytoopposeanyformofno-fault.And,eveninstatesthathavestuckwithno-faultplans,regulatorshavetendedtolowerliabilitylimitswhichlawyerslike.

UnderNewJersey'sno-faultautoinsurancelaw,alldriversmustbuypersonalinjuryprotection(PIP)coverage.Ifanaccidentoccurs,itpaysforallmedicalbillsandlostwagesfortheinsuredupto$250,000.DrivershavetobuyPIPaspartofeveryautomobileinsurancepolicy.Thiscoverageisasubstitutefortheindemnificationtypicallyhandledthroughcivillawsuits.

InMichigan,legislatorsconsidermodificationstothestate'sexpensiveno-faultsystemonwhatseemslikeanongoingbasis.Thatstate'sPIPcoveragealsohasnoliabilitylimitalthoughthefinancialmodelonwhichit'sbasedassumesanaveragelimitof$250,000.Nootherno-faultstaterequiresunlimitedPIPcoverage.

ThetroublingtrendforMichiganautoinsurancecostsisthatthetotalvalueofso-called"PIPcatastrophic"claims,thoseexceeding$250,000,explodedinthelate1980sandearly1990s.Thecostofpaidclaimsrosebymorethan1,500percentbetween1984and1994,whilethenumberofclaimsreportedrosebyonlyabout200percent.

Ininsuranceindustryjargon,thiskindofincreaseiscalledadeteriorationinclaimsexperience.AsaresultofMichigan'sdeterioration,theannualcostofPIPcoveragerosefrom$3in1978to$23.60in1988andto$96.95in1995.Andthisisasurchargeaddedtothepremiumofeverydriverinthestate.

InsurersblameMichigan'sunlimitedbenefitsfordrivingupthecostoftotalpremiumsbymorethan50percentbetween1990and1995."Ifyou'regoingtohaveaMichigan-stylesystem,youmightaswellnothaveno-faultatall,"saidaspokesmanforoneofthebiggestautoinsurancecompaniesinthecountry.

In1993,Connecticutabandoneditsno-faultsystemtoreturntoatraditionalliabilitysystem.Repealingtheno-faultsystemwasn'teasy

but,"consideringthealternatives,itwastheleastDraconian,theleastintrusive,theleasttraumaticimpactontheconsumers,"saidGarrettMoore,presidentoftheConnecticutTrialLawyersAssociation.

Savingscameprimarilyfromnolongerrequiringthepartialno-faultcoverage,whichpaidupto$5,000formedicalbillsandlostwages.ConnecticutInsuranceCommissionerRobertGooginsnotedthatratesonpoliciesdropped7.7percentonaveragebuttheeffectonindividualconsumersvariedwidely.Atsomecompanies,risingcostsofliabilityclaimsoffsetthecostreductionsfromthereturntothetraditionalliabilitysystem.

Inshort,theexperienceofno-faultsystemshasbeenmixed.Bytrim-

mingthethresholdsofthethings,politiciansneutralizetheireffectiveness.(We'llseesomesimilarissuesinourdiscussionofHMOsinChapter11.)

Ifyouareinano-faultstate,makesurethatyourpolicycoversdamagesthatgoabovetheno-faultthreshold.Ifyourpolicydoesn'tdothis,getsupplementalcoveragethatdoes.Ifyouareinastatewhichallowstheoptionofselectingapartialno-fault,it'sprobablyworthtakingbecauseitdoesmakeresolvingsmalldamagesrelativelyeasy.Butyoustillneedtomakesurethatyouhavetheabove-thresholdcoverage.That'swherethingscangetugly.

Conclusion

Manypeopleonlybuyautoinsurancebecausethelawsaystheyhavetoandoftenmaketheirchoiceofapolicybasedoncostalone.

Insurancecompaniesreacttotrendslikethisbyaccomodatingconsumerneedsandpreferences.Theymakeautoinsurancecheaperbylimitingtheamountsandkindsofcoveragethepoliciesoffer.Asaresult,touseoneexample,standardpoliciesthatusedtocoverrentalcarlossesbegintolimitthiscoverage.

Forthisreason,youneedtopayattentiontothedetailsofanyautopolicyyouconsiderbuyingevenifyou'rebuyingonprice.Twopoliciesthatcostthesameamountmayoffersignificantlydifferentlevelsandtypesofcoverage.Whenitcomestocarinsurance,thepolicyyouchoosemakesabigdifference.

KeyQuestions

Questionstoanswerforyourselfbeforeyoucallaninsurancecompany,agentorsalespersonaboutautocoverage.

1)Whichcarsdoyouneedtoinsure?Listtheyear,make,modelandvehicleidentificationnumber.

Year VIN Model Make

Car#1______ ______ ______ _________

Car#2______ ______ ______ _________

Car#3______ ______ ______ _________

Car#4______ ______ ______ _________

2)DoallofthesevehiclesqualifyforaPersonalAutoPolicy,ordosomeneedtobecoveredbyacommercialpolicy(e.g.,vansthatareusedtodelivermerchandise)?_______________3)Whoarethelicenseddriversinyourhousehold?Anyonedrivingthecarslistedaboveneedstobelistedontheinsurancepolicy.Theinsurancecompanywillwanttheirageanddriverslicensenumber.

Name Age LicenseNumber

Driver#1__________ _____ _______________

Driver#2__________ _____ _______________

Driver#3__________ _____ _______________

Driver#4__________ _____ _______________

(We'llconsidersomeofthedetailsofwhodrivesinyourhouseholdinthenextchapter.)4)Whatistheminimumliabilitycoveragerequiredinyourstate?Itmaybeasplitlimit,withseveralnumbers.

_________________________________________________

5)Doyouwantcollisionandother-than-collision(a.k.a.comprehensive)coverageonsomeorallofyourcars?

Yes NoIfyes,whichones?_________________________________

6)Doyouwanttowingandlaborcostcoverage?(IfyouareaAAAmemberorbelongtoanotherroadsideassistanceprogram,youprobablydon'tneedit.)

Yes No7)Doyouwantuninsuredandunderinsuredmotoristcoverage?(This,youprobablydoneed.)

Yes NoQuestionstoaskaninsurancecompany,agentorsalesperson.(Youmaywanttophotocopythesequestionsandusethemforeachpolicyorcompanyyouconsider.)1)Howmuchindollarsoftheestimatedpremiumcovereachtypeofautocoverage?Whataretheliabilitylimitsofeach?

Premium$ LiabilityLimitLiability ____________ _______________Collision ____________ _______________Other-than-Collision ____________ _______________MedicalPayments ____________ _______________RentalReplacement ____________ _______________Towing,etc. ____________ _______________Other ____________ _______________2)ArethereanyunusualexceptionsorexclusionstotheCollisionorOther-than-Collisioncoverage?Collision _________________________________Other-than-Collision _________________________________

3)Doesthepolicyincludeanyunusuallanguageinitscancellationsection?Ifso,whatisit?

_________________________________________________

4)Whatdoestheinsurancecompanyconsidergroundsforcancellationornonrenewalofapolicy?____________________

5)Whatkindofcomplaintrecorddoesthecompanyhavewiththestateinsurancecommissioner'soffice?Ifithashadproblems,isthereagoodexplanation?GoodSomeComplaints Bad_________________________________________________

6)Whatkindofcoverageforrentalcarsdoesthepolicyyou'reconsideringoffer?_________________________________

7)WouldyouneedtopurchasetheCDWorsupplementalliabilityinsurance?

CDW Supplemental

Chapter2HowtoCalculateYourNeedsNowyouknowhowautoinsuranceworks.Buthowmuchwillyouhavetopayforitandwhy?

Onemajorfactorthatwilldeterminetheamountandcostoftheautoinsuranceyoubuyiswhereyouliveor,moreaccurately,whereyoukeepthecarthatyou'reinsuring.Differentareaspaydifferentratesbecauseofanumberoffactors:stateinsurancerequirements,localpopulation,weatherconditions,collisiondamagerepaircosts,autotheftratesandhospitalcosts.Also,insurancecompanieschargecustomersinaparticularareaforthecostofnearbyaccidentsinvolvinguninsureddrivers.

Premiumrangesvaryfromstatetostate.Inthe1990s,driversinHawaiipaidthehighestpremiumsinthecountry,anaverageofnearly$1,000ayearthankstoliberalliabilitylawsandanabundanceofuninsureddrivers.DriversinNorthDakotapaidthelowest,anaverageoflessthan$350ayear.

TheIdeasBehindRating

Withintheinsuranceindustry,professionalsrefertopricinginsurancecoverageasrating.Arateisthecostforaunitofinsurance.Asyoumightguess,somemeanshadtobedevisedforchargingindividualpolicyholdersequitablyfordifferentamountsofinsuranceprotection.

Ifyoucallseveralinsurancecompaniesandgetverydifferentquotesforcoverage,itmayseemthatpricesaresetarbitrarily.But,actually,insurancecompaniesuseaconsistentsetoffactorstodeterminethepremiumsyoupayforautoinsurance;differentcompaniesjustapplythosefactorssomewhatdifferently.Forexample,somecompanies

considercertaincharacteristicssuchasyourageoryourdrivingrecordmoreimportantwhensettingratesthanothercompaniesdo.

Insurers'claims-processingcosts,salescostsandotheroverheadcostsalsocanaccountforthedifferencesinrates.Plus,insurancecompaniesuseyourpremiumstogenerateincomethroughinvestmentssocompaniesthathaveagoodinvestmentrecordmayofferlowerratesthanthosewhoseinvestmentshavebeenfaringpoorly.

Eachinsurancecompanywillsetabaserateforeachspecificcoverage,suchasbodilyinjuryandpropertydamageliability.Forexample,abaseratemightbe$300ayearfor$100,000ofliabilitycoverage.Adriverwithagooddrivingrecordmightqualifyforthisbaserate,whileadriverwithapoordrivingrecordwouldbechargedmore.Thishigheramountiscomputedbymultiplyingthebaseratebyaratingfactor.

Ratingisanimportantfunctionintheinsuranceindustry.Forinsurancecompaniestobefinanciallystable,ratesmustbeadequatetocovercosts.Forinsurancecompaniestoremaincompetitiveinthemarketplace,ratesmustbefairandreasonableinrelationtotheriskofloss.

Theprimaryfactorsthataffectratesotherthanthestateinwhichyouliveanddriveinclude:

whoyouare(forexample,yourage,sexandmaritalstatus);

yourdrivingrecord;

whereyoulivewithinthestate;

howyouuseyourcar;

themodel,mileageandyearofyourcar;and

thetypeofcoverageyouselect.

Eachofthesefactorsreflectssomeaspectofyourparticularinsuranceneeds.Eachisalsoquantifiedbytheinsurancecompany.Together,theyadduptoatotalratingfactor,whichisthenmultipliedbythebaserateforallmajorcoveragesexceptuninsuredmotoristscoverage.

RatingfactorsdonotapplytoUMcoverageortotowingorotherminorcoveragesthatmaybeaddedbyendorsement.Thepurposeofthefactorsistoanalyzeandcategorizethemajorcoverages.

We'llconsidereachoftheseratingfactorsandwhattheymeanintermsofyourinsuranceneedsinturn.

WhoAreYou?

Thisisthemostimportantfactorindeterminingbothyourinsuranceneedsandthepriceyou'llpay.It'snotaphilosophicalquestion,butratheroneofhowaninsurancecompanyperceivesyou.Areyouamajorriskoraminorrisk?Areyoulikelytogetinanaccident...ornot?

Todetermineyourriskprofile,insurancecompaniesrelyheavilyoninformationconcerningyourage,sexandmaritalstatuswhatinsurancecompaniesrefertoasprimaryfactorswhencomputingpremiums.

First,theinsurancecompanywillconsideryourage.

Ifyou'reyoungandyou'reinsuringyourself,you'llpaymorethananyotheragegroup.Dependingonwhereyoulive,youalsomayhaveveryfewchoicesastowhatkindofinsuranceyoucanbuy.Ifyou'reaparentorguardianwhohasayoungdriverinyourfamily,heorshelikelywillbethesinglebiggestcost-driverinyourinsurancepremium.

Mostinsurancecompaniescategorizedriversinagebrackets.Theseareageranges,usuallybetweensevenand15years.Forexample,theyoungestagebracketformostdriversis16to25yearsold.Withintheagebrackets,sexandmaritalstatusarefactoredinandtheyhavemoreofanimpactonthebottomlineifyoufallintotheyouthfuloperatorcategory.Whenitcomestoyoungdrivers,insurancecompaniespayparticularattentiontoyourmaritalstatus,drivertrainingcreditandwhetheryou'reagoodstudent.

Asdatedaconceptasitmayseem,maritalstatusdoesmeanagreatdealtoinsurancecompanies.Mostinsurancecompanieshaveactuarialtablesthatshowthatmarriedpeoplearelesslikelytobe

involvedincaraccidents.

Forexample,allmalesunderage25qualifyasyouthfuloperatorswithmostinsurancecompaniesbutonlyunmarriedfemalesautomaticallyqualify.Generally,singlemenyoungerthan25willpaythehighestpremiums.So,whenyou'rebuyingautoinsurance,rememberthatgettingmarriedmovesyouintoabetterriskprofile.(Nowthere'saromanticreasontotietheknot.Maybeyoucansaveontaxes,too.)

Onceyou'veagedabitorgottenhitched,you'reconsideredanadultoperator.Thereareonlythreeclassificationsbasedonageandsexforthisgroupallotherclassificationsrelatetouseofthevehicle.

Formostmenandwomen,autopremiumsactuallydropwhilethey'reintheirfortiesandfifties.Therateofaccidentspermilesdrivenislowerforpeopleinthisagegroupthanforanyothergroup.Insurancecompaniesknowthisandpricetheircoverageaccordingly.

Youngoperatorsarenottheonlypeoplewhopayhighpremiums.Sinceretirement-ageadultstendtodrivelessandusuallyavoiddrivinginthemostdangerousconditions(atnight,duringrushhourandinbadweather),fewerolderadultsthanteenagersdieontheroads.

However,accidentratesandpremiumsbegincreepingupagainwhendriversreach65.Forpeopleoverage75,therateoffatalcrashespermilesdrivenisevenhigherthanitisforteenagers.

Theaccidentnumbersfortheoldestdriversskewperceptionsamongautoinsuranceriskanalysts.Theytendtocharacterizetheentirepopulationofover-65driversashighrisk.Thismeansthatdriversbetween65and75,whoseaccidentratesremainrelativelyclosetodriversinthemiddle-agecategories,subsidizethedriversoverage75.Thisbecomesapoliticalissue.

''Alogicalstepwouldbetoadjustpremiumssothattheoldestdriverspaidmuchhigherrates,"saysoneriskanalystforabigmulti-lineinsurancecompany,whorequestedanonymityforhiscommentsonthissubject."Butthatwouldeffectivelyforcepeopleover70certainlyover75offtheroads.Thepoliticalfalloutfromthatwouldbehuge.Therewouldn'tbeanelectedofficialinFloridawhostillhadajob."

Proposedplansforreducingolderdrivers'accidentratesincludetighterrelicensingrulestoensurethattheirvisionorotherrelevantcapabilitieshaven'tfallenbelowminimumlevels.In1994,16stateshadage-basedlicenserenewalregulations.Butsomeadvocacygroups,suchastheAmericanAssociationofRetiredPersons(AARP),considerthemdiscriminatory."Asageneralrule,"saidTedBobrow,anAARPautoinsurancespecialist,"weopposeage-basedtesting.Itmaybeagoodideatotestalldriverseveryyearoreveryfouryears."

Seniorcitizensusuallycangetdiscountsontheirautoinsuranceiftheysuccessfullycompletedriversafetycourses.Also,seniordiscountsforkeepingotherlinesofinsuranceforinstance,homeownersandpersonalliabilitywiththesamecompanysometimesaregreaterthanforotheragegroups.

YourDrivingRecord

Whilewhoyouareistheprimaryfactorthatinfluenceshowinsurancecompanieslookatyouasanautorisk,therearesecondaryratingfactorsbasedonsomespecificvariablesuniquetoeachindividual.Thesesecondaryfactorsalsodeterminethecostofcoverage.

Yourdrivingrecord(whatinsurancecompaniescallasub-class)isthemostimportantofthesesecondaryfactors.Insurancecompanystatisticssay:

Themoreaccidentsthatyouhave,themorelikelyitisthatyouwillbeinvolvedinanotheraccident.

Normally,companiesdivideautopoliciesintothreecategories:preferred,forthebestdriverspresentingtheleastrisk;standard,forpeoplewithgoodbutless-than-perfectrecords;andnonstandard,forhigh-riskdrivers.

Ifyou'vehadseveralticketsoraccidents,youwillgetlumpedintothehigh-risk,nonstandardcategory.Youalsomaywindupinthiscategoryifyou'vehadalapseofinsurancecoverageinthepastoryou'veneverhadinsurancebefore.

Ifyouorsomeoneinyourfamilyhasabaddrivingrecord,youneedtoconsidertwothings.First,youmaybelimitedintermsofthekindofinsuranceyoucanbuy.Second,youmayhavedifferentneedsthanyouthoughtyouhad.Whileahigh-riskdriverincreasesyourinsurancecosts,heorshealsoincreasesyourneedforliability,medicalpayments,collisionandother-than-collisioncoverages.

Atsomepoint,youmayneedtotakethekeysawayfromariskydriver.Intheinsurancecontext,youcandothisbymakingthatpersonanamedexclusionfromcoverageunderyourpolicy.However,reservethiscourseofactiononlyforatrulydiresituation.Theinsurancecompanywillwritethiskindofexclusion,butyouwillbelefteffectivelyself-insuringthathigh-riskdriver.Ifyouexcludesomeonebynamefromyourcoverage,makesurethatpersondoesn'tdrive.

Inpracticalterms,excludingfamilymembersfromaninsurancepolicydoesn'tworkwell.Itdoesn'tsolveyourproblemonlytheinsurancecompany's.Whenthisdoeswork,itusuallyinvolvesolderfamilymemberswhosedrivingskillshavebeenerodedbyage.

Excludeateenageronlyifyou'recertainyoucankeephimorherfromdriving.

NonstandardAutoPolicies

Atypicalnonstandardpolicyholderseekstheminimumlimitsofliabilityrequiredbylaw,hasanundesirableorunverifiabledrivingrecord,poorcredithistory,poorclaimsexperienceorminimalnetworth.

Sadly,thissegmentoftheinsurancemarketisrapidlygrowing."Nonstandardisgrowingata14percentto15percentrate,whiletheoverallmarketisgrowingat6percentto7percent,"saysCharlesGray,presidentandchiefoperatingofficerofTennessee-basedMidlandFinancialCo.

MidlandFinancialsellsnonstandardautoinsurancein16states,primarilyintheSouthandWest.Thecompanyalsoprovidescarinsurancetopeopleinpersonalbankruptcyproceedings.

Whywouldbankruptcybeanissue?Ifacompanythinksyou'renotfinanciallystable,youmightberejectedforcoverageorpushedintoahigh-riskpool,evenifyou'veneverhadanautoaccidentoraticket.Itmightevencancelapolicyyourecentlybought.

Whydoesyourcreditratingmatter?Insurancecompaniessaythere'saclearconnectionbetweengoodcreditrisksandgoodinsurancerisks.Theyclaimthatpeoplewhodon'tpaytheirbillsaremorelikelytofileatheft,fireoraccidentclaim.Mostlargeinsurancecompanieswillusepersonalcreditratingsasasecondaryfactorifapolicyapplicantmeetssomepredeterminedriskprofile.

Morethan100insurancecompaniesuseacredittestdevelopedbyFair,Isaac&Co.,aCalifornia-basedstatisticalrisk-evaluationfirm(anddeveloperofthenearlyubiquitousFICOcreditscoringsystem).OtherbigcompaniesincludingAllstateInsuranceusetheirowncredittests.

Fair,Isaacevaluatesatleast35piecesofcreditinformation.Nosingleonemakesabadinsurancerisk,saysWendellLarson,directorofmarketingfortheinsurancedivision.Whatmattersisyourtotalscore.Itincludeshowlongyou'vehadacreditcard,thenumberofaccountsthatare60dayspastdue,andanyliens,judgmentsorbankruptcyfilings.

Thetestcoversgeneralcreditinformationforthepastfiveyearsandlate-payinformationforthepasttwoyears.

Allstatescreensforseveralmajorcreditblemishesincurredinthepastfiveyears,includingforeclosures,judgments,bankruptciesandliens.Italsolooksforwhetheryouhavehadasecondoccurrenceofgarnishmentorrepossessionorleftabillof$100ormoreunpaidforatleastthreemonths.

JustoneoftheseproblemscantipyouintoAllstate'shigh-riskcategory,wherechargesare50percentto100percentmoreforcoverage.It'snotaplaceyouwanttobe.

HowYouUseYourCar

Yourinsuranceneedsandtheinsurancecompany'sriskanalysiscoincidewhenitcomestothequestionofhowyouuseyourcarorcars.

Amongtheinsurancecompany'sprimaryratingfactorsaretheautomobileuseclassifications.Theseincludepleasureuse,businessuse,farmuseanddrivingtowork.

Ifyouonlyusethecarforpleasure(thisissometimescalledoccasionaluse),yourpremiumwillbelowerthanifyoudriveiteverydaytowork.Carsthatyouclaimforbusinessusetendtobeevenmoreexpensivetoinsure.Theothercategoriesfallinbetween.

Thenumberofcarsyouhavealsoimpactsthekindofinsuranceyoubuy.APersonalAutoPolicywillberatedaseitherasingle-carriskoramulti-carrisk.Inmostcases,insuringyourcarsasamulti-carriskwillbemorecost-effectivesincemanycompaniesgivemulti-cardiscountsthaninsuringcarsseparately.Butthisissueisworthexploringwithyourinsurancecompanyoragentespeciallyifyouhaveahigh-riskdriverinyourhousehold.

Generally,theuseissuecomesintoplaywhenyou'reinsuringmorethanonecar.Ifyourhouseholdhastwoorthreecars,youprobablyshouldn'tinsurethemallaswork-orbusiness-related.Trytoinsureatleastoneofthecarsthatyoudon'tdriveeverydayasapleasureoroccasional-usevehicle.

Also,letyourinsurancecompanyknowifyouwon'tbeusingacarformorethan30days.Youmightbeabletosuspendyourcollisioncoverage.

YourNeighborhood

Thestateyouliveinhasaneffectonyourinsuranceratesandsodoesyourneighborhood.Thisisanothersecondaryfactor.

Ifyouliveinalargemetropolitanarea,youwillpaymoreforautoinsurancethanifyouliveinthecountry.AndifyouliveincertainZIPcodesorareaswithinabigcity,yourinsurancemaybeevenmoreexpensivestill.

Whilesomeinsurancereformplanshavedoneawaywithit,moststatesstillallowinsurancecompaniestoadjustinsuranceratesaccordingtoneighborhood.Thispracticepenalizespeoplewholiveinhigh-crimeandhigh-accidentareas.Criticsarguethatthisquicklybecomesamechanismforunfairlydiscriminatingagainstcertaingroupsofpeoplered-lininginthemostextremecases.

Candidinsurancecompaniesarguethatthisisaprocessofdiscriminatingbadrisksfromgoodones.Theyarguethatclaimshistoriessupporttheirpremiumstructures.Inyourparticularcase,higherlocalratesmaymeanmorepeoplemaybedrivingwithoutinsuranceinyourarea.Theyalsomeanagreaterriskofhit-and-runaccidents.

Intermsofyourinsuranceneeds,thesefactorsmakeuninsuredandunderinsuredmotoristscoverageparticularlyimportant.Ifyouliveinabigcityanddriveanewcar,youshouldmakesureyouhaveUMthatcoversthecar'svalueandyourown.

Inmoststates,UMappliesonlytobodilyinjury.Inafewstates,italsoappliestopropertydamageorpropertydamageUMcoveragemaybeavailableasanoption.RatesforUMcoverageoftenapplyto$50,000singlelimitcoverageor$25,000/$50,000splitlimitsofcoverage.Ifyouwanthigherlimits,anadditionalflat-dollarpremiumchargeisaddedtothebaserate.

Insurancecompaniesalsoareinterestedinwhetheryoukeepyourcarinagarage.Garagedcarsarelesslikelytobestolenorsideswipedbyerrantdrivers.Ifyoukeepyourcarinagarageinalow-riskarea,you'llgetabreakonyourpremiuminahigh-riskarea,thatbreakwillbeevenbigger.

Youalsomaykeeponeormorecarsatanotheraddress.Forinstance,youmightliveinWashington,D.C.,butkeepacaratavacationhomeontheDelawareshore.Ifyoudo,you'llwanttolettheinsurancecompanyknow.Itwillusethegaragingaddressforeachvehiclewhendeterminingthepremiumyou'llpayandtheratesinDelawarewillbemuchlowerthanforyourhomeneighborhood.

TheMake,ModelandAgeofYourCar

Thefinaland,tosomepeople,themostimportantsecondaryriskfactoristhekindofcarorcarsyouareinsuring.Thisfactorconsidersthemake,modelandageofyourcar.Thisisthereasona1969Corvettemaycostmoretoinsurethana1995Cavalier.Or,morecommonly,whyaone-year-oldBMWwillcostmorethanathree-year-oldMercedes.

Tosetratesforcollisionandother-than-collisioncoverageifyouchoosetopurchasethesecoveragesaninsurancecompanyhastocalculatehowmuchyourcarisworthandthencalculatehowmuchitwillchargeinpremiums.Toavoidinconsistencies,theinsuranceindustryusesstandardformulasforcalculatingpremiums.

Fourfactorsinfluenceautoinsurancepremiums:

theageofthevehicle;

thevalueofthevehicle;

thedeductibleamountyou'vechosen;and

theterritoryinwhichthevehicleislocated.

Ifallotherfactorsareequal,theolderthevehicle,thelessthecostforcollisioncoverage.Mostvehicleswearoutwithuse,andthereplacementvaluedeclinesovertime.(Especiallythefirstminuteafteryoudriveanewcaroffofthesaleslotbutcardepreciationschedulesarearantforanotherbook.)

Theageofavehicleisderivedfromthemodelyear.Thiscanbeaflexiblething.Historically,automanufacturerstraditionallystartedsellingtheirnewmodelsinthefallofthepreviousyearforexample,1994modelswouldbeintroducedinthefallof1993.However,inthelastfewyears,carmakershavebeenknowntointroduce1997modelsasearlyasthespringof1996.

Notsurprisingly,insurersuseasomewhatdifferentmethodforcalculatingthecurrentmodelyear.Theyfollowanagegrouprule,whichmeansthatthemodelyearforinsurancepurposeschangeseachOctober1,regardlessofwhenmanufacturersactuallyintroducenewmodels.Forexample,afterOctober1,1997,all1998modelswouldbeclassifiedasagegroupone,1997autoswouldbeagegrouptwo,and1996vehicleswouldbeagegroupthree.

Themaximumageissix,soallvehiclesthataremorethanfiveyearsoldareclassifiedasagegroupsix.

Thesecondfactorthataffectscollisionandother-than-collisionratesisthevalueofthevehicle.Insurersassigncarstovarioussymbolgroups.Thesymbolgroupsmakeuparatingsystemdevelopedbyadjustinganautomobile'svaluewhenitmovesupordowntoreflectthephysicaldamagelossexperienceforthatparticularmodel.So,two1998carsofdifferentmakesandmodelsmighthavethesamemarketvalue,buttheywouldbeassignedtodifferentsymbolgroupsifonemodelsuffersgreaterdamageinacrashorismoreexpensivetorepair.Thehigherthesymbolgroupcode,thehighertherate.

Shownbelowisasectionofasampleratetableusedbyinsurancecompaniestocalculatetheriskfactorsthatinfluencetheinsuredvalueofacar.Thebaserateforcollisioncoverageforaparticularautomobileiswheretheappropriateterritory,agegroupandsymbolcolumnsintersect.AUTONO.

CLASSIFICATIONCODE

PRIMARYSECONDARYTOTALFACTOR+FACTOR=FACTOR

SYMBOLAGEGROUP

TERRITORY

1 ___________ _______+_______=_______

2 ___________ _______+_______=_______

=_______3 ___________ _______+_______

=_______

AUTO AUTO2 AUTO3COVERAGEBASETOTAL=

PREMIUMRATExFACTOR

BASETOTAL=PREMIUMRATExFACTOR

$BI$PD$BI/PDSL$MP$UM$COMP$COLL$TOWING

________________________

____________

________________________

____________

________________________________________________$_____

________________________

____________

________________________

____________

________________________________________________$_____

________________________

____________

________________________

____________

________________________________________________$_____

Sportsandluxurycarscostmoretoinsurethanyouraveragesedan.Evenifyou'renotdrivingaFerrarioraLamborghini,asportscarcancostalottoinsure.Mostinsurancecompaniesclassifycarmodelsinoneoffourgroups:

standard,

highperformance,

sportsand

highperformancesports.

Thelastthreeclassificationsallincludehigherpremiums.

Manypeoplefindout,oncethey'veboughttheirfirsthigh-performancesportscar,thattheinsurancecancostasmuchasthemonthlypaymentonthecar.Evenwhenthecostisn'tthatdramatic,itwillbesignificant.Ifyouwanttoindulgeatasteforexoticorhigh-performancecars,factorinbetween50percentand100percentoftheannualcostofbuyingandkeepingthecarforinsurance.

Conclusion

Inthepreviouschapter,weconsideredthemechanicsofhowcarinsuranceworksingeneral.Inthisone,weveconsideredtheratingfactorsthatreflecttheparticularsofindividuals,families,makesandmodelsofinsuredcarsandfinancialneeds.

Thesefactors,whicharecategorizedaseitherprimaryorsecondaryinfluences,arebasedonlosshistoriesthatvariousinsurancecompanieshavetrackedformanyyears.

Asyoucomparecoveragesandshopforcost-effectiveinsurance,youshouldkeeptheratingfactorsthatapplytoyoursituationathandinareviewableformat.Youmayfindthatinsurancecompanieswillbe

quitewillingtolowerpremiumsifyoucanadjusttheratingfactors.Ifyouknowwhatthesefactorsare,youcanspeakknowledgeablywiththeinsurancecompanyoritsrepresentatives.

KeyQuestions

Aninsuranceagentorsalespersonisgoingtowanttogathersomeinformationfromyoubeforegivingyouaquoteoncoverage.Here'swhattheagentismostlikelytoask.

Questionstoaskforeachdrivertobecoveredbytheinsurancepolicy.

1)Howoldareyou? ______

2)Whatisyourgender? ______

3)Areyoumarried? ______

4)Doyouhaveanypointsonyourdrivingrecord(frombeinginanaccidentorgettingaticket)?YesNo

Ifyes,howmanypoints?______

5)Wheredoyoulive?(Mostlikely,theinsurancecompanywillaskforyourZIPcode.)___________________________

Questionswhichapplytothecarscoveredbytheinsurancepolicy.

1)Whatmodelcategory(standard,highperformance,sportsorhighperformancesports)appliestoeachcar?

_______________

2)Whatisthemileageofeachcar?

_______________

3)Howdoyouuseeachcaryouareseekingtoinsure(business,pleasure,farm,drivetowork)?

_______________

Chapter3ComparisonShoppingforCarInsuranceShoppingforautoinsuranceisn'teasy.Youwanttogetthebestratespossible.Butyoualsowanttogowithacompanythatwilltreatyouwellintheeventofaclaimandonethatwillbearoundwhenyouneedit.

Thebestwaytofindagoodinsurancecompanyistoaskpeopleyoutrustabouttheirexperiences.Mostwillbehappytotellyoutheirtalesofwoe.Butthey'llalsousuallyrecommendacompanythey'vehadgoodexperienceswith.Thenyoucancallthosecompaniesandaskforquotes.

It'salsoagoodideatocheckwithyourstate'sinsurancedepartmentorinsurancecommissionertoseeifacompanyyouareconsideringattractsanunusualnumberofcomplaints.

In1994,approximately200,000peoplefiledsomeformofcomplaintagainsttheirautoinsurancecompaniesrangingfromunfairlyrejectedpolicyapplicationsandexcessivepremiumstoinsufficientsettlements.

Manystatespublishbrochuresthatrankinsurancecompaniesaccordingtothenumberofcomplaintsfiledagainstthem,comparedwiththetotalnumberofpoliciesthateachcompanywroteinthestate.(AlistofstateinsurancedepartmentsappearsintheAppendixattheendofthisbook.)

And,aswithanyimportantpurchase,you'llwanttocomparisonshop.Ratesforautoinsurancecanvarywidely.So,you'llwanttocallatleastthreedifferentcompaniestocheckpremiums.

However,beforeyoupickupthephone,it'sagoodideatomakeachartthatwillhelpyoucompareappleswithapples.You'llalsowanttoconsiderseveralstrategiesforreducingpremiums.

GettingGoing

Asanautoinsuranceconsumer,yourchoiceofwhichcoveragetopurchasewillbeinfluencedbythefollowingquestions:

Whatcoveragedoyouhavetobuybecauseofstatelaw?

Whatadditionalcoveragedoyouneedorwant?

Howmuchwilltherequiredandoptionalcoveragescost?(Themorecoveragesbeingpurchased,thehigherthepremium,ofcourse.)

Severaldifferentelementsadduptothepremium.Youcanpickandchoosecoveragesand,insomecases,manipulatethemenutogetmoreprotectionforlessmoney.

Let'sstartbychartingyourneeds,thentakealookatanumberofwaystosaveyourhard-earneddollars.

HowManyAssetsDoYouHavetoProtect?

Yournetworthdefineshowmuchliabilitycoverageyoushouldbuy.Ifyou'renotworthmuch,thestateminimumsprobablywillcoveranyliabilityyoumightface.Butyoudon'thavetoberichtobeconcernedaboutprotectingyourassets.Instateswithaliabilityminimumof$50,000,eventheequityinamodestsuburbanhousemaybeworthprotectingwithahigherliabilitylimit.That'swhymostcompaniesofferstandardinsurancepackagesthatinclude$100,000,$300,000andeven$1millioninliabilitycoverage.(Bearinmindthatatwo-caraccidentinvolvingfourpeoplecaneasilygenerateseveralmilliondollarsinlosses.)

Mostfinancialadvisersgenerallyrecommendthatyoucarrybodilyinjurycoverageofatleast$100,000perpersonand$300,000peraccident,aswellaspropertydamagecoverageofatleast$100,000.Ifyouhavesubstantialnetworththatyouwanttoprotectagainst

potentiallawsuits,you'llwanttoincreaseyourbodilyinjurycoverage.

Asimplewaytocalculatehowmuchliabilitycoverageyouneedistoadduptheequityvalueyouhaveinyourhouse,anyotherpropertyyouown,majorpersonalpossessions(suchascars,jewelryorcollectibles),andanysavingsorliquidinvestmentsyouhave.(Inthecasesofrealestateandpossessions,youdon'tevenhavetoownthemoutright.Calculatethecurrentmarketvalue,minuswhateverdebtsyouowe.)

Someexpertsalsosayyoushouldaddinanypensionorretirementben-

efitsyouhaveorinvestmentsyou'vemade.Althoughtheseusuallycan'tbeseizedinalegaljudgment,theirbenefitscanbeattachedovertime.

Thetotalvalueofallthesethingsevenifyoucouldn'traiseitbysellingeverythingtomorrowiswhatyouneedtoprotect.Youshouldhaveliabilitycoverageequaltoatleastthisamount.

AssetsInventoryYoumaynotevenrealizehowmuchyouhavetoprotect.Here'saquickchecklisttojogyourmemory.AssetCategory Description ValueHome

Secondhome

Incomeproperty

Savings

Stocksorbonds

Mutualfunds

Alimonyincome

Pensionbenefits

Airplanes

Collections(e.g.,stamps,dolls)

Computerequipment

Jewelry

Stereoequipment

Totalvalue

Ifyouhaveassetsworthmorethan$300,000,youshouldconsiderbuyinga$1millionumbrellaliabilitypolicy,inadditiontoyourautoinsurance.Anumbrellapolicywillpayoffifdamagesexceedthelimitsofeitheryourautoorhomeownerspolicies.

A$1millionumbrellapolicygenerallycosts$200to$300ayear.Thisislessthanincreasingtheliabilitylimitsonyourautopolicy,plusyougetbroadercoverageforyourmoney.

Thebiggestmistakemostpeoplemakeontheirautoinsuranceisthattheyareunderinsuredonliabilitycoverageandoverinsuredoncollisionandcomprehensivecoverage.

MedicalPaymentsCoverage

Liabilitycoverageisn'ttheonlypartoftheautoinsurancepackagethatyoucanadjust.Themedicalpaymentssectionalsocanincludegreaterorlesserlevelsofcoverage.

Medicalpaymentscoveragealwaysiswrittenwithasinglebasiclimitthatappliesperpersonineachaccidentbutthatlimitcanbeadjusted,usuallyin$5,000increments.So,youcanpickthecoverageyouwant,andtheinsurancecompanywilladdaflatdollaramounttothepublishedrateforeachadditional$5,000ofcoverage.

Generally,ifyouhaveahealthinsuranceplanforyouandyourfamilythatyou'rehappywith,youcankeepthemedicalpaymentscoveragetothestateminimum.Butifyou'reinamanaged-carehealthsystemthatsometimesresistspayingforexperimentalorhigh-risktreatments,youmightconsiderhighermedicalpaymentslimits.

Insomecases,yourinsurancecompanyoragentmightsaythathigherliabilitylimitsandlowermedicalpaymentslimitsaretoughtocombine.Don'ttakethisasanabsolute.Whilesomeinsurancecompaniesprefertokeepliabilitylimitsconsistentinhigh,middleandlowpackages,theycananddomixcoveragelevels.

CollisionCoverage

Oneofthemajorfactorsaffectingthepriceofcollisioncoverageisthedeductible.And,fortunately,thisissomethingyoucancontrol.

Adeductibleissimplyariskthatis''self-insured."Witha$1,000deductible,youpayfor(orself-insure)thefirst$1,000ofeachloss.

Obviously,howmuchyoucanaffordtopayisgoingtobeoneofthedecidingfactorswhenyouchooseadeductiblebutthisdoesn'tjust

meanhowmuchyoucanpayintheeventofaloss.Mostpeoplewanttopayaslittleaspossibleifthey'reinacollision.Buttheypickhigherdeductiblesbecausetheywantlowerinsurancepremiums.

Ifallotherfactorsareequal,thegreaterthedeductibleamount,thelowerthepremiumforcollisioninsurance.Thisisbecausehigherdeductiblesreducetheinsurancecompany'sexposure.Smalllossesthatdonotexceedthedeductibledonotrequireaclaimsettlement(loweringtheinsurancecompany'scostsofdoingbusiness),andlargelossesthatexceedthedeductibleresultin(asmallersettlement).

Deductiblestypicallyaresetat$500to$1,000perclaim.However,deductiblesrangingfromaslowas$100toashighas$5,000areavailablefor

collisioncoverage.Inpickingyourdeductible,youneedtoaskyourselfhowfrequentsuchlossesmightbe,howmanycarsarebeinginsuredandhowmanyloss-freeyearsyouwillneedtolivethroughbeforethepremiumsavingsequaltheextrariskbeingtaken.

Toplayitsafe,assumethatifyouchooseadeductible,you'llhavetopayitonceayear.Thisassumptionbudgetsinthedeductibleasacostofcoverage.

Todeterminewhetheradeductibleworksforyou,compareayear'spremiumswithoutaparticulardeductibletoayear'spremiumswiththatdeductibleplustheamountofthedeductible.Thedeductibletotalwillbehigher.Butifyougothroughtheyearwithoutmakingaclaim,yougettokeepthedeductibleamount.

Inmostcases,insurancecompanieswillstructurepremiumstoencouragehighdeductibles.Forexample,thecostofcollisioncoveragewitha$500deductiblecanbeasmuchas45percentlessthanthecostwitha$100deductible.Inthisscenario,a$500deductiblewillpayforitselfinpremiumsavingsinaslittleasthreeyears.Anda$1,000deductiblecanpayforitselfinjustalittlelongerthanthat.Butbothofthesescenariosassumethatyoudon'tmakeanyclaimsduringthatperiod.

Acaveat:Ifyoufinanceyourcar,thefinancecompanymaynotletyouhaveahighdeductible.

Inthecaseofcollectibleorantiquecars,youcanopttoinsurethevehicleforapredeterminedreplacementvaluecalledthestatedvalue.Insurancecompaniesusuallyofferthisintheformofapremiumper$100ofdeclaredvalue.

Forexample,a1957Chevyinmintconditionwouldbeworthfar

morethana"restorable"'57Chevy.Itmightcostmanythousandsofdollarstoobtainareplacementvehicleandrestoreittothesamemintconditionafteratotalloss.So,you'dwanttoinsureitforanamountthatyoudetermine.

Butthiscoverageisexpensive.Thecherry1957Chevythatyoudeclaretobeworth$40,000maycostmoretoinsurethananewMercedesthatsoldforthesameamount.Also,theinsurancecompanyhastoagreetoyourdeterminedamount.

WaystoReduceYourRates

Whenshoppingforinsurance,don'tforgettoaskaboutspecialdiscounts.Manycompaniesofferpricebreakstopeoplewhodrivefewermilesthantheannualaverage.Mostalsoofferlowerratestomotoristswhohaven'thadanaccidentormovingviolationforthreeyears.

Alsoaskaboutsafety-featurediscounts:Youmaygetabreakifyourcarhasairbags,anti-lockbrakes,andanalarmoranti-theftsystem.Forinstance,TheAutoCluboffersapproximately10percentoffcomprehensivecoveragepremiumifyouhaveaqualifyinganti-theftsystemand15percentsavingsonyourmedicalpayments,uninsuredmotoristandbodilyinjurycoveragesifyouhaveanairbag.

Ifyouhavetwocars,youalsomaybeabletocutyourcostsbyinsuringthembothonthesamepolicy.Discountsformultiple-carhouseholdscanrangefrom15percentto20percent.

Also,lookintoinsuringyourhousewiththesamecompany.Multi-policydiscountsshaveafewpercentagepointsoffthepriceofbothyourhomeownersandyourautoinsurancepolicies.

Thereareseveralotherwaystoreduceyourcarinsurancepremiums.Theseinclude:

Droppingtherental-reimbursementcoverage.Rentalcoveragepaysforrentingacarwhenyourownautoisintherepairshop.Ifyouhavetwocars,youmaybeabletogetalongwithoutarental.

Droppingtowingandlaborcostscoverage.Ifyoualreadyhavecoveragethroughanautomobileclub,forexampleyou'rejustduplicatingyourcosts.

Droppinglossofincomebenefits.Youmaywanttoskipthiscoverageifyouhaveagooddisabilityplanatwork.

Cancellingcoverageifyourcarwon'tbeusedforalongperiod.Ifyou'reflyingoutofthecountryonvacationforamonthorlonger,seeifyoucancancelyourcoverageforcollisionandliabilitywhileyou'regone.

Joiningacarpoolortakingpublictransittowork.Insurersbaseyourpremiums,inpart,onhowmuchtimeyou'redriving.Ifyoucanlower

yourannualmileagesufficiently,youcanloweryourrates.Somecompaniesoffera10percentto20percentdiscountforregularcarpooldrivers.

Checkingoutinsurancecostsbeforeyoumove.Insurancecompaniesbasetheirratespartlyonwhereyoulive.Peoplelivinginbigcitieswillpaymorethanthoseinsmalltowns,allotherthingsbeingequal.RatescanevenvaryfromoneblockorZIPcodetoanother,becauseofloweraccidentortheftrates.

Getolder.Driversaged50or55qualifyforamaturedriverdiscountusuallyinthe10percentto20percentrange.

Buycarswithbetterinsurancerecords.Generally,expensivecarscostmoretoinsurethaneconomycars;sportscarscarryheftierpremiumsthanfamilysedans.Carsthataremorepopulartargetsofthievesalsocancostmoretoinsure.Andcarsthatcostmoretorepairorsustainmoredamageinanaccidentthanaveragealsocostmoretoinsure.

Installanalarmorfuelcut-off.Mostcompaniesgivediscountsforanti-theftdevicesmanyofwhichwilldeterallbutthemostdeterminedthieves.

We'llconsiderevenmoretipsandtechniquestohelpyousaveonyourinsuranceinafewpages.Butfirst,afewwordsaboutthebuyingprocess.

ConsideringInsuranceCompanies

Thekindofinsurancecompanyyouchoosecanmakeabigdifference,especiallywhenyouhavetomakeaclaim.Differentcompaniesofferdifferentbenefitssomestresslowprices,othersstressexcellentservice.

Companiesalsotargetdifferentgroupsofdriversfortheirpolicies.Forinstance,ifacompanyonlywritespoliciesforsqueaky-cleandrivers,itsratesaregoingtobelowerthanonethatacceptsabroaderrangeofdrivers,hopingtomakemoneyonhighervolumeandtheextrainvestmentincomeitcangeneratebycharginghigherpremiums.Generally,insurancecompanieswithlowerlossrecordschargelessforinsurance.

Somecompanieschargemoresothattheycanprovidequickerservice.Ifacompanyhasmoreclaimsadjustersinyourarea,itprobablywillsettlecasesfaster.Butitalsoislikelytochargehigher

premiums.Onlyyoucandecideifthetradeoffisworththemoney.

Bargain-basementinsurers,incontrast,maybemakingtheirmoneybykeepingatightfistonexpenses.Tokeepcostsdownandprofitsup,theymayofferpoororminimalcustomerservice,avoidpayingclaimswheneverpossibleandprocessclaimsatasnail'space,sotheirreservescankeepearninginvestmentincomeaslongaspossible.

Someinsurancecompaniesalsoofferdiscountsifyouagreetohaveaccidentrepairsdoneatpreapprovedbodyshops.Insurerssaythattheycan

savemillionsonthecostsofprocessingaccidentclaimsbyvirtuallyeliminatingtheinsuranceappraiser.Theycomparethesecost-containmentplanstomanaged-caresystemsinthehealthinsurancemarket.

Undercost-containmentplans(alsocalledpreferredprovideroptionplans),repairshopsappraisecarsandsendtheestimatestotheinsurancecompanyviacomputer.Thatcutsthetypicaltimeittakestogetadamagedvehiclerepairedfrom14daystoseven.Becausetheshopgetsasteadystreamofbusiness,itgivestheinsurancecompanyreducedlaborratesandpartsdiscountsusuallyintheneighborhoodof5percentto10percent.

Preferredprovideroptionisanoutgrowthofanothertypeofplancalleddirectrepairprogramsthatinsurancecompaniesbeganofferinginthelate1980s.Directrepairprogramsencourageownerstochooseabodyshoprecommendedbytheinsurancecompany,althoughtheowneralsocangotoashopthat'snotonthelist.

InPennsylvania,state-approvedautoinsuranceratesdroppedbetween1993and1995,largelyduetoacost-containmentprovisionina1990reformlaw.

Althoughonlyahandfulofaccidentclaimsfellundercost-containmentoptionsduringthemid-1990s,insuranceindustryofficialspredictthat25percentofclaimswillusethesesystemsbytheyear2000.

DirectPurchases

Increasingly,smartconsumersarebuyingtheirautoinsurancedirectlyfrominsurancecompanies.Youcandothisthroughthemail,onthetelephoneorthemostrecentdevelopmentviaon-linecomputerservicesandtheInternet.

Theon-lineservicesareanareainwhichmostinsurancecompaniesseemarketingpotential.Theypredictadaywhenyoucantapintoacomputerandseeacomparativelistofauto-insuranceratesofferedbyeachcompany.

Armedwiththisinformation,youcouldsettheagendawhenitcomestimetobargainforthepolicythatwillcoveraprizedcarortrustyfamilywagonoratleastkeepyouontheroadlegally.Thiswillrequireagreaterlevelofconsumersophistication.You'llneedtoknowmoreaboutwhatcoveragesyouneedandwhatyou'rebuyingwithyourpremiumdollars.

Anumberofcompaniesalsohavebegunusingdirectmarketingastheirmainmethodofsellingcoverage.Directmarketersdon'tuseagentsorbro-

kerstoselltheirinsurance;theysellthroughdirectmailandtelemarketing.Sincetheyeliminateasalesstaffandacommissionstructurethesecompaniesusuallyoffercheaperpremiums.Theproblemis:Someofthesecompanieshandleclaimsthesamewaytheysellpolicies.Inotherwords,thepricebreakusuallycomesatthecostofservice.Nonetheless,directmarketingsaleshavebecomeoneofthefastest-growingpartsoftheautoinsurancemarket.

Single-vs.Multiple-CarPolicies

Aswementionedinthelastchapter,insurancecompaniesuseratingtablestosetpremiumprices.Thesetablesoftenaredividedintotwosectionsoneforsingle-carrisksandoneformulti-carrisks.Themulti-carratingfactorsandthereforetheratesarelower,becausetheyincludeadiscountforinsuringtwoormorecars.

Infact,iftherearenopointsagainstinsureddrivers,theratingfactorforthesecondcaractuallycanbezeroorevenanegativenumber.

InsuranceexperiencepointsarenotthesameasthepointstheDepartmentofMotorVehiclesissues,butthey'resimilar.Insurancecompaniesassignpointsforticketsandaccidents,thenaddthosepointstoyourratingfactorbasedonyourage,sex,location,etc.Thetotalratingfactoriswhattheymultiplythestandardratebytocomeupwithyourprice.

So,theoretically,insuringasecondcaronthesamepolicywillbemuchlessexpensivethaninsuringtwocarsseparately.However,inpractice,multi-carrisksoftenincludemultipledrivers.Andoneofthesedriversmighthaveapoorrecordorbeyoung.Thisiswhatcandriveupcosts.

Insurancecompaniesapplysecondaryratingfactorstomulti-carrisksverysimply.Therearetwokeyelementstoremember:

Whenratingmorethanonecar,drivingrecordpointsareappliedtoamaximumoftwocars.Whenratingthreeormorecars,thedrivingrecordpointsareassignedtothetwocarswiththehighestbasepremium.Alladditionalcarsdon'thavetohavepoints,sotheirrateswillbelower.

Whentherearenoyouthfuloperators,theprimaryfactorfortheprincipaloperatorofacarisappliedtothatcar.Ifyouaddyouthfuloperatorstoyourpolicy,theprimaryfactorsforyouthfuloperatorswillapplytoallvehiclesthosedriversuse.

Inallcases,ifayouthfuloperatoristheprincipaloperatorofacar,theprimaryfactorfortheyoungdriverappliestothatcar.

Althoughyouthfuloperatorswhoarenotprincipaloperatorsareassignedtocarsthathavethehighestbasepremiums,itispossiblefortwoormorecarstohavethesamebasepremium.Thereisaratingruletoresolvethispotentialconflictwhenitarises.

Ifthetotalbasepremiumisthesamefortwoormorecars,ayouthfuloperatorwhoisnotaprincipaloperatorwillbeassignedtothecarwiththelowestrated-useclassification(the"pleasure"versus"business"distinction).

Thereareseveralreasonswhyyoungdriversareexpensive.Autoaccidentswerethemostfrequentcauseofdeathamongpeopleages6to33yearsoldin1992.In1993,morethan5,400teenagersdiedonAmericanroads,andhalfofthedeathswerealcohol-related.

FamilyRisks

Herearesomeeffectivewaystosavemoneyonfamilyautoinsurance:

Staywithacompany.Thelongeryou'reagoodcustomer,thebettertherates.

Makesureyourkidstakedriver'sed.Addingateenagertoatwo-driver,two-carpolicycanboostafamily'spremiumsby50percent.However,mostmajorinsurancecarriersreducepremiumsfordriversuptoage21by10percentto15percentiftheytakeacertifieddrivereducationcourse.Iftheirschoolhasnoprogram,acourseatacertifiedprivatelyrundrivingschoolalsowillqualifyyouforthediscount.

Encourageyourkidstogetgoodgrades.MostinsurancecompaniesprovideadiscountforstudentswithaBaverageorbetterorwitha3.0gradepointaverageincollege.Thetypicaldiscountis10percent.

(Somecompaniesaskforcopiesofreportcardsortranscriptseachtimeyourenewyourpolicy.)

Talkyourteenintodrivinganice,big,safestationwagon.Intermediate-sizecars,sedansandother"low-profile"vehicleswillcarrylowerpremiumsthanhigh-performancecars,sportutilityvehiclesandsportscars.Ifyourteenagerwantstodriveasportscar,youwillhavetogotoacompanyspecializinginhigh-riskpoliciesandthepremiumcanbedoublethenormalrates.

Raisethedeductibleamountsordropcollision,fireandtheftcoverageforthecarstheteenagerdrives.Manyagentssuggestgettingadeductibleof$500forcollisionand$250fortheftandotherdamage,anddroppingtowingandlaborcoverage.Thisapproachisespeciallyappropriateifyourchilddrivesanoldercar.

Putyourteenagedriveronyourpolicy.Thisusuallyischeaperthanbuyingseparateinsurance.Evenifyoursonhashisowncar,includinghiscoverageonthefamilypolicywillhelpgetthemulti-cardiscount.

Ifateenagedriverisinanaccidentthatisnotjudgedanotherdriver'sfaultoriftheteenagergetsatrafficticketthecostofyourpolicywillrise,oftendramatically.Inthiscase,youmaywanttoputyourteenageronaseparatepolicy.Ifyourteenagerhashisowncaranddoesn'tqualifyforagoodstudentordrivereducationdiscount,itmaybebetterforhimtohavehisownpolicyespeciallyifhehasabaddrivingrecord.

WhatIsaSafeDriver?

Safedriverstypicallysaveasmuchas20percentoffinsurancecompanies'standardrates.Butdifferentinsurancecompanieswillhaveslightlydifferentdefinitionsofasafedriver.

The"SafetyPays"programfromAmericanExpress'sinsurancedivisions(AMEXAssuranceCo.andIDSPropertyCasualtyInsuranceCo.)willgiveanideaofwhattheyhaveinmind.TheSafetyPaysprogramlooksfordriverswith:

Nomorethanoneminorviolationorat-faultaccidentinthelastthreeyearsperhousehold.

Nomorethanonecomprehensivelossornot-at-faultaccidentinthelastthreeyearsperhousehold.

Nomajorviolations,suchasdrivingwhileintoxicated,inthelastfiveyears(threeyearsinArizona,California,Delaware,Florida,Maryland,Michigan,Oklahoma,Oregon,PennsylvaniaandVirginia).

Norevocationorsuspensionofdriver'slicense(s).

NoFinancialResponsibilityFilingsrequiredinthelastthreeyears.

Fiveyears'drivingexperienceintheUnitedStatesforprincipaldrivers.

Nolapseininsurancecoverage.

Noaccidentsorticketsifunderage21.

Inaddition,somehigh-performancecarswilldisqualifyyoufromthediscountprogram.Classic,antiqueandcustomizedvehiclestypicallyarenoteligible,andneitherarecommercialvehicles.

WannaMakeaBet?

Insurancecouldbeconsideredagamble.You'reeitherbettingthatyouwillhaveanaccidentorbettingyouwon't.

Ifyoufeelluckyinotherwords,ifyouarewillingtoassumesomeadditionalriskyoumaywishtoimplementoneormoreofthefollowingrisk-relatedsuggestionsfortrimmingautoinsurancecosts.

Weighthecostofcomprehensiveandcollisioncoverageagainstthevalueofthecar.Onacarthatisfinanced,banksrequirecollision,whichpaysfordamagetoadriver'sowncarifheorsheisinvolvedinawreck,andcomprehensive,whichpaysfortheft,fireandotherlosses.Butoncetheloanispaidoffandthecargetstobefiveorsixyearsold,adrivermaywanttodroponeorbothcoverages.

Wheneveryourcar'svaluegetsbelow$3,000,it'sagoodtimetoreconsiderthesecoverages.Insurerswon'tpayfordamagethatismorethanyourcarisworthontheopenmarket.Thatmeansthatan8-or10-year-oldcarthatsuffersseveralthousanddollarsindamagemaynotgetrepaired.Instead,itwilljustbetotaledi.e.,declaredanunrepairableloss.You'llgetonlythebookvalueofthecarwhichcouldbelessthan$1,000,dependingonthemodelandyear.

However,ifyourcarisstillworthsomemoney,youmaywanttokeepthesecoverages.

Ifyoudodropthemandyoucauseanaccidentthatdamagesyourcarorifyourcarisstolenyouwillnotbereimbursedatall.So,dropcomprehensiveandcollisiononlyifyouarewillingtopaytheentirecostofrepairingorreplacingyourcar.

Considerraisingyourdeductibles.Ifyoudon'twanttopayforthewholecostofthecarintheeventofacollisionortheft,youmaybeabletolowerthecostofcollisionandcomprehensivecoveragesenoughtomakethemworthwhilesimplybyincreasingthesizeofthedeductibles.

TheNationalInsuranceConsumerOrganization,anonprofitconsumergroup,saysthatincreasingyourcollisiondeductiblefrom$100to$250willknockanaverageof20percentoffthecostofthatcoverage.Boostingthedeductibleto$500couldsaveanother30percent.Evenpaying$1,000intheeventofanaccidentcanbemorecosteffectivethanpayinghigherpremiums.

Obviously,ifyouhaveanoldercar,it'simportanttoknowwhatit'sworthbeforeyoubuyinsurance.Agoodwaytodetermineyourcar'smarketor"book"valueistousethebookmanyinsurancecompaniesuse:theNationalAutomobileDealersAssociation'sOfficialUsedCarGuide,whichisupdatedeachmonth.Somecompaniesalsousethemoreconsumer-orientedKelleyBlueBook.Mostpubliclibrarieshavecopiesofbothbooks.

MoreWaystoSave

Thereareanumberofotherwaysyoucancutyourinsurancecosts.Someinvolveassumingmorerisk.Othersinvolvetransferringrisktoadifferenttypeofinsurancepolicy.

Forinstance,ifyourstate'slawsallowit,youmaywanttodropyourautomedicalpaymentscoverage.Ifyoudomostofyourdrivingaloneorwithfamilymembersandyouhavegoodhealthinsurancecoverage,youmightdecidetoskipthemedicalpaymentscoverageandavoidpayingtwiceforsimilarinsurance.

However,ifyouoftenhavepeopleotherthanfamilymembersinyourcar,youshouldkeepyourmedicalpaymentscoverageso,intheeventofanaccident,injuriestoallpassengerswouldbecovered.(Passengerswhoarefamilymemberscouldcollectunderyourhealthinsurancepolicy,butnon-familymemberswouldhavetosueyoufornegligencetocollectunderyourautomobileliabilityinsurance.)

Othertips:

Considerbuyinglastyear'smodel.Ifyou'reinthemarketforanewcarandit'stheendofthemodelyear,you'reprobablyconsideringtheadvantagesanddisadvantagesofbuyinglastyear'smodelonsale.Lastyear'smodelisnotonlycheapertobuy,it'scheapertoinsure.That'sbecauseratesarebasedonmodelyear.However,thecaralsowillhaveareducedresalevalue(comparedwithacarofthenextmodelyearpurchasedontheexactsameday)andareducedactualcashvalueforinsurancepurposes.Ifyou'releasingandplantoturninthecar

attheendofthetermanyway,thefinancialbenefitsofleasingtheoldermodelclearlyoutweighthedisadvantages.

Don'tgetticketsorhaveaccidents.Gooddriverscanreceiveasmuchas20percentoffthestandardpremiumfromsomecompanies.Incontrast,adriverwithmorethanfiveexperiencepointsonhisorherrecordcanpaydoubleandsometimeseventriplethestandardpremium.

Alwayswearaseatbelt.Whethertheaccidentisyourfaultornot,weallbeararesponsibilitytokeepthecoststoourmedicalandlegalsystemsdown.This,inturn,keepsinsuranceratesdown.Besides,it'sthelaw.

Lookahead.Whathappensifyougetinanaccident?Whatifyou'reintwoaccidentsinayear?It'sworthknowinghowaccidentsandclaimsmightaffectyourfutureratesandhowtheinsurancecompanyyouchoosehandlesclaims.

Don'tmakesmallclaims.Useyourinsuranceasalastresort.Carryhigherdeductiblesanddon'tmakesmallclaimstoyourinsurer.Statisticsshowthatpeoplewhohaveahistoryofmakingsmallclaimseventuallytendtomakelargerones,aswellandinsurancecompaniesbasetheirratesonthesestatistics.

Don'tsmoke.Severalcompaniesofferlowerratesforliability,no-fault(medicalbenefits)andcollisioncoveragetonon-smokersthantosmokers.Thereason:Smokingisthoughtofasahigh-riskbehavior.

Staymarried.Losshistoriesshowthatmarriedpeoplearelesslikelytobeinvolvedinaccidentsthansinglefolksandsotheygetbetterrates.Ratesareespeciallyimprovedformenintheirtwentiesandthirties.

Ifyou'reaseniorcitizen,checkoutdriversafetycoursediscounts.

Somecompaniesoffer10percentormoreofftheirstandardpoliciesfordriverswhoareage50orolderandtakeasafe-drivingclass.(However,thosediscountsmaynotapplytodriverswhoareover65.)

Retireearly.Intheirsearchformaturedriverswhopaypremiumspromptlyanddon'tspendmuchtimeontheroad,insurancecompaniesareofferingbigdiscountstoearlyretirees.

Don'tassumeanassociation'sratesarethebestavailable.Forexample:In1994,NationalInsuranceConsumerOrganizationPresidentRobertHuntersaidolderdriversprobablywouldpaylessintheirstate'sassignedriskinsuranceplanthantheywouldforAARP'sheavilypromotedautoinsurance.''Guaranteedrenewabilityatinaffordablepricesisnoguaranteeatall,"saidHunterreferringtotheprimaryreasonolderpeoplebuyAARPinsurance.

Youalsocansavemoneyinsomestatesbyselectingano-faultinsurancepolicy.AswesawinChapter1,bygivingupcertainrightstosueintheeventofanaccident,youreceiveastate-mandatedpremiumdiscount(usuallyatleast15percent).

Askinsurersiftheyhaveanyuniqueorpromotionaldiscounts.Differentcompaniesdohavedifferentlossexperiencesanddifferenttargetmarkets,andtheymayprovidearewardifyou'retheirkindofcustomer.

Findoutwhetheranagentcangetyouabetterdeal.Afteryou'vedoneyourownshoppingandcomparing,youcangotoanindependentinsuranceagentsomeonewhosellspoliciesfromseveraldifferentinsurancecompaniesandseeifheorshecanfindalowerprice.

Insomestates,youalsocanaskyouragentforacommissionrebate.Forinstance,inCalifornia,Proposition103authorizesagentstorebatepartoftheircommissiontoyou.Theymaynotlikedoingit,butitneverhurtstoask.

Don'tSkimpontheLiability

Whileit'stemptingtocutliabilitycoveragetosavemoney,theriskofinjuringorkillinganotherpersonisthelargestriskyoufacewhendriving.And,infact,yousaveverylittlebypurchasinglowerliabilitylimits,becausethecostper$1,000forliabilitydecreasessharplyas

yourlimitsincrease.Don'triskthelossofyourhomeorotherassetsjusttosaveafewbucks.

Theaveragepersonusuallycarries$25,000perpersonperaccidentinliabilitycoverage.Manyexpertsrecommendthatyouraiseyourcomprehensiveandcollisiondeductiblesandspendsomeofthemoneyyousavetopayformoreliabilitycoverage.

Ifyoudoalotofdrivingparticularlyinhigh-riskareasyoumightconsiderincreasingyourthird-partyliability.Courtawardsinexcessof$1millionareincreasinglycommon.Theadditionalcostofraisingthiscoveragefrom$1millionto$2millioncanbeaslittleas$10to$50ayear,onaverage.Ifyou'reover25andhaveagooddrivingrecord,it'sevencheaper.

Anotherapproach,ifyouliveinahigh-costmarketwhichincludesalmosteverybigcityandyouneedmorethanminimumamountsofliabilityinsurance,istolowertheliabilitylimitsonyourautoinsuranceandpurchaseapersonalumbrellapolicycalleda"pup"inthatfuninsuranceindustrylingo.Insomeareas,thiscanslashyourautoinsurancebillbyhundredsofdollarsandyouwon'tbepayingthatmuchforthesameamountofliabilitycoverageunderaplup.

IDidn'tWantThat

Sometimes,youcansavemoneysimplybyreadingyourpolicy.

It'sarealityofthemoderninsurancemarketthatunwittingconsumersgetrippedoff.Inmanymarkets,therip-offsfocusonsellingmultiple,redundantpolicies.Inautoinsurance,thetwobiggestscamsaresellingpolicieswrittenbyinsurancecompaniesthatarebankruptordon'texistandaddingbogussurchargestopremiumbills.

InAugust1995,theownerofasouthFloridainsuranceagencywasarrestedandchargedcriminallywithbilkingmorethan1,000customersoutofnearly$100,000byslippingunneededorunwantedchargesintotheirautopolicies.

MonthslaterinnorthFlorida,fouragentsworkingforanotherinsuranceagencyinitsTallahasseeandPensacolaofficeswerechargedwithadministrativecomplaintsinwhatinvestigatorssaidwasasimilarscheme.

Ineachinstance,theagentsallegedlyrippedoffconsumersthroughadeceptivesalesschemeknowninindustryjargonassliding.

"Slidingorchargingcustomersforinsuranceproductswithouttheirknowledgeorconsentisastatewideproblem,"saidFloridaInsuranceCommissionerBillNelson."WearereceivingcomplaintsfrompeopleindifferentpartsofFlorida,andeachisbeingthoroughlyinvestigated.

Wherewarranted,chargeswillbebrought."

Besidesthecasesresultingincharges,investigatorswiththeFloridaDepartmentofInsurancehadanumberofotherslidingallegationsunderactiveinvestigation.

InsurancedepartmentinvestigatorsinotherheavilypopulatedstatesincludingCalifornia,Texas,NewJerseyandNewYorkhavebeguncampaignstostampoutsliding.

Youcanremedyslidingproblemsquicklybyreadingyourpolicywhenitarrivesandreportinganycoveragesyoudidn'twanttoyourinsuranceagent

orcompany.Ifyoudon'tgetsatisfactionrightaway,callyourstateinsurancedepartment.

CollectorCarInsurance

We'vetalkedabout'69Corvettesand'57Chevys.Butthisisn'tjustlooseautomotivespeculation.Peoplecollectcarstheyloveandloveisatoughthingtoinsure.

Ifyouhaveastreetrod,classiccarorothercollectiblevehicle,thereisoneotherwayyoucanloweryourbasicautoinsurancerates:byputtingthatcollectorcaronaseparateinsurancepolicy.However,thesepoliciestypicallyhavealowannualmileagelimitaround2,500milessothey'reonlyappropriateforcarsthataredrivenonlyonweekendsortocarshows.

Thepremiumsforthesepoliciesusuallyarereasonablepossiblyaslowasathirdofthepriceforadaily-driverbecausetheinsurancecompaniesknowyou'lltakeparticularlygoodcareofthiscar.

Thereareseveralotherreasonswhythepremiumsaresolow.Oneisthemileagelimit.Anotheristhetypicalrestrictionsonwhereandwhenyoumaydrive,andwhatsortofstoragefacilityyoumustuse.(Thesecarsmustbegaraged,andsomepoliciesrequireadditionaltheftandfireprotection.)Also,youthfuldriversmaynottakethesecarsoutforaspin.

However,toqualifyforoneofthesecollectorcarpolicies,yourcaroftenmustbeatleast25yearsold.Ifyoudon'tqualifyforoneofthesepolicies(perhapsbecauseofyourcar'sageorthatitisn'tgaraged),youcansavesomemoneyonyourPersonalAutoPolicybylettingtheinsurancecompanyknowthatthisvehicleisapleasurecar.Thiswillqualifyitforlowerrates.

OptionalCoverages

Whenyou'reassessingyourautoinsuranceneeds,youshouldconsideralltheoptionalcoveragesthataren'trequiredinyourstate.Theseoptionalpackagescananswermanyspecificinsuranceneeds.

Inmanystates,uninsuredmotoristscoveragemustbeincludedinautomobileliabilitypolicies,althoughsomestatespermitaninsuredtorejectthecoverageinwriting.Insomestates,underinsuredmotoristscoverageisaseparateoptionalcoveragethatappliesonlywhenanadditionalendorsementisattachedtothepolicy,inwhichcaseaseparatepremiumalsoischarged.Ifthevalueofyourcarishigherthanthestate-requiredpropertydamageliabilityminimum,youdefinitelywillwantunderinsuredmotoristscoverage.(You

alsoshouldbuythiscoverageifyourareaisnotedforthenumberofuninsureddriversontheroad.)

Somestatesallowbenefitstackingasanoptionalcoverage.Thiscoveragemeansthatyoucanaddtheuninsuredmotoristslimitsfrominsuranceonseveraldifferentcarstoapplytoasingleclaim.Butbecarefulaboutstackingyouobviouslyshouldn'tbuyitifyouonlyhaveonecar,andsomestateshavebeenaccusedofallowingstackingchargestobeappliedtoallinsurancepolicies.

Towingandlaborcostcoverageisaminorphysicaldamagecoverage.Itcoverschargesfortowingandlaborwhenacoveredautoisdisabledduetoabreakdownoraccident.Coveredlabormustbeperformedattheplaceofdisablementlaborperformedafteranautomobileistowedtoagarageisnotcovered.

Conclusion

Armedwiththisbook,youshouldbeabletoshaveasignificantchunkoffthepriceofyourautoinsurance.Justbesuretocomparequotesfromatleastthreecompanies,anddon'tforgettochecktheirrecordswithyourstate'sinsurancedepartment.Abargainisn'tagooddealifthecompanyisnotoriousfordelayingpaymentonclaimssometimespermanently.

KeyQuestions

1)Beforeyoucontactanagentorinsurancecompany,you'llwanttodecidehowmuchcoverageyouneed,aswellaswhatdeductiblesyouwouldconsider.Thefollowingchartwillhelpyoukeepallthisinformationstraight.

CoverageLimitdesired

Deductible

Bodilyinjuryliability

Propertydamageliability

Medicalbenefits

Uninsuredmotorist

Underinsuredmotorist

Collision

Comprehensive

______

2)Wouldyoulikeanyofthefollowingoptionalcoverages?

Rental-carreimbursement

Yes No

Towingandlaborcosts Yes No

Lossofincome Yes No

Funeralbenefit Yes No

Stacking Yes No

3)Whencomparingcompanies,you'llwanttofindoutwhichdiscountsyoucanqualifyfor,

andhowmuchthosediscountsare.Thefollowingaresomeofthemorecommondiscounts:

Discount Howmuch?

CompanyACompanyBCompanyC

Safedriver

______ ______ ______

Non-smoker

______ ______ ______

Retireddriver

______ ______ ______

(Tablecontinuedonnextpage)

(Tablecontinuedfrompreviouspage)

Discount Howmuch?

CompanyACompany

CompanyC

Driverage50-64 ______ ______ ______

Seniorsafe-drivingcourse ______ ______ ______

Youngadultdriver'sed.course ______ ______ ______

Goodgradesforstudents ______ ______ ______

Collegestudent(s)awayfromhomewithoutacar ______ ______ ______

Anti-theftdevice ______ ______ ______

Carkeptinagarage ______ ______ ______

Automaticseatbelts ______ ______ ______

Airbags ______ ______ ______

Anti-lockbrakes ______ ______ ______

Lowannualmileage ______ ______ ______

Carpool(ortakingpublictransportationtowork) ______ ______ ______

Pleasureuseonly ______ ______ ______

Multi-cardiscount ______ ______ ______

Multi-policydiscount(e.g.,homeownersandautowiththesamecompany) ______ ______ ______

Legend: CompanyAis______.CompanyBis______.CompanyCis______.

4)Willtheagentgiveyouacommissionrebate? YesNo

5)Ifyouaregettingcollisionandcomprehensivecoverage,you'llalsowanttocomparepremiumswithdifferentdeductibles.

Raisingtheamountofthedeductiblecanloweryourpremiumssubstantially.

CompanyA

CompanyB

CompanyC

Deductible1forcollision($_____) ______ ______ ______Deductible2forcollision($_____) ______ ______ ______Deductible1forcomprehensive($_____) ______ ______ ______Deductible2forcomprehensive($_____) ______ ______ ______

6)Ifyouownacollectorcar,it'sworthinquiringaboutdeclaredvaluecoverage,aswellasoccasional-usediscounts.It'salsoworthittocomparetheserateswiththoseforaspecialcollectorcarinsurancepolicy.(Companiesthatoffercollectorcarinsuranceusuallyadvertiseincarmagazines.)Typeofcar:______Declaredvalue:______Willthiscarqualifyforcoverage? Yes No

Doestheinsurancecompanyagreetoinsurethecarforthisdeclaredvalue? Yes NoHowmuchwillthepremiumsbe?______Whatrestrictions,ifany,areplacedonthevehicle?______Whataboutanoccasional-usediscount?______Premiumforacollectorcarpolicy:______Whatrestrictions,ifany,areplacedonthevehicle?______

Chapter4InsuringBoatsandPersonalWatercraftAssocietyhasbecomemoreaffluentandmoremobile,unprecedentednumbersofAmericanfamilieshavepurchasedboatsandpersonalwatercraft.Ofcourse,thefactthatpeoplearemarryinglaterinlifealsohascontributedtotheupsurgeinsales,toosincesinglepeopletendtohavemoredisposableincome.

Ifyou'reoneofthosepeoplewhoisheadedforthegreatoutdoorseverychanceyougetalongwithyourboatorpersonalwatercrafthere'swhatyouneedtoknowaboutinsurance.

TheBasics

Firstofall,don'texpectastandardhomeownersinsurancepolicytomeetyourcoverageneeds.MostpeoplewhorelyontheirhomeownersinsurancetocoveraboatorJetSkiwindupwithgapsincoveragethattheydon'tknowaboutuntilit'stoolate.

Thekindofcoveragethatyouneedissimilartopersonalautoinsurance.Ataminimum,boatsandjetskisneedliabilityandcomprehensivecoverage.Liabilityprotectsyouifyourvesselinjuressomeoneordamageshisproperty,andcomprehensiveinsuranceprotectsyourpropertyincaseofvandalism,damageordestructioncausedbytheftorfire.Dependingontheageandvalueofyourcraft,youalsomaywanttopurchasecollisioninsurance,whichprovidescoveragefordamageyoucausetoyourownproperty.

Boatinsurancepricesdependonthevalueoftheboatandyourboatingequipment,theengine'shorsepowerwhetherithasanin-boardorout-boardmotor,andthelengthoftheboat,accordingtotheIndependentInsuranceAgentsofAmerica(IIAA).Youalsocanadd

coverageforsuchthingsas:

fuelandotherspillageliability;

aboattrailer;

medicalpayments;

personaleffects;and

liabilitytoprotectyoufromanuninsuredboater.

Aswithautoinsurance,itispossibletogetsomepricebreaksonboatpolicies.Typically,discountsareofferedforhavingsafetyequipmentonboard,orforprovidingprotectivestorageforyourboatwhenit'snotinuse.Inaddition,youmaybeeligibletoreceivelowerratesifyouholdacaptain'slicenseorifyoucompleteoneofthesafetycoursesofferedbytheU.S.CoastGuardAuxiliaryorPowerSquadron.

PleasureBoats

Insomerespects,owningaboatisalotlikeowningacar.Foronething,you'llfacethesamesortsofexposurestoloss.Theseinclude:

Bodilyinjuryandpropertydamagetoothers,suchasinjurytopassengers,skiers,swimmers,occupantsofothercraftanddamagetoothercraft.

Physicaldamagetothecraftitselfbecauseofcollisionwithotherboatsorobjects,fire,andtheft(aswellasmanyoftheothercomprehensive-typelossestowhichcarsareexposed);andlossesdueto"perilsoftheseas,"includingwaveaction,stranding,sinking,orcapsizing).

Injurytotheboatoperatorandotherguestsonboardthecraftbecauseoftheactionsofanotherboaterwhoisuninsured.

Liabilityimposedbecauseoftheresponsibilityforremovinga

wreckedcraftfromthewaterway.

Youcaninsuremostboatsaspartofyourhomeownerspolicyorwithaseparateboatowners'packagepolicyoranoceanmarinepolicy.Yachtshavetheirowntypeofcoverage,sincethereareafewadditionalconcerns.

Regardlessofthetypeofcoverageyoubuy,certainconditionsandexclusionsarealmostalwayspartofapleasureboatinsurancecontract.Policiesstipulatethatthecraftmustbeused"solelyforprivatepleasurepurposes,"

andthatcoveragewillnotapplyiftheboatishiredout,chartered,orusedtotransportpeopleorpropertyforafee.Anothercommonexclusionremovescoveragewhilethewatercraftisbeingusedinanofficialraceorspeedcontest(unofficialeventsarenotexcluded).

YourHomeownersPolicy

Ifyouhaveahomeownerspolicy,itwillprovideverylimitedwatercraftcoverage.Forinstance,coverageforphysicaldamagetowatercraft,trailers,furnishings,accessories,equipmentandmotorsislimitedtojust$1,000peroccurrence.Notonlyisthisarelativelylowdollaramount,butthiscoverageappliesonlytothenamedperilsinthehomeownerspolicy.So,evenifyougetthebroadesthomeownerscoverageavailable,itstillwon'tprotectyourboatfor"perilsoftheseas"(includingwaveaction,stranding,sinkingorcapsizing).

Evenwhencoveragedoesapplytowatercraft,itisoftenquitelimited.Forexample,underthewindstormandhailperils,ahomeownerspolicywillcoverwatercraftandrelatedequipmentonlywhentheyareinsideafullyenclosedbuilding.Sincemanyboatownersstoretheirboatsoutside,theywouldn'tbecoveredunderatypicalhomeownerspolicy.

Theftcoverageforwatercraftalsoisrestrictedunderahomeownerspolicy.Itappliesonlytotheftthatoccursatyourhome.Ifyourboatand/ortrailerwerestolenfromalakesidevacationspot,aparkinglotinanationalparkoranyplaceelseotherthanyourhome,therewouldbenocoverage.

Liabilitycoverageunderahomeownerspolicyislimited,too.Ahomeownerspolicyofferscoverageonlytoaveryfewtypesofvessels.Forthekindsofvesselsthatarecovered,itincludescoverageforownership,maintenance,use,entrustmentofthewatercraftbyan

insuredtoanyoneelseandvicariousparentalliabilityfortheactionsofachildorminorusingthewatercraft.Excludedwatercraft,obviously,arenotcovered.

Thefollowingchartillustratessomeoftherestrictionsthataffectthecoverageofcertaintypesofboats.PowerandLengthRestrictionsforCoveredWatercraft

Ownedbytheinsured

Rentedtotheinsured

Borrowedbytheinsured

Outboard Total25hporless

Nolimit Nolimit

Inboardandinboard-outdrive

Total50hporless

Nolimit

Sailboats 26feetorless 26feetorless Nolimit

Evenifyouownasmallboatthatfallswithinthepermittedrangeforhomeownersliabilitycoverage,theoddsareyou'llwanttolookelsewhereforcoveragethankstothe$1,000limitonpropertycoverage.Inmostcases,$1,000wouldn'tevenbegintocoveryourlosses.

However,youmaybeabletotakeupsomeoftheslackintermsofliabilitycoverageviaanendorsementtoyourhomeownerspolicy.Thewatercraftendorsementprovidestherangeofnormallyexcludedliabilitycoverage(relatedtoownership,maintenance,use,entrustmentandvicariousliability)forboatsthatexceedthepowerandlengthlimitationsoutlinedabove.

Acaveat:Youstillwouldn'tbecoveredifyouwereinanofficialraceorpracticingforarace(unlessyourcraftisasailboat).Inaddition,sailboatsandinboardandinboard-outdrive-poweredboatswouldn'tbecoveredforbodilyinjurytoanyemployeeifthatemployee'smaindutiespertaintothemaintenanceoruseofthewatercraftandthereisnocoveragewhilethewatercraftisusedtocarrypeopleforafeeorwhileitisrentedtoothers.

Thewatercraftendorsementmaysolvesomeofyourproblemswithhomeownersinsurancecoverage.However,itdoesn'thelpalleviatethephysicaldamageexposuresyouface.

BoatownersPolicies

Insteadoftryingtoadaptahomeownerspolicytomeetonlysomeofyourneeds,you'llprobablybebetteroffgettingaboatownerspolicy,whichisdesignedtoprovideallofthecoveragesnecessarytomeetaboatowner'sneeds.Someofthesepoliciesaredesignedtocoversmalltomid-sizedboats,whileothersaredesignedspecificallytocoverlargercraft,includinghigh-valuehouseboatsandevenluxuryyachts.

It'simportanttopointoutthatinsurancecompaniesusedifferenttermsfromtherestofuswhentheydescribethesepolicies.WhilemostpeopleusethephrasepersonalwatercraftasthegenericnameforJetSkiorWaveRunner-typecrafts,insurerscallboatpoliciespersonalwatercraftpolicies.We'llcallthemboatownerspolicies,tobeclear.Tomakethingsevenmoreconfusing,insurancecompaniesalsoofferpoliciesspecificallyforJetSki-stylepersonalwatercraft.Obviously,whenyougetquotesforaboatownerspolicy,you'llneedtobesureyouandyouragentareonthesamewavelength.

So,whatdoyougetonaboatownerspolicy?Again,boatownerspoliciesarealotlikecarinsurancepolicies.Atypicalpolicywillinclude:

physicaldamagecoveragefortheboatanditsequipment(oneitherareplacementcostoractualcashvaluebasis);

liabilitycoverageforbodilyinjuryorpropertydamagetoothers;

medicalpaymentscoverageforoccupantsoftheboat;and

uninsuredboatercoveragetocoverinjuriesthatmaybecausedbyanuninsuredorhit-and-runboater.

Policiesdesignedforlargervesselsoftenalsoincludecoverageforpersonalpropertyonboardthecraft,andspecialcoverageforinjuriestocrewmembers.

Definitions

Boatownerspoliciesuseavarietyoftermsthatmaybefamiliartoyou.Theseinclude:

YourinsuredpropertymeaningtheboatorboatsscheduledontheDeclarationsPage,alongwithrelatedequipment.Policiesdesignedtocoverhigher-valuevesselswillincludefurnitureanddinghies,whilepoliciesdesignedforlower-valuecraftusuallylimitcoverageforrelatedequipmenttothatwhichisnecessarytotheoperationormaintenanceoftheboat.

Coveredpersonmeaningyouoranypersonorlegalentityoperatingthecoveredboatforprivatepleasureusewiththeinsured'sdirectandpriorpermission.(Businessuseisnotallowed,becausethisisapersonalwatercraftpolicy.)Anyofyourfamilymembersoranyoneelseoperatingtheboatwithpermissionwouldbea''coveredperson."However,thedefinitionof"coveredperson"doesnotincludepaidcrew,oranypersonorentityoperatingoremployedbyamarina,boatrepairyard,boatsalesagency,boatservicestationoryachtclub.(Thisissimilartothe"autobusiness"exclusionsfoundinaPersonalAutoPolicy,whichstatethatifashopdamagesyourcar,itisliablefortherepairsyourinsurancecompanyisn't.)

Horsepowermeaningtheamountstatedbythemanufactureraspeakhorsepower(attheflywheel).

Latentdefectmeaningaflawinmaterialormachinerythatexistedatthetimetheboatwasbuilt,butwasnotdiscoveredbyordinarymethodsoftesting.

Atypicalpolicyalsoprovidescoveragefornewlyacquiredwatercraft,aslongasyounotifytheinsurancecompanywithintheprescribedtimeperiod(usually15days)andaslongasthenewboatdoesn'texceedamaximumvalue(whatyoupaidforitor$50,000,whicheverisless).

Ifyouselltheboatorassignortransferownershiptosomeoneelsecoveragewillterminateatthattime,unlesspriorwrittenconsentoftheinsurerhasbeenobtained.

AShortLeash

Mostboatownerspolicieslimitwhereyoucanuseyourvessel.Thepolicymaynameaspecificlake,oritmightdescribeabay,regionorboundarieswithinwhichtheboatispermittedtooperate.

Example:AyachtberthedinSanFranciscomightbepermittedtonavigate"thewatersofSanFranciscoBayanditstributaries,thecoastalwatersoutsideSanFranciscoBayboundedonthenorthbyPt.ReyesandonthesouthbySantaCruz."Ifyouventureoutofthisareawithoutcontactingyourinsurancecompany,youwon'tbecovered.

Whydoestheinsurancecompanycarewhereyougoboating?Insurersbasetheirratesontheriskoflossandthefartheryoutravel,thegreatertherisk,particularlyifyouliveneartreacherouswaters.So,thecompanywillchargehigherratesforaboatthatwillnavigatetheentireglobethanforasimilarvesselthatwillnavigateonlyinChesapeakeBay.

Ontheotherhand,ifyourboatingexcursionsnormallyareconfinedtotheSanFranciscoBayarea,butyouwanttotakeyourboatonatriptoMexico,allyouhavetodoisgetpermissioninadvanceandpayanadditionalpremiumtocovertheadditionalexposure.

Whereyourboatwilloperatealsowillhaveaprofoundeffectonyourrates.Becauseofrecord-settingdamagefromhurricanesduringthelastseveralyears,boatinsuranceistoughertocomebyinsomepartsofthecountry.However,manyinsurancecompanieswillsellpoliciesinhigh-riskareasundercertainconditions.Youmayhavetochangewheretheboatisstoredduringhurricaneseason(JulytoNovember)andagreetonavigationallimits(e.g.,travellingonlyininlandwaters,ornomorethan300milesfromland).Youmayevenbeaskedtocomeupwithawrittenhurricaneemergencyplan.

Ifyou'reinahigh-riskarea,youalsocanexpecttopay25percentmorethanyouwouldhavebeforeHurricaneAndrewstruckin1992.Boatinsurancerateshaveincreasedabout15percentsincethen.However,aswithcarinsurance,youcanoptforahigherdeductibletoreduceyourrates.

WhatIsandIsn'tCovered

Manyboatownerspoliciestakeanallrisksofdirectlossapproachtocoverage(thoughasmallernumberarewrittenonamorerestrictive,named-perilsbasis).Theall-riskpoliciescoveralllossesthatarenotexplicitlyexcluded.Thisincludescoverageforperilsoftheseasandforlandtransportationperils,suchascollisionoroverturn.(Incontrast,watercraftcoverageunderahomeownerspolicy,evenwithendorsements,wouldnotprovidesuchcoverage.)

However,asinanyinsurancepolicy,thereareexclusions.Typicalpropertydamageexclusionsmeanthepolicywillnotprovidecoverageforlossordamageresultingfromanyofthefollowing:

wearandtear,gradualdeterioration,weathering,insects,mold,animalormarinelife;

marring,scratchingordenting(pictureaboatmooredatdockside,bumpingupagainstthedockalldaylong);

osmosis,blisteringorelectrolysis(thesearechemicalandelectricalactionsthattakeplaceinfreshorsaltwater,whichgraduallyaffectyourboat;onlysuddenandaccidentaldamageisintendedtobecoveredbythepolicy);

manufacturer'sdefectsordefectsindesign(boatpoliciesvaryonthispoint,andsomedoprovidecoveragefordefectsinhullormachineryasalways,askbeforeyoubuy);and

thecostofrepairingorreplacinganyitemhavinga"latentdefect"however,ifsuchaflawinmaterialcausesotherdamageforexample,ifadefectivesteeringmechanismmalfunctionsandcausesacollisionthepolicywillcovertheresultingdamage.

GettingtheCoverageYouNeed

Vitalpointstoaddressarewhetheryourboatiscoveredforactualcashvalue(ACV)orreplacementvalue,andwhetherthepolicywillcoverpersonalpossessionsontheboat,fromfishingequipmenttowaterskis.Ifyoutowyourboattothewater,you'llalsoneedsufficienttrailercoverage.

Somedeclaredvaluepolicieswillpaythefullpolicylimitintheeventofatotalloss,eveniftheactualvalueofthecraftislessthanthedeclaredvalue.However,mostpoliciesthataredesignedtocoversmallercraftinclude

loss-settlementprovisionslimitingtheinsurer'sobligationtopay.Usually,theamounttheinsurerwillpayforlossordamagewillnotexceedthelowestofthefollowing:

thedifferencebetweenthepre-lossACVandthepost-lossACV;

theactualrepaircost;

thepre-lossACV;

theactualreplacementcost;or

thedeclaredvalueofwatercraft.

Largewatercraftthataredamagedordestroyedoftenhaveasalvagevalue,soaboatownerspolicyalsowillincludeaprovisionconcerningsalvagecharges.Becauseasalvagecompanywillchargeforitsservices,theinsureragreestopaythosecharges.Inreturn,ifthereisanysalvageorrecoveryaftertheinsurerhaspaidforaloss,thecompanyhasarighttorecoverwhatispaid.

Mostboatownerspoliciesforsmallcraftdonotprovidecoverageforyourpersonalpropertywhileitisonboardthevesselorbeingloadedorunloaded.However,policiesforlargecraftoftendooffercoverageforsuchthingsasclothing,personaleffects,fishinggearandsportsequipment(thereisnocoverageformoney,jewelry,traveler'schecks,orvaluablepapersanddocuments).Theyalsomayincludecoverageforinsuredpropertythathasbeenremovedfromthecrafttemporarilyforstorageonshore.Ifapolicyhasthiskindofcoverage,itwon'trequirethatauxiliaryequipmentactuallybeonboardatthetimeofloss(whichmeansthatcoverageisprovidedforequipmentonshore).

Theinsurancecompanyalsowillpaythefullcostfornecessaryandreasonablerepairstocoveredproperty,withoutdeductionfordepreciationwiththeexceptionofpropertydescribedinthe

"replacement"provision.

Forpropertycoveredbythereplacementprovision,thepolicyprovidescoverageonanactualcashvaluebasis(theactualrepaircostorthereplacementcostminusdepreciation,whicheverisless).Thisprovisiononlyappliestoplasticandcanvascoverings,all-weatherbridgeandcockpitenclosures,sails,outboardmotorsorout-driveunits,andcomponentsofanyoftheseitems.

Youalsomaywanttobuycommercialtowingandassistancecoverage,whichistheboatversionofthetowingandlaborcoveragefoundinaPersonalAutoPolicy.Inanemergency,thepolicywillreimburseyouupto

$300forthereasonablecostsfortowingtothenearestplacewhererepairscanbemade;forthedeliveryofgas,oilorparts;orforemergencylabor,whileyou'reawayfromasafeharbor.Nodeductibleappliestothiscoverage.

LiabilityConcerns

Aboatinsurancepolicyincludescoverageifyoubecomelegallyliabletopaybecauseofbodilyinjuryorpropertydamagethatarisesoutoftheownership,maintenanceoruseoftheboat.

Likeanautopolicy,aboatpolicywillhavestatedlimitsofliability.Theinsurancecompanywillpayuptothatamountforalldamagesorlossesarisingoutofanyoneaccidentoroccurrence,oraseriesofoccurrencesarisingoutofthesameevent.So,youneedtochooseyourlimitscarefully.

Intheeventofaliabilityclaim,aboatownerspolicyalsowillpaydefensecostsinadditiontothepolicylimit.

Policiesaimedatlargecraftalsomayincludecoverageforliabilityarisingoutof:

Attemptedoractualraising,removalordestructionofthewreckofyourboat;

Failuretoraise,removeordestroythewreckofyourboat;and

YourliabilitytopaidcrewmembersundertheJonesActorotherMaritimeLaw.

Naturally,apolicyalsowillincludealistofliabilityexclusions.Thesepoliciestypicallydonotprovidecoveragefor:

Liabilityofothercoveredpersonstoyou,yourspouseorotherresidentsoftheinsured'shousehold;

Yourliabilitytoyourspouseortoanyotherpersonresidinginyourhousehold;

Liabilityassumedbyyouundercontractoragreement;

Finesorotherpenaltiesthatanygovernmentrequiresyoutopay;and

Punitivedamages.

Thefirsttwoexclusionsaredesignedtoprecludeyouandyourfamilyfromseekingdamagesfromoneanotherunderthepolicy,whichissupposed

toprotectyoubycoveringinjuriesordamagessufferedbyotherpeople.So,ifanotherfamilymemberorafriendisoperatingyourboatwithyourpermissionandinjuresyou,youwillnotbecoveredifyousuethatotherperson(whowouldotherwisebea"coveredperson"underthepolicy).Ifyouareoperatingtheboatandinjureafamilymember,thatinjuredfamilymemberalsowillnotbecovered.

Somepoliciesalsowillincludeanexclusionforliabilitythatariseswhiletheboatisbeingtowed,exceptwhentheboatishauledoutorbeinglaunchedbutmostdocovertowingaspartofthe"ownership,maintenanceoruse"exposure.

Becausefinesorpenaltiesimposedbygovernmentalagenciesandpunitivedamagesareaformofpunishmentforyourintentionalactions,theyarenotcovered.

Finally,youalsomaywanttoconsiderpurchasinganumbrellaliabilitypolicy(coveredlaterinthisbook).Unlessboatsarespecificallyexcludedfromtheumbrellapolicy,itwillcoveranyliabilityinexcessofthatprovidedbythehomeownerspolicyorboatpolicy.However,anunderlyingboatpolicystillisrequiredinmostcases.

Astandardboatownerspolicywillpaynecessarymedical,ambulance,hospital,nursingandfuneralexpensesresultingfromaccidentalbodilyinjury.Thiscoverageappliesonlytopersonsinjuredwhilein,upon,boardingorleavingtheinsuredboat(whichisvirtuallyidenticaltohowthecoverageappliesunderaPersonalAutoPolicy).

Likeanautopolicy,thereisalsoatimelimitonmedicalpaymentscoverage.Theinsurancecompanyonlywillpaycostsincurredwithinoneyearoftheaccidentdate.

Thiscoveragealsocomeswithexclusions.Coverageusuallyisnotprovidedfor:

injuriestoyouremployee(s)whileinthecourseofemployment,orwhileusing,maintainingorrepairingyourboatoritsequipment,sincethisshouldbecoveredbyworkers'compensationinsurance;

anyresponsibilityforpaymentassumedundercontractoragreement,sincethispolicydoesnotcoverbusinesuse.

Youcanselectyourlimitformedicalpaymentscoverage.Thisisthemosttheinsurancecompanyisobligatedtopayperpersonforeachaccident

orevent(whichmeansthatifthelimitis$5,000perpersonandthreepeopleareinjuredinthesameaccident,thepolicycouldpayupto$15,000).

UninsuredBoaterCoverage

Justasuninsureddriversareaproblemforcarinsurance,uninsuredboatersareaproblemforwatercraftinsuranceandmoreso,becauselawsrequiringwatercraftinsurancearelessrigid.So,therespondingcoverageiscommonlyfoundinmostboatownerspolicies.Itisremarkablyliketheuninsuredmotoristscoverageprovidedbypersonalautopolicies.

Theinsurancecompanyagreestopaydamagesthatyouarelegallyentitledtorecoverfromtheuninsuredowneroroperatorofanotherboat,becauseofbodilyinjuryreceivedaboardyourboat.Theterm"uninsuredowneroroperator"includessomeonewhocannotbeidentified,suchasahit-and-runboater.

Policiesalsoincludeanumberofuninsuredboaterexclusions,whicharesimilartotheuninsuredmotoristexclusionsfoundonaPersonalAutoPolicy.Uninsuredboatercoveragedoesnotapplyto:

claimssettledwithoutthecompany'swrittenconsent;

anyuninsuredvesselownedbyagovernmentalbody;

anyvesselownedbyorfurnishedfortheregularuseofanyinsuredorfamilymember;

anyinsuredwhileusingavesselwithoutpermission;

yourboatwhileitisbeingchartered;and

anylosswherenoevidenceofphysicalcontactexistsbetweenyourwatercraftandeitheranuninsuredorahit-and-runcraft.

Youalsocan'tgetpaidtwiceforthesamelossundertheuninsuredboatercoverageandtheliabilitycoverageofthepolicy.

Again,youchooseyourlimitsforthiscoverage,andtheinsurancecompanywillnotpaymorethanthatamountforallinjuriesarisingoutofanyoneaccidentorevent,regardlessofthenumberofpersonsinjured,claimsmadeorvesselsinvolved.

PricingCoverage

Thesize,typeandvalueofyourboatandthewatersinwhichitisusedarefactorsthathelpdeterminehowmuchcoverageyouneedandhowmuchyou'llhavetopayforit.

Oneoftheprimarycost-driversforboatinsuranceiswhetheritisamotorizedcraftorasailboat.Liabilitypremiumchargesincreaseasthehorsepoweroftheengineincreases,whereasinsurersoftendon'tevenchargeforliabilityforsailboats.

Aninsureralsowilllookatthespeedatwhichaboatcantravelandtheskilloftheskipperwhensettingrates.Forinstance,accordingtotheInsuranceInformationInstitute(III),theannualcosttoinsurea25-footspeedboatworth$20,000to$25,000forthephysicalvalueoftheboat(againsttheft,fire,winddamage,collision,etc.)andforabout$500,000worthofliabilitycoverageisbetween$500and$900.Insuringasailboatofthesamesizeandvaluecouldcostasmuchas50percentless,sinceitdoesnotgoasfastandisassumedtohaveamoreskilledskipper.

Inadditiontoyourskill,theinsurancecompanywillbeconcernedaboutyourboatingrecord.Becauseitisdifficulttoascertainifyouhavebeeninvolvedinaboataccidentbefore,sincethereisnocentralizedrecord-keepingbody,mostinsurancecompanieswilllookatthewayyouoperateacar.IfyouhavehadseveralspeedingviolationsoraDWIwithinthelastthreeyears,youprobablypresentmoreofariskforboatoperationthansomeonewhohasacleandrivingrecord.

Theageofthecraftisanotherfactorinsettingpremiumprices.Asageneralrule,physicaldamageexposureisgreaterforanolderhullthanforanewerone.Thisisduetotheagingprocess,aswellasthenatureofthematerialofwhichthehullisconstructed.Manyinsurerschargeahigherpremiumforboatswitholderhulls.

Andthentherearethemiscellaneouscreditsandsurcharges.Insurancecompaniesmaygiveyoupremiumcreditsforfavorablefactorsorchargeyouextraforunfavorablefactors.Thefollowingchartdetailstypicalcreditsandsurcharges.

MiscellaneousCreditsandSurchargesCredits SurchargesSailboat OldercraftDieselengine WoodenhullCoastGuard/U.S.PowerSquadronmember

Drivingrecordviolations

Onlyoperatorisoverage50Ship-to-shoreradio

CoastGuard/U.S.PowerSquadroncoursecompleted

Often,youcansave5percentto15percentonboatownersinsurancebyattendingarecognizedsafetyeducationcourse,suchasthoseofferedbytheCoastGuard,U.S.PowerSquadronandtheAmericanRedCross.

TheU.S.PowerSquadronalsooffersahomevideocourseforpeoplewholiveinareaswithoutregularlyscheduledcourses.

Ifyouhavetwoyearsofclaim-freeexperienceandanotherinsurancepolicywiththesameinsurancecompany,youmayqualifyforadditionalsavings.

Discountsof5percentto10percentalsoareavailablefordiesel-poweredcraftthatareequippedwithsafetyequipment,suchasfireextinguishersandship-to-shoreradios.

Inmanypartsofthecountry,boatscanonlybeusedforpartoftheyearduetoweatherconditions,roughseasonalwaters,orotherfactors.Ifyourboatwillbeoutofthewaterforsometime,youcangetapremiumcreditforthetimeperiodduringwhichthecraftwillnotbeused.However,inexchangeforthediscount,yougiveupcoverageduringthe"lay-upperiod."

Finally,territorialdefinitionsorrestrictionsusuallycomedowntoeitherinlandwaters/fresh-waterorcoastal/salt-waterboating.Premiumvariancebetweenthesetwo"territories"usuallyappliesjusttophysicaldamagecoveragefortheboat;itdoesnotapplytoliabilitycoverage.

OperatingOtherPeople'sBoats

Whenyouhavecarinsurance,youarecoveredwhiledrivingotherpeople'scars.Whenyouhaveboatownersinsurance,thatisn'talwaysthecase.Ifyouplantooperateotherpeople'sboatsoccasionallysuch

aswhentheywanttoskionawater-skiingvacationyouneedtobesureyougetapolicythatoffersthiscoverage.

Policiesthatdoofferyoucoveragewhileyouareoperatingsomeoneelse'sboatassumingyouhavetheowner'spermissionincludephysicaldamagecoveragefortheboat,butonlyuptothelimityoucarryonyourownboat.Inaddition,ifthereisanyotherinsuranceapplicablesuchasthatboat'sinsurancepolicyyourcoverageonlywillapplyas"excess"overtheotherinsurance.Inotherwords,yourinsurancecompanywillmakeupthedifferenceifthedamageexceedsthecoverageontheotherowner'spolicy.(Thisisnearlyidenticaltothe"otherinsurance"provisionsthatapplytotheuseofnon-ownedautosunderaPersonalAutoPolicy.)

Evenifyouhavecoveragewhileoperatingotherpeoples'boats,therearesomeexclusionsprimarilydesignedtokeepyoufromweaselingoutof

payingforcoverageinthefirstplace.Aninsurancecompanywillnotprovidecoverageunderyourboatownerspolicyforanyothervesselthatiswhollyorpartiallyownedbyyou,rentedorcharteredbyyou,isbeingusedforpurposesotherthanprivatepleasureorisfurnishedforyourregularuse.

YachtPolicies

Thepoliciestypicallypurchasedbyyachtownersdifferinstructurefromtheboatpolicieswe'vediscussedsofar,buttheyprovidemanyofthesametypesofcoverage.Trueyachtpoliciesarestructuredmorelikethetraditionaloceanmarinepoliciesthatareavailabletocovercommercialships.

Yachtpoliciesalsousesomedifferentterminology.Herearesomeofthekeycoverageconceptsandterminologyyoucanexpecttofindinayachtpolicy:

Hullcoverage.Thisisphysicaldamagecoverageforthevesselitself,andtheequipmentandmachinerynecessarytotheoperationofthevessel.Afewuniquecoverageclauses(sueandlabor,lay-upreturnsandrunningdown)differentiatethiscoveragefromthatfoundinotherboatownerspolicies.

Sueandlaborclause.Youmusttakeallreasonablestepstoprotectdamagedpropertyfromfurtherdamage.Paymentwillbemadeforexpensesincurredindoingso.

Lay-upreturns.Asdiscussedearlier,watercraftpoliciesprovideapremiumcreditforalay-upperiodduringwhichthecraftisnotinuse(forexample,October1toApril30).Forveryexpensivecraft,alay-upofevenafewweekswouldmakeyoueligibleforanappreciablepremiumcredit.Thisclauseprovidesthatifyouryachtislaidupandoutofcommissionduringanunscheduledperiod(perhapsitisoutof

servicebecauseofbreakdownandrepairs)foracertainminimumtimeperiod(usuallya15-dayminimum),you'llgetapremiumcredit.

Runningdownclause.Thisprovidespropertydamageliabilitycoverageintheeventyourvesselstrikesanothervessel.Itcoversdamagetotheothervessel(bothhullandcargo),butnotbodilyinjuryliability(whichisavailableunderprotectionandindemnitycoverage).Itisattachedtoandonlywrittenwithhullcoverage(itislikecollisioncoveragewrittentoprotectothers).

Valuedpolicy.Coverageforhigher-valuecraftmaybewrittenonavalued-policybasis.Thehullcoverageofmostyachtpoliciesiswritteninthismanner,makingthemmorelikeoceanmarinepoliciesthanpersonalwatercraftpolicies,whichcoversmallervessels.

Protectionandindemnity(P&I).Thiscoverageprovidesthebulkoftheliabilitycoverageforaccidentsandothereventsthatariseoutoftheownership,maintenanceoruseoftheyacht.Itincludescoveragefor:

a)Bodilyinjurytoothers(includingthoseonboardyourvessel,suchaspassengersorcrewmembers,andpeoplewhoarenotonboardyourboat);

b)Damagetothepropertyofothers(thissupplementstherunningdownclause,andcoversallothertypesofpropertydamageliability,suchasdamagetofixedobjectsandnon-collisiondamagetoothervessels);and

c)Propertydamageliabilityarisingoutofraisingand/orremoving(orfailuretodoso)thewreckoftheyacht.

YachtpoliciesalsoincludecoverageforobligationsduetothefederalLongshoremensandHarborWorkersAct,whichrequirescompensationbenefitsforinjuriestovariousmaritimeworkersotherthancrewmembers.

Thesepoliciesalsoincludemedicalpaymentscoverage,likethatdescribedforsmallerboats.

InsuringJetSkis

Untilnow,we'vediscussedinsuranceneedsforboats.However,JetSkisandothersimilarpersonalwatercraftrequireessentiallythesametypeofinsurance.Youstillneedliabilitycoverage(incaseyouinjure

someoneordamagesomeoneelse'sproperty).And,dependingonthemoneyyouhaveinvestedinyourJetSki,youmaywantcomprehensiveandcollisioncoverage.Plus,youmaywanttoaddcoverageforatrailertoyourpolicy,aswellascoveragetopayyourmedicalbillsifyou'reinanaccident.

SeveralcompaniesofferinsurancepoliciesspecificallyforJetSkisandrelatedwatercraft.Thesecompaniesareofteneasiesttodealwithwhenitcomestimetogetinsurance,simplybecausetheyareawareofthekindsofcoverageyou'llneedandthetypesofcraftonthemarket.

ThecostofcoveragewilldependontheJetSki'svalueandenginesize.Coststypicallywillbehighertoinsureapersonalwatercraftwithamotorthatislargerthan500cc.Comprehensiveandcollisionratesalsowillbehigherfornewerandmorevaluablemodels.

Sincepersonalwatercraftcanbeinsuredundeatraditionalboatownerspolicy,ifyouhaveaboatandseveralpersonalwatercraft,itprobablymakessensetogetonepolicytoserveallyourneedsandreduceyourcostofcoverage.Infact,theIndependentInsuranceAgentsofAmericapointsoutthatyoumaybeabletogetonerecreationalvehiclepolicyforallofyour''toys,"fromboatsandJetSkistomotorhomesandall-terrainvehicles(moreoninsuringthelatterinthenextchapter).

Conclusion

Insuringaboatorapersonalwatercraftisalotlikeinsuringanautomobile.Youneedliabilitycoverageincaseyouhurtsomeoneorsomeone'sproperty.Youalsomaychoosetopurchasecomprehensivecoverageincaseoffire,theftorvandalismandcollisioncoveragetocoverthecostofrepairstoyourboat.Aboatownerspolicyalsowillincludemedicalpaymentscoverage.

Thetypeofpolicyyoupurchasewilldependonyourcraft.Largervesselsaremoreappropriatelycoveredbyyachtpolicies,whilesmallerboatscanbequiteadequatelycoveredbyapersonalboatpolicy.Personalwatercraftcanbecoveredbyapolicyspecificallydesignedforthesesmall,nimblevesselsorbytraditionalboatownerscoverage.

Thekeyistopurchaseadequatecoveragetoprotectyourinvestmentandtoprotectyourassets,intheeventthatyouarefoundliableinanaccident.

KeyQuestions

Here'stheinformationtogatherbeforeyoucallaninsurancecompany,agentorsalesperson.

1)Howlongisyourboat? _________

2)Isitasailboat? Yes No

3)Formotorboats,doesithaveanin-boardorout-boardmotor?

_________

4)Whatistheengine'shorsepowerrating? _________

5)Whatmakeandmodelistheboat? _________

6)Howmuchistheboatworth? _________

7)Howmuchliabilitycoveragedoyouwant?(YoumaywanttorefertothePersonalAssetsInventoryinChapter3forhelpindeterminingyourneeds.) _________

8)Doyouwantcomprehensivecoverage? Yes No

9)Doyouwantcollisioncoverage? Yes No

10)Doyouwantcoverageforfuelandotherspillageliabilities?

Yes No

11)Doyouneedcoverageforatrailer? Yes No

12)Doyouwantmedicalpaymentscoverage? Yes No

13)Doyouwantcoverageforpersonaleffects? Yes No

14)Doyouwantcoverageforcommercialtowingandassistance?

Yes No

15)Doyouwantuninsuredboatercoverage? Yes No

16)Doyouenterorganizedracingevents?(Ifso,youmayneedadditionalcoverage.)

Yes No

Wherewillyoubeusingtheboat(e.g.,ocean,lake,withinafew

17)milesoftheharbor,alongtheentireEasternSeaboard)?________________________________________________

(Continuedonnextpage)

(Continuedfrompreviouspage)

18)Doyouwantreplacementcostcoverage? Yes No

19)Doyouneedcoverageforoperatinganotherperson'sboat?

Yes No

20)Isthevesselinquestionayacht? Yes No

Youmaybeabletogetadiscountonboatcoverage.Herearekeyquestionstoask.

1)Doyouholdacaptain'slicense?(Ifso,itmayqualifyyouforapremiumdiscount.)

Yes No

2)Haveyoucompletedasafetycourse?(Italsomayqualifyyouforapremiumdiscount.)

Yes No

3)Whatsortofsafetyequipmentdoyouhaveonboard(fireextinguishers,ship-to-shoreradioequipment,etc.)?_________________________________________________

4)Isyourboatinstoragewhenit'snotinuse? Yes No

5)Doyouhaveacleandrivingrecord? Yes No

6)Howoldareyou?(Discountsaregivenforboatersoverage50,oroverage45insomecases.) _________

7)Doyouhaveanotherinsurancepolicywiththissameinsurancecompany,orwouldyoubewillingtoswitchanotherpolicytothiscompany? Yes No

8)Haveyoufiledanyboatingclaimswithinthelasttwoyears?

Yes No

Forpersonalwatercraft,thekeyquestionsare:

1)Whatmake,modelandyearJetSkidoyouwanttoinsure?__________________________________________________

2)Whatsizeistheengine? _________

3)Howmuchliabilitycoveragedoyouwant?(YoumaywanttorefertothePersonalAssetsInventoryinChapter3.)

_________________________________________________

6)Doyouwantmedicalpaymentscoverage? Yes No

7)Doyouwanttoaddcoverageforatrailer? Yes No

Chapter5InsuringRVs,ATVsandOtherToysThereareallsortsofland-boundmotorizedvehiclesthattypicallyaren'tthoughtofascarsandthatmaynotbebestinsured(orevenpossibletoinsure)underapersonalautomobilepolicy.Insurancecompaniesusethetermsspecialtyvehiclesandrecreationalvehiclestorefertothesemachines,whichincludemotorcycles,mini-bikes,dirtbikes,mopeds,motorhomes,campertrailers,three-orfour-wheeledall-terrainvehicles(ATVs),electricorgas-poweredgolfcarts,snowmobilesanddunebuggies.

Forthemostpart,thesevehiclesarenotcoveredunderahomeownerspolicy.Infact,ahomeownerspolicyprettythoroughlyexcludesliabilityandmedicalpaymentscoverageforanythingtodowithanytypeofmotorizedvehicle.Itmayprovidecoverageforaboatthatisstoredonyourpremises,anditmayprovidecoverageforagolfcartorATVusedtoserviceyourproperty.Butifyouaregoingtobeusinganyofthesevehiclesoff-site,youreallyneedtoinsurethemproperly.

Thiscanbeassimpleasaddinganendorsementtoyourhomeownerspolicyortoyourautomobilepolicy.But,morelikely,you'llwanttogetspecialstand-alonecoveragejustforthetypeofvehicleyouneedtoinsure.Inthischapter,we'lllookateachtypeofvehicleandthetypeofcoverageoffered,alongwithappropriatecoverageissues.

InsuringaMotorhomeorRV

Youcaninsureamotorhomeorrecreationalvehicle(RV)byaddinganendorsementtoyourhomeownersorautoinsurancepolicy.However,thesepoliciesweren'tdesignedtocovermotorhomes;andtheendorsementsdonotgiveyouthecompletecoverageyoucanget

bypurchasinganRVpolicy.

Forexample,willyourautomobileorhomeownerspolicycoverappliances,plumbing,outsideawningsandotheraccessories?Willitcoveremergencyexpensesthatyoumayincurwhiletravelling?Probablynot.

What'smore,intheeventofaclaim,youmayhavetopayexpensesout-of-pocketwhileyourinsurancecompanydecidesifcoverageisorisn'tprovidedunderyourhomeownersorautopolicy.Ifyourhomeownersandautopoliciesarewithdifferentinsurancecompanies,thiscanreallygetugly.

WhenitcomestoinsuringanRV,aPersonalAutoPolicywillnotcover:

personalbelongingsinyourRV;

liabilitywhenyourRVisparkedandyou'reusingitasaresidence;

attachedaccessories,includingawnings,antennas,rooftopairconditionersandsatellitedishes;

expensesforlodgingortogetyouhomeifyoucan'tstayinyourRVbecauseofacoveredloss.

Meanwhile,ahomeownerspolicyusuallywillallowyoutouseonly10percentofyourpersonalbelongingsinsurancelimittocoveroff-premisesproperty(inotherwords,whileit'sinyourRV).Thatmaynotbeenoughtocoveritemsyoubringonalongtrip.

Incontrast,RVinsurancepoliciesweredesignedspecificallyformotorhomes,andtheyprobablywillbettersuityourneeds.

Typically,anRVinsurancepolicywilloffer:

liabilitycoverageincaseyouinjuresomeoneordamagesomeone

else'sproperty(theinsurancecompanyalsowillpaymedicalbillsandwagelossincurredbyaninjuredperson,andotherdamagesyouareobligatedtopayasresultofanaccident);

personaleffectscoverageforlostorstolenclothing,cameras,dishes,sportinggoods,jewelry,etc.oftenavailableonareplacement-costbasis(ratherthanadepreciated,actualcashvaluebasis);

towdolly/hitchcoverage(atowdollyorhitchwouldbeusedtohaulacarortruckbehindthemotorhome,soyoucanrunerrandsonceyou'veparkedthebigrig);

campsite/vacationliabilitycoverageforbodilyinjuryorpropertydamageifyouareliableforanaccidentarisingoutoftheownership,maintenanceoruseoftheRVasatemporaryvacationquarters;

comprehensiveandcollisioncoveragefordamagecausedbyaccidents,fires,smoke,floods,landslides,hail,windstorms,miceorotherstrayanimals,vandalism,lowbranchesoroverhangsthisincludescoverageforawnings,antennas,satellitedishes,airconditioningunitsandotherroofcomponents;

towingandroadsidelaborcoverage;

emergencyexpensecoverage,whichtypicallywillpayupto$750forreasonabletemporarylivingfacilities,transportationandthecostofgettingtheRVhomeifitbecomesinoperableduetoacomprehensiveorcollisionclaimmorethan50milesfromitsusualstorageplace;and

medicalexpensecoverage,nomatterwhoisatfault.

Asyoucanseefromthenatureofthesecoverages,RVinsuranceisservice-oriented.Itisdesignedtoofferasmuchprotectionaspossible,intheeventyouhavemechanicalproblemsontheroad.Infact,somepoliciesmayoffermoreofthisprotectionthanyouactuallyneedespeciallyifyouareamemberofAAAorasimilargroup.

Somecompaniesalsoofferreplacementcostcoverage.Intheeventofatotalloss,ifyoupurchasethiscoverage,youwillreceiveanewmotorhomeofthesamemodel,class,bodytype,sizeandequipmentasyourinsuredvehicle.Anotheroptionispurchasepricecoverage,whichwillreimburseyoufortheoriginalpurchasepriceofthevehicleintheeventofatotalloss.

YoucanadduninsuredmotoristcoveragetomostRVpolicies,aswell.

Mostinsurancecompanieswillplaceconditionsonthecoverageof

yourpersonaleffects.Typically,acompanywillpaynomorethan$500foranysinglecameraorvideocamera;fortraveltickets,passports,manuscripts,stampsandcollectibles;forsportingequipment;andforanysinglearticleofjewelry,art,antiquesorfurs.

CertainitemsarenotcoveredatallunderanRVpolicy,includingpropertypertainingtoyourbusinessoroccupation;deeds,documents,records,

bills,money,notes,securities,etc.;animals;anyself-propelledvehicleorwatercraft;andpropertyotherwisecoveredbyotherinsurance.

Tomakesureyoupurchaseadequatecoverageforyourpersonalproperty,you'llneedtomakeacompletelistoftheitemsandvaluesinvolvedmuchliketheinventoryyou'dmakeathomesoyoucouldcollectunderahomeownersorrenterspolicy.(RefertotheHouseholdAssetsInventoryinthehomeownerssectionforhelpinlistingalltheappropriateitems.)

IfyouliveinyourRVallthetime,companiesthatspecializeinRVinsurancecanprovidewhat'sreferredtoasfull-timerscoverage.Sinceyoudonothaveahome,thiscoverageprovidescomprehensivepersonalliabilityprotectionverysimilartothatofferedinahomeownerspackagepolicy.ItalsocoversadditionallivingexpensesifyourRVbecomesunlivableduetoacoveredloss,andevenprovidescoverageforfiredepartmentservicecharges.

Toqualifyforfull-timerscoverage,someinsurancecompanieswillrequireyoutohaveanothervehicleinthehouseholdtorunerrands,andtheymaystipulatethattheRVnotbeusedasacommercialorretailworksite(e.g.,ifyoutravelaroundthecountrytoswapmeetsandselloutofyourvehicle,itwouldnotqualifyforcoverage).

Premiumratesformotorhomeinsurancereflectaninsurancecompany'sconcerns.Whatarethoseconcerns?

Fromanoperationalstandpoint,motorhomeshavemanyofthesamedrivingtraitsasonewouldencounterindrivingatruck(size,maneuverability,susceptibilitytowind).Ifyouareinexperiencedatdrivingamotorhome,youcouldhaveconsiderabledifficultyoperatingone.Hence,yourexperienceisanissueinsettingrates.

Anotherconcern,ofcourse,isyourdrivingrecordforpassengercars.

Ifyouhavealotofpointsonyourlicense,theinsurancecompanyfiguresyouwillbejustaslikelytocommitoffenseswhiledrivingamotorhomebutwiththepotentialtocausegreateramountsofinjuryanddamage.

Fromapropertyinsurancestandpoint,amotorhomecanhaveaveryhighvaluewhichmeansitpresentsasignificantrisktoaninsurancecompany.Becauseofthehighvehiclevaluesinvolved,manyinsurersalsorequirevehicleinspectionsandphotosandsomeinsurerschargeextrawhenphysicaldamagecoverageisrequestedforoldermotorhomes.

Anotherissueinherenttomotorhomesconcernscookingon-board.This,ofcourse,increasesthechanceoffirelossbeyondwhat'spresentinprivatepassengercars,sofireextinguisherscommonlyarerequired.

Whatifyouloanyourmotorhometosomeone(oneofyourgrownchildren,forexample)orrentitout?Manyautopolicyendorsementsthatprovidemotorhomecoveragespecificallyrestrictliabilitycoverageintheeventyouloanorrentthevehicletosomeoneelseandsodomanystand-alonemotorhomeinsurancepolicies.Why?Youcanrentoutyourmotorhometoapotentiallyunlimitedrangeofoperators,rangingfromgooddriverstobad.Sinceyourinsurancecompanyonlywantsgooddriversbehindthewheel,itmayexcludeallcoverageinrentalsituations,oritmaychargeahigherrateformotorhomesthatarerentedorleasedout.

ManycompaniesthatspecializeinRVinsurancewillofferdiscountsformaturedriverswithgooddrivingrecords(usuallypeopleover45,butsometimesover50).YoualsomaybeabletogetadiscountifyoubelongtoanRVassociation.

Somecompaniesevenofferaprogramcalleddisappearingdeductibles,whichpertainstocomprehensiveandcollisionclaims.Typically,ifyoudon'tfileaclaimduringtheyear,yourdeductiblewillbereducedbyone-fourthforthenextyear.Ifyoucontinuetoliveclaim-free,theinsurancecompanywillcontinuetoreduceyourdeductibleuntilit'sgone.Needlesstosay,thisisagreatwayfortheinsurancecompanytokeepyouasalong-termcustomer.

Youalsomayneedspecialcoverageforatraveltrailerorcamperunit.Traveltrailersaretowedbyacarortrucktheydonotdriveundertheirownpower.So,theliabilityforatraveltraileriscoveredundertheinsuranceonthetowvehicle.However,physicaldamageprotectionmustbepurchasedseparatelybasedonthevalueofthetrailer.

Acamperunitcanbemountedonthebackofapickuptruckifitisspecificallyconstructedforlivingpurposes.Itiscoveredforliabilitythroughtheinsuranceonthevehicletowhichitismounted.However,

physicaldamageprotectionmustbepurchasedseparatelybasedonthevalueofthecamperunit.

InsuringMotorcycles

Coveragefortwo-wheeledvehiclesisalotlikepersonalautomobileinsurance.It'sjustthatmostinsurancecompaniesviewmotorcyclesasrisky.Quitesimply,they'dprefernottoinsurethem.Fortunately,thereareseveralsmallerinsurancecompaniesthatspecializeinmotorcycleandusuallydirtbike,mopedandATVcoverage.

Whenyouinsureacar,youhavethechoiceofpurchasingliabilityinsur-

anceonly,andyouhavethesameoptionwhenyoushopformotorcyclecoverage.Youalsocanaddtheusualoptions:

comprehensivecoverage;

collisioncoverage;

uninsured/underinsuredmotoristcoverage;

towingandroadsideassistance;and

medicalexpensecoverage.

Somecompaniesalsooffercoverageforcustompartsandequipmentorspecialpolicyoptionsforcustomorcollectorbikes.

Liabilitylimitscanberelativelylowonmotorcyclepolicies,anditisagoodideatoreferbacktotheAssetsInventoryinChapter3todetermineyourliabilityinsuranceneeds.Ifamotorcyclepolicydoesnotpreciselymeetthem,somecompaniesalsowilloffermotorcycleexcessliabilitycoverageofupto$1millionoryoumayprefertopurchaseapersonalliabilityumbrellapolicy(seeChapter10).

Ifyouliveinanareainwhichtherearealotofuninsureddrivers,youprobablywillbeinterestedinpurchasinguninsuredmotoristcoverage.Actually,thiscoverageisevenmoreimportantformotorcycliststhanitisfordriversofcarsandtrucks.Unfortunately,uninsuredmotoristcoveragetypicallyisquiteexpensiveunderamotorcyclepolicy.Thisisbecauseofthetypesofaccidentstowhichmotorcyclesaresusceptible.

Often,amotorcyclistcanbebrushedbyavehicle,whilethecar'sortruck'sdriverisentirelyoblivious.Theresultinginjurytothemotorcycleoperatorbecomesanuninsuredmotoristclaimbecause,moreoftenthannot,thedriverofthecarwillneverbeidentified.(Hit-

and-runaccidentsarecoveredunderuninsuredmotoristcoverage,unlessyourbikeisparkedatthetime.Thenyourcollisioncoveragewouldcomeintoplay.)

Ifyouridewithapassenger,itisimportanttomakesurethepassengerwillbecoveredunderyourpolicy.Manyinsurancecompaniesrefertothisasguestliability.Somemotorcyclepoliciesaremorerestrictivethanothersinhowtheycoverguestliability.

Also,besuretogetyear-roundcoverageifyoumayberidinginthewinter.Seasonalcoveragecostslessanditmaybeallsomeinsurancecompanieswillofferbutifyouareridingwithoutcoverageonabright,sunnydayinJanuary,you'retakingonwaytoomuchrisk.

Likemostinsurersofvehicles,motorcycleinsurancecompaniesprefertowritepoliciesformature,experienceddriverswithcleanrecordswholivefarawayfromcitycentersandkeeptheirbikesinagarage.They'dalsopreferitifyoujusttraileredyourbiketoshowsandneverrodeit.Thesepreferencesareimportant,onlybecauseinsurancecompanies'preferencesarereflectedintheirrates.

Insurancecompaniesalsoconsiderthekindofmotorcycleyouaretryingtoinsurewhentheysetrates.Whenitcomestocarinsurance,companiestypicallychargelowerratesforsafefamilysedansthanfortwo-seatsportscars.Whenitcomestomotorcycleinsurance,companiesarelikelytochargemoreformodifiedorcustomizedbikes,sincetheycanbemoreexpensivetorepairintheeventofaphysicaldamageclaim.Insurancecompaniesalsoareconcernedabouttheattitudeofcustombikers.And,finally,insurancecompaniesconsiderthefactthatlargehighway-orientedmachinescostthousandsofdollars,andtheymaybedrivenonextendedcross-countrytrips.

Insurancecompanieswillrewardpeoplewhofittheirideaofanidealriderbyofferingpremiumdiscounts.Forinstance,youmayqualifyfor:

agoodrider/driverdiscountofabout20percent;

amotorcycleridertrainingcoursediscountforinstance,forcompletingaMotorcycleSafetyFoundationcourseoftenintheneighborhoodof15percent;

atouringcyclediscountofabout25percent(sincetouringcyclesareconsideredlessriskythanthefasterandlighter-weightsportbikes;

adiscountforbeingamemberoftheAmericanMotorcyclistAssociationortheHarley-DavidsonOwnersGroup;

amultiple-bikediscountofupto30percent;and

aclaim-freerenewaldiscountofabout25percentifyourenewwiththesamecompanyandhaven'tfiledanyclaims.

Anotherpointworthmentioning:Mostinsurancecompaniesexcludecoverageforanyformofracing.Ifyouwillberacingyourbike,youwillneedtonotifyyourinsuranceagentandtrytofindtheappropriatecoverage.

Snowmobiles,DirtBikes&ATVs

Ifyoupurchasestand-alonecoverageforsnowmobiles,dirtbikes,andthree-andfour-wheeledATVs,itismuchlikethemotorcyclecoveragede-

scribedabove.Infact,manyofthesameinsurancecompaniesthatoffercoverageforstreetbikesalsooffercoveragefortheseoff-roadvehicles.YoucanfindthesecompaniesontheInternet,andtheyalsoadvertiseinmagazinesaimedatriders.(Notethatthetermoff-roadvehicleisbeingusedtodescribevehiclesprimarilyusedoffofpavedroadsforrecreationalpurposesnotfour-wheel-drivetrucks.)

Coverageissuesforsnowmobiles,dirtbikesandATVsaresimilartothoseformotorcycles,butthereareacoupleofdifferences.Foronething,torideamotorcycleonthestreet,youneedtohavereachedthelegaldrivingageinyourstateandyouneedamotorcyclelicense.Torideasnowmobile,dirtbikeorATVoff-road,youdon'tneedanyparticularlicense

First,let'slookattheageissue.Insurancecompaniescansetratesforindividualswhohavereacheddrivingagebyreviewingtheirdrivingrecordsandtheirclaimshistoriesontheirautopolicies.However,foryoungeroperators,yourinsuranceagentmaybeforcedtoperformwhatisknownaslosscontrolbyinterviewingtheyoungoperatorsandadvisingthemoftheveryrealriskofinjurytothemselvesandothersarisingfromcarelessorrecklessoperationoftheATV.Otherwise,aninsurancecompanymaynotbewillingtotakeontheriskofinsuringyourATV.

AnotherissuewhenitcomestominorsridingATVsisvicariousparentalliability.Parentscanbeheldliablefortheactsoftheirchildren,whichisanimportantconsiderationifthosechildrenaregoingtoberidingATVs,snowmobilesorothermotorizedvehicles.(It'sonethingifyour12-year-oldthrowssnowballsatyourneighbor'schickencoop.It'sanotherifhemowsdownthecoopwiththefamily'ssnowmobile.)

Whilevirtuallyallmotorcycleridersinsurestreetbikeslikecars,

manypeopletrytoinsuredirtbikes,snowmobilesandATVsundertheirhomeownersinsurancepolicies.And,tosomedegree,theycandoso.

CoverageUnderaHomeownersPolicy

HomeownersinsurancepoliciesobviouslyaredesignedtoprotectyourhomenotyoursnowmobileorATV.Therefore,theyhaveverystrictexclusionsconcerningcoverageformotorizedvehicles.

First,ahomeownerspolicytakesawaysomecoverageformotorized

vehicles.Specifically,itwillnotcoverbodilyinjuryorpropertydamagearisingoutof:

ownership,maintenance,use,loadingorunloadingofmotorvehiclesorallothermotorizedlandconveyances,includingtrailers(whetheryouown,operate,rentorborrowthevehicle);

entrustmentofanysuchvehicletoanyotherperson(thisapplieswhenyoulendavehicletosomeoneelseorletsomeoneelsedrive);or

vicariousparentalliabilityfortheactionsofaminorusinganexcludedvehicle.

However,oncetheyhaveexcludedcoveragefortheentireuniverseofmotorizedvehiclesunderahomeownerspolicy,insurancecompanieswillgivebacksomecoveragealbeitlimitedcoverage.

LiabilityCoverageUnderaHomeownersPolicy

Togivebacksomeoftheliabilitycoveragethathasbeentakenaway,atypicalhomeownerspolicywillsaythatthegeneralvehicleexclusiondoesnotapplyto:

trailersthatarenotbeingtowedbyorcarriedonamotorizedlandconveyance.Forexample,ifyouhaveatow-behindtraveltrailersimplybeingstoredinyourbackyard,therewouldbecoverageifaneighbor'schildclimbeduponitandfelloffandwasinjured.Butassoonasyouhookituptoyourcar,evenwhileparkedinyourdriveway,thiscoverageceases.(That'sagoodincentivetounhookyourtrailerrightaway.)

awiderangeofoff-roadvehicles,subjecttoanumberofqualifiers.Thesevehiclesmustbedesignedforrecreationaluseoffpublicroadsandnotbesubjecttomotorvehicleregistration.

Forinstance,anumberofthree-wheeledandfour-wheeledATVsare

specificallydesignedforoff-roaduseandarenotsubjecttomotorvehicleregistration.Sincebothconditionsaremet,homeownersliabilitycoveragemayapplytothesevehicles.

However,whenitcomestodirtbikes,youhavetopayattentiontolocalvehicleregistrationlaws.Insomejurisdictions,variousclassesofdirtbikes(suchasdual-sportbikes)areconsideredmotorcycles,andthey'resubjecttomotorvehicleregistration.So,theywouldnotqualifyforcoverage,eveniftheywereoperatedoffpublicroads.

Ahomeownerspolicyalsohasqualifiersbasedonownership.First,itsaysthatoff-roadvehiclesmaybecoverediftheyare''notownedbyaninsured."So,youmayoperateaneighbor'sATValmostanywhereandhavehomeownersliabilitycoverageifanaccidentoccurs.

Ontheotherhand,ifyouowntheoff-roadvehicleinquestion,theareaonwhichcoverageappliesislimitedtotheinsuredlocation.Thismeanswhereyoulive,someplaceyouarestayingtemporarilyoronafewothertypesoflandownedbyorrentedtoyou.Itdoesnotincludecoveragewhileyouareonanyothertypeofpublicorprivateland.Thus,therewouldbenocoverageforuseofanATVthatyouownwhileyouareinapublicpark,astateforestorevenaneighbor'sbackyard.

Forexample,ifyouhopontotheol'three-wheelertorundowntotheconveniencestoreforagallonofmilk,thehomeownersliabilitycoverageendsassoonasyoucrossyourownpropertyline.

Anotherexceptiontothegeneralexclusionofmotorvehiclesunderahomeownerspolicyprovidesliabilitycoverageformotorizedgolfcartsbutonlywhileyou'reusingthemtoplaygolfonagolfcourse.Inotherwords,thereisnohomeownersliabilitycoveragewhiledrivingagolfcarttoorfromagolfcourse,whichisacommonpractice.Plus,golfcartsarecommonlyusedinsteadofcarsinretirementcommunities,andhomeownersliabilitycoveragedoesnotapplytothatexposure.

Agolfcartdoesnotpresentthetame,low-riskexposureyoumightthink.Duetotheirrelativelyhighcenterofgravityandthenatureoftheirconstruction,theypresentasignificanthazardofrollingover,especiallyinhillyareas.Also,thereisvirtuallynoprotectionfortheoccupants,shouldaroll-overorothertypeofaccidentoccur.Ifyouareusingagolfcartinlieuofanautomobile,aninsurancecompany

willconsideritahigherriskthanoneusedexclusivelytoplaygolf;basically,you'llneedanautomobilepolicytocoveracartusedinplaceofanautomobile.

Thefinalexceptiononahomeownerspolicygivesyouliabilitycoverageforvehicles"notsubjecttomotorvehicleregistration"thatareusedtoserviceyourresidence,aredesignedtoassistthehandicappedorareheldindeadstorageontheinsuredlocation.Thisprovidesliabilitycoverageforseveraltypesofmotorizedconveyances,suchasamotorizedlawnmowerorsnowremover,oranelectricwheelchair.Italsoopensthedoorforsomeoff-

premisescoverageforATVs,snowmobilesanddirtbikesthatareusedtoserviceyourresidence.

Forexample,manyhomeownerswhoownsignificantacreageuseATVstogetaroundthegreatdistancesinvolved.IfyouusetheATVtocheckfencesanddoroutinemaintenanceontheproperty,thatuseconstitutes"servicingoftheinsuredresidence."

StretchingtheCoverageDefinitions

Thereissomethingofaloopholeinmanyhomeownersinsurancepolicies.Inthesepolicies,coverageforvehiclesusedto"serviceaninsured'sresidence"isnotqualifiedastolocationorcurrentuse.So,ifyouuseyourATVtocheckfences,liabilitycoveragewouldcontinuetoapplyifyouwentofftheinsuredlocationattimestopickupsuppliesorperformothererrands.Thesameappliestosnowmobilesthatareusedtoperformpropertymaintenancetasksduringthewintermonths.Ifyouventuredoffyourpropertytogatherfirewoodortodoanyotherchoresrelatedtomaintenanceoftheproperty,liabilitycoveragewouldcontinuetoapply.

Tostretchthingsevenfurther,ahomeownerspolicydoesn'tsaythatsuchservicingvehiclesarecoveredonlywhileoperatedorusedinserviceoftheresidence.So,ifavehicleisusedtoservicetheresidencesomeofthetimeandisusedpurelyforrecreationalpurposesatothertimes,itwouldhaveliabilitycoverageallofthetime.Inotherwords,youcouldtakeaservicingvehicleintothewoodsonacampingtripandstillbecoveredbythehomeownerspolicy.

Thissameopeningofcoveragealsocouldapplytoagolfcart.Thepreviousprovisionofcoverageformotorizedgolfcartssaidthatcoverageappliesonlywhileusedonagolfcoursetoplaygolf.Butif

agolfcartwereusedtoserviceyourresidence,itwouldbecomeaservicingvehicle,andonceagainnolimitationsastolocationorcurrentusewouldapply.

Acaveat:It'sdoubtfulthatinsurancecompaniesintendtoprovidecoverageforservicingvehiclesatalltimesandatanylocation.Thefactthatpoliciesneverusedtolimitcoverageinsuchcasesmayhavebeenanoversight,soyoushouldcheckyourpolicytoseeiftheinsurancecompanyhasclosedthisloophole.Ifithasn't,intheeventofacoveragedisputeoveravehicleusedonlypartofthetimetoservicetheresidence,acourtprobablywouldresolvetheissueinyourfavorduetotheabsenceoflimitationsinthecontract(ambiguitiesarealmostalwaysresolvedintheinsured'sfavor).

Still,it'ssafesttoassumetheleastaboutinsurancecoveragedisputes.IfyouuseanATVprimarilyforrecreationalpurposes,don'tcountonyourhomeownersinsurancepolicyloopholeornoloopholetoprovideadequatecoverage.

PropertyCoverageUnderaHomeownersPolicy

Homeownerspropertydamagecoverageformotorizedvehiclesismorenarrowlydefinedthantheliabilitycoverage.Onceagain,thepolicybeginswithasweepingexclusion:Thelistofpropertynotcoveredincludesmotorvehiclesorallothermotorizedlandconveyances,includingtheirequipmentandaccessories.

And,onceagain,wefindqualifiersthatrestorecoverageforsomevehicles,butthistimecoverageislimitedtotwotypesofmotorizedconveyances:thoseusedtoserviceaninsured'sresidenceandthosedesignedtoassistthehandicapped.

Thisclearlyismorerestrictivethantheliabilitycoverage.Thereisnopropertydamagecoverageforanyothertypeofvehicledesignedforoff-roaduse,eitheronorofftheinsuredlocation.Thereisnopropertydamagecoverageforanygolfcart,evenwhenusedonagolfcourse.Andthereisnopropertydamagecoverageforanymotorizedvehicleindeadstorage.

AddingCoverageViaEndorsements

Youcanexpandcoverageforsnowmobiles,ATVs,dirtbikesandgolfcartsunderahomeownerspolicytoadegreebyaddingoneormoreendorsements.Thesearethesuresttoolsforinsuringyourtoys.

Forinstance,youcanusetheIncidentalMotorizedLandConveyancesEndorsementtoprovideoff-premisescoverageforuseofsomeoftheservicingvehiclesforwhichcoverageisalreadygivenwhenusedon-premisesforanextracharge.However,thisendorsementdoesnot

providecoverageformotorizedbikes,mopedsorgolfcarts.Also,thereisnocoverageforanyvehiclethatcanexceedaspeedof15mph,norforanyvehiclesubjecttomotorvehicleregistration,norforanyvehiclewhileusedtocarrypersonsforafee,whileusedinbusiness,whilerentedtoothersorwhilebeingoperatedinanyprearrangedraceorspeedcontest.

TheSnowmobileEndorsementmaybeusedtoexpandhomeownersliabilitycoverageforsnowmobilesagain,foranadditionalpremium.Anunendorsedhomeownerspolicyprovidesliabilitycoverageforsnowmobilesonlywhenbeingused"onaninsuredlocation."Theendorsementaddsliabilitycoveragefortheownership,maintenance,use,operation,loadingorun-

loadingofsnowmobiles"offaninsuredlocation."Coverageisonlyprovidedfordeclaredsnowmobiles(i.e.,themakeormodelandserialnumbersofthesnowmobilesyouwanttoinsuremustbelistedbytheinsurancecompanyontheendorsement).

TheSnowmobileEndorsementalsoexpandsthedefinitionof"insured"toincludeanypersonororganizationlegallyresponsibleforyoursnowmobile,aslongastheyareusingitwithyourpermission.

Anexample:Thechurchyouthgroupasksyoutobringyoursnowmobileovertothechurchforayouthgroupparty.Ifanymemberofthegroupisoperatingthesnowmobileandinjuressomeone,theinjuredpartycouldsuethechurch(asthesponsoringorganization),theoperator(asthedriver)andyou(astheownerofthesnowmobile).Underthisendorsement,allwouldbecoveredas"insureds"byyourhomeownerspolicy.

Someinsurancecompaniesalsoofferendorsementsthatprovidephysicaldamagecoverageforsnowmobiles.

However,insomestates,snowmobilesaresubjecttomotorvehicleregistration.Ifyoursnowmobileissubjecttoregistration,itwon'tbeeligibleforliabilitycoverageunderahomeownerspolicyforrecreationalvehiclesusedon-premises(oranyuseofanon-ownedone).

CoverageUnderYourPersonalAutoPolicy

Generally,personalautocoverageisavailableforprivatepassengerautos,pickupsandvansthathavefourwheels,thatseatuptosixpeople,thataredesignedforuseonpublicroadsandthataresubjecttomotorvehicleregistration.Inotherwords,theycoverthekindsofcarsandsmalltrucksthatyousitintrafficwitheveryday.

Coverageforspecialtyvehicles(two-wheeledvehicles,three-andfour-wheeledATVs,golfcarts,snowmobiles,etc.)isnotintendedunderaPersonalAutoPolicy.Infact,liabilityarisingoutofownership,maintenanceoruseofanyvehiclehavingfewerthanfourwheelsorthatisdesignedmainlyforuseoffpublicroadsisexplicitlyexcluded.Soaremedicalpaymentsandpropertydamagecoverageforthesevehicles.

Onepossiblegrayareamightbepickupsorvansthathavebeenmodifiedtoincludesleepingorlivingfacilities.Manypeoplemountcamperbodiesonthebackofapickup,ormodifypickupsorvanstohaveheight-extendingroofsorwidth-extendingareas(tent-likefold-outs).Sincethebodyofthesevehiclesqualifiesforcoverageonyourautopolicy,theliabilityexposureis

notreallyincreased(thereisnoincreasedcapabilityforoff-roaduse).Butthephysicaldamageexposureisincreasedbecauseoftheadditionalvaluecreatedbythesevarious"add-ons."

Insurancecompanieshandlethissituationbyaddingthreeexclusionstothephysicaldamagesectionofanautomobilepolicy.OneappliestoanyownedcamperbodyortrailernotshownontheDeclarationsPageoftheinsurancepolicy,whichlistswhatiscoveredbythatpolicy.(Thesebodiesortrailersmaybecoveredforanadditionalpremiumiftheyareshowninthepolicy,oracquiredduringthepolicytermandcoverageisrequestedwithin30days.)Thesecondexclusionappliestoawningsorcabanasandequipmentdesignedtocreateadditionallivingfacilities.Thethirdexclusionappliestocustomfurnishingsorequipment,suchascookingorsleepingfacilitiesandheight-extendingroofs.

Whiletheseexclusionslimitthecoverageunderanautopolicy,endorsementsareavailablethatallowyoutobuybackmuchofthatmissingcoverage.

ThemainendorsementunderwhichanautopolicycanbebroadenedtocoverspecialtyvehiclesistheMiscellaneousTypeVehicleEndorsement.(However,notallcompaniesthatwriteautoinsuranceofferthisendorsement.)ItcanbeusedtoextendallPersonalAutoPolicycoveragestoawiderrangeofvehiclesbymodifyingthedefinitionofcoveredautotoalsomeanmiscellaneoustypevehicle,atermthatmayinclude:

motorhomes;

motorcyclesandsimilarvehicles;

all-terrainvehicles(ATVs);

dunebuggies;and

golfcarts.

Eachindividualvehicletowhichtheendorsementappliesmustbelistedonthepolicy,andyouwillhavetopayextraforeachcoverageforeachvehicle.

Thisendorsementalterstheautopolicyinavarietyofwayswhichmakesforsomeunintendedconsequences.Underliabilitycoverage,iteliminatescoverageforotherpersonsororganizationsforanyliabilityarisingoutofyouroperationofanyvehiclewhichisnotacoveredauto(suchasanon-ownedATV).Thiscreatesvariousgray-areaissues.

Forexample,Daleownsafour-wheeledATV,forwhichcoverageisprovidedbyaMiscellaneousTypeVehicleEndorsementattachedtohisautopolicy.InsteadofusinghisownATV,heborrowssomeoneelse'sfour-wheelertotaketothechurchyouthgroupparty.If,becauseofDale'sactions,someonegetshurtandsuesthechurch,thechurchwouldnotbean"insured"underDale'spolicy.

Next,acommonendorsmentrestatestheexclusionofvehicleshavingfewerthanfourwheelstoclarifythattheexclusiondoesnotapplytoanyvehiclehavingfewerthanfourwheelsforwhichliabilitycoverageand,likewise,medicalpaymentscoveragehasspecificallybeenpurchasedundertheendorsement.

Thefinalliabilitycoveragerevisionandthisisamajorchangeistheadditionofapassengerhazardexclusion.Normally,underaPersonalAutoPolicy,youhaveliabilitycoverageforapassengerinyourcarwhoisinjuredinanaccident.Underthepassengerhazardexclusion,itispossibletoexcludesuchcoverageforanyone"occupying"thedescribed"miscellaneousmotorvehicle."

Giventhesometimes-more-hazardousnatureofoperatingorridingamotorcycleorATV,thisexclusioncanmakesuchariskmorepalatabletoacautiousinsurancecompany.Askingforthepassengerhazardexclusionisalsoawaytoloweryourpremium,ifyouneedtoaddtheMiscellaneousTypeVehicleEndorsementtoyourpolicy.Butitaddsconsiderableexposurebackontoyoushoulders,soavoidthisexclusionifyouhaveachoiceinthematter.

Thefinalsectionofthemiscellaneoustypevehicleendorsementconcernsthegreatestamounttheinsurancecompanycouldhavetopayintheeventofaphysicaldamageloss.

Whilethephysicaldamagecoverageiswrittenforastatedamount,theamountshownisnotnecessarilytheamountthatwillbepaidifthereisaloss.

Underthiscoverage,theinsurancecompanywillpaythesmallestofthefollowingamounts:

theamountshowninthescheduleorontheDeclarationsPageforthevehicle;

theactualcashvalueofthestolenordamagedproperty;or

theamountnecessarytorepairorreplacethepropertywithotherpropertyoflikekindorquality.

Anexample:Youhave$10,000ofscheduledphysicaldamagecoverageforacurrent-modelATV,whichisstolen.Itwouldtakeabout$14,000toreplaceit(sinceitisstillacurrent-yearmodel),buttheactualcashvalueofthevehicleisabout$12,000(becauseyou'veusedit).However,becauseyouonlypurchased$10,000worthofcoverage,theinsurancewillnotpaymorethan$10,000forthisloss.Anotherexample:Youhave$10,000ofscheduledphysicaldamagecoverageforanolderATV,whichisstolen.Theactualcashvalueofthevehicleisabout$8,000onthecurrentmarket,butareplacement(samemake,modelandquality)canbepurchasedforabout$6,500atanauction.Inthiscase,theinsurancecompanywillnotpaymorethan$6,500.

Obviously,thekeyhereistopurchasetherightamountofphysicaldamagecoveragesoyoudon'tsufferalossatsettlementtime.Butthere'snopointinpayinghigherpremiumsformorecoveragethanyourATVorsnowmobileisworth,becauseitisn'tgoingtogetyoualargersettlement.

Anotherthingtoremember:ThedeductibleyouhavechosenfortheautomobilepartofthepolicyalsoappliestotheMiscellaneousTypeVehicleEndorsement.So,paymentforalossunderthisendorsementwillbereducedbytheamountoftheapplicabledeductible.However,ifmorethanonecoveredautoisdamagedinthesamecollision(e.g.,ifyoubackintoyourcarwithyourATV),onlyonedeductiblewillapplybutitwillbethehighestapplicabledeductible.

CoveringaSnowmobileonanAutoPolicy

YoualsocanaddcoveragespecificallyforasnowmobileunderaPersonalAutoPolicy.Inthiscase,theSnowmobileEndorsementwouldbeusedinsteadoftheMiscellaneousTypeVehicleEndorsement,anditcanbeusedtoprovideyouwithmostofthe

typicalautopolicycoverages.

TheSnowmobileEndorsementdefinessnowmobileasalandmotorvehicle,designedforuseoffpublicroadsonsnoworice,andpropelledonlybywheels,crawlertreadsorbelts.Trailersdesignedtobetowedbysnowmobiles(butnotfortransportingthem)alsoareincludedinthisdefinition.

Thedefinitionof"snowmobile"thenspecificallyexcludesanyvehiclepoweredbypropellersorfans.Somevery-high-speedhybridsnow/icevehiclesarepoweredinsuchamanner,andtheycannotbecoveredbythisendorsement.

(Youwillprobablyneedastand-alonesnowmobilepolicyforhigher-performancemodels;andyoumayhavetopurchaseseparatesnowmobile

coverageifyoudon'thaveagreatdrivingrecord.Youalsomaybeabletoobtaincoverageunderoneofthesepoliciesforasnowmobilethatyourace.)

Anysnowmobilesyouhavemustbespecificallylistedonthepolicy.Italsowillcoverasnowmobilethatyoubuywhilethepolicyisineffect,butonlyifcoverageisrequestedwithin30days.Anditwillcoveranynon-ownedsnowmobileusedasatemporarysubstituteifyoursnowmobileisoutofservice.

Bothliabilityandmedicalpaymentscoverageareexcludedifyouusethesnowmobileforbusiness,ifyouraceit(whetherit'sinasanctionedraceornot),andifyourentorleaseittoanyone.Inaddition,apassengerhazardexclusionmaybeadded.And,ifotherinsuranceapplies,snowmobilecoveragewillbetreatedasexcessoveranyothercollectibleinsurance.

Thesamerestrictionsapplyunderuninsuredmotoristcoverage,andunderphysicaldamagecoverage(exceptforthebusinessuseexclusion).PhysicaldamagecoverageagainhasalimitofliabilityprovisionthatoperatesinthesamemanneritdoesintheMiscellaneousTypeVehicleEndorsement(theinsurancecompanywillnotpaymorethanthestatedamount,actualcashvalueoractualcosttorepairorreplacetheproperty).

Whenitcomestosettingrates,fromaninsurancecompany'sstandpoint,asnowmobilecanbeanespeciallyhigh-riskvehicleinthewronghands.So,theinsurancecompanywillcheckyourdrivingrecordtoseeifyouareapttobeasafesnowmobileoperator.Thecompanyalsowillwanttoknowyourlevelofexperience.

Plus,thecompanywillwanttoknowaboutyourfamily.Inmanystates,nolicensingrequirementsexist,soanychildinthehousecan

climbaboardandbuzzoffintothewinterscape.Insurersworryaboutthisandchargeaccordinglyifyouhaveanychildreninyourhousehold.

Fromapropertyinsurancestandpoint,thetypeofsnowmobilebeingconsideredisimportant.Isitaname-brandvehicle,ordidyoubuildyourown?Thetypeofdrivetrainalsomustbeknown,sincepropeller-drivencraftpresentgreaterexposurestolossduetotheirhighspeedcapabilityandareexcludedbythesnowmobileendorsement,aswellasbysomestand-alonepolicies.

InsuringMopeds

Whataboutmopeds?They'reoftenoperatedonthestreet,butaren'tsubjecttomotorvehicleregistrationeverywhere.Theirslowspeedcanhindertraffic,yettheycanbeusedtoweaveinandoutoftraffic.Theypresenta

smallprofile,whichisdifficultforothermotoriststosee.Frequently,theyareoperatedonthestreetsbychildren.

Ifamopedisnotsubjecttoregistration,youwouldhaveliabilitycoverageonyourownpremisesunderahomeownerspolicy,butnocoverageoff-premises.Ifitissubjecttoregistration,homeownersliabilitycoverageisnotavailableatall.

YoucanobtainbroaderliabilitycoverageundertheMiscellaneousTypeVehicleEndorsementtoyourautopolicytoprovidecoverageonandoffthepremises.Butmanyinsurancecompanieswillnotprovidethiscoverageformopeds,especiallyifthereareunder-ageoperators.

Asaresult,you'llprobablyhavetoobtainastand-alonepolicy.Thesearehardtofind,inmostcircumstances.Motorcycleinsurancecompanieswillusuallyhavestand-alonepolicies...butmaynotbeexcitedaboutsellingyouone,becausethepremiumsarelow.

Infact,mostpeoplewhoridemopedsdonotcarryspecificinsuranceandabsorbanyliabilitiestheyincur.

Conclusion

Specialtyvehiclespresentsomeuniqueinsuranceexposures.Ifyoualreadyhavehomeownersinsurance,youmayhavelimitedcoverageforsomeofyourtoys,buttherearesuretobesomeseriousgapsincoverageforinstance,ifyoueverwanttorideyourATVoffofyourproperty.

YoumaybeabletoaddthecoverageyouneedforoneormoreATVs,snowmobilesordirtbikesbypurchasinganendorsementtoyourhomeownerspolicy.Oryoumaybeabletoendorseyourautopolicytoincludeothermotorizedtypesofvehicles.

Theotheroptionispurchasingastand-alonepolicyforyourATV,

snowmobileordirtbike.Astand-alonepolicyusuallyisbettertailoredtotheneedsofaspecifictypeofvehiclebutitisn'tnecessarilycheap.Ontheotherhand,forsomespecialtyvehicles,suchasmotorcyclesandmotorhomes,astand-alonepolicyisdefinitelythewaytogo,sincethesepoliciesbetteraddressyourcoverageneeds.

Whetheryougowithastand-alonepolicyoranendorsementtoyourhomeownersorautoinsurance,onewaytocutthecostofcoverageforliabilityexposuresistopurchaseapersonalliabilityumbrellapolicy.

KeyQuestions

Formotorhomecoverage,hereareafewkeyquestions.

1)Whatisthemake,modelandyearofthemotorhometobeinsured?_______________________________________

2)Whatequipmentisonthisparticularvehicle?_________________________________________________

3)Howmuchliabilitycoveragedoyouneed? _________

4)Howmuchpersonaleffectscoveragedoyouneed?

_________

7)Doyouneedtowdolly/hitchcoverage? Yes No

8)Howmuchcampsite/vacationliabilitycoverageisofferedunderthepolicy?

_________

9)Doesthepolicyoffer24-hourclaimservice? Yes No

10)Doyouneedtowingandroadsidelaborcoverage?

Yes No

11)Howmuchemergencyexpensecoveragedoesthepolicyprovide?

_________

12)Doyouwantuninsured/underinsuredmotoristcoverage?

Yes No

13)Doyouwantmedicalexpensecoverage? Yes No

14)Doyouwantreplacementcostcoverage? Yes No

15)Doyouwantuninsuredmotoristcoverage? Yes No

16)Doyouqualifyfor/needfull-timerscoverage? Yes No

17)Howoldisthedriver?_________ _________

18)HowexperiencedwithRVsisthisdriver? _________

19)Doesthedriverhaveacleandrivingrecord? Yes No

20)DoestheRVhavecookingfacilities? Yes No

21)WhatistheZIPcodewheretheRVisstored? _________

22)Doyouloanorrentoutthismotorhome? Yes No

23)DoyoubelongtoanRVassociation? Yes No

24)Doesthisinsurancecompanyofferdisappearingdeductibles?

Yes No

Formotorcyclecoverage,hereareafewkeyquestions.

1)Whatisthemake,modelandyearofthemotorcycletobeinsured?

_________

2)Howoldistheprimaryrider? _________

3)Doestheriderhaveacleandrivingrecord? Yes No

4)WhatistheZIPcodewherethebikeisstored? _________

5)Isthemotorcyclelicensed? Yes No

6)Whataretheliabilitylimitsdesired? _________

9)Doyouwantuninsured/underinsuredmotoristcoverage?

Yes No

10)Doyouwantmedicalexpensecoverage? Yes No

11)Doyouwanttowingandroadsideassistancecoverage?

Yes No

12)Hastheriderundergonesafetytraining? Yes No

13)Isthebikegaraged? Yes No

Forsnowmobiles,ATVs,dirtbikes,mopeds,golfcartsandotheroff-roadvehicles,hereareafewkeyquestions.

1)Willthevehiclebeusedexclusivelyonyourproperty?

Yes No

2)Canyousecureadequatecoveragebyaddinganendorsementtoyourhomeownerspolicy?(You'llhavetodiscusscoveragewithyouragent.)

Yes No

3)Canyousecureadequatecoveragebyaddinganendorsement

toyourautopolicy? Yes No

4)Ifyouareconsideringstand-alonecoverage,howmuchliabilitycoveragedoyouneed? ____________

5)Howmuchisthevehicleinquestionworth? ____________

6)Willminorsberidingthevehicle? Yes No

7)Isthisahigh-performancevehicle? Yes No

8)Willyoubeinsuringmultiplevehiclesonthispolicy?(Mostcompaniesofferdiscountswhenyouinsuremultiplevehicles.)

Yes No

9)Arethereanydiscountsavailableforbeingclaim-freeforaperiodoftime?

Yes No

10)Howcanyouqualifyfordiscounts?_____________________________________________________

PROTECTINGYOURHOME

Chapter6TheBasicsofHomeownersInsuranceBuyingahomeisthesinglelargestinvestmentmostpeoplemake...thatisanoldnote,butatrueone.Themostcommonwaytoprotectthatinvestmentisbypurchasinghomeownersinsurance.Homeownersinsurancecanbeconfusingallthetalkaboutcoveredperils,uncoveredperils,exclusions.

But,whenyoubreakthecoveragedowntoitsessence,it'sprettyeasytoseewhichkindisrightforyouandyourdreamhouse.

Formostpeople,therightkindisoneofthreebasichomeownerspolicies.Thesepoliciesarerelativelycompletepackages.Theycoveryouandyourhomeforfire,theftandliabilitytheresidentialandpersonalexposuresthatmostindividualsandfamiliesencounter.

BasicTypesofHomeownersCoverage

Insurancecompaniesgenerallyusestandardizedformstodescribedifferenttypesofcoverage.Ifyouspeakthelingo,itbecomesmucheasiertocomparepolicies.So,here'syourfirstlesson.

Insurancecompaniesusesixformsforhomeownersinsurance,whichtheycall:HO-1

thebasicform

coversyourhomeagainstfire,lightningandlimitedformsofinternalexplosion(apackageofoptionalcoveragescanbeaddedforanadditionalpremium)

thebroadform

coversallofthestandardandoptionalperilsavailableonthebasicformandexpandsseveralofthose

thespecialform

insuresagainstanyrisksthatarenotspecifi-ortheall-riskformcallyexcluded

(Continuedfrompreviouspage)HO-4 condominiumandcoopcoverageHO-6 renter'scoverageHO-8 specialcoverageforolderhomes

Mosthomeownerswillgetapolicythatusesoneofthefirstthreeforms.Thesethreepoliciesdifferintermsofthecoverageoffered,withHO-1beingthemostrestrictiveandHO-3beingthemostgenerous.

InsurancecompaniesrefertoformsHO-1andHO-2asnamed-perilscoverage,becausetheylist,orname,theperilsthatarecovered.Incontrast,formHO-3,theall-riskform,listsonlytheperilsthatarenotcovered.

Inadditiontoprovidingbroadercoverage,anall-riskformshiftstheburdenofprooffromyoutotheinsurancecompany.Withnamed-perilscoverage,youhavetoprovethatacoveredperilcausedtheloss.Withall-riskcoverage,theinsurancecompanyhastoprovethatanexclusionappliedinordertodenycoverage.

WhoCanBuyThesePolicies?

Homeownerspoliciesareissuedtocoverapremisesthatisusedprincipallyforprivateresidentialpurposes.Someincidentalbusiness''occupancies,"suchasastudiooroffice,arepermitted.However,ifyouoperateabusinessfromyourhome,youprobablywillneedaseparatebusinesspolicyoratleastanendorsement,whichisanadd-onthatprovidesexpandedcoveragetoyourbasichomeownersinsurance.

Ahomeownerspolicycannotbeissuedtocoveranypropertysituatedonpremisesusedforfarmingpurposes.

AninsurancecompanycanissuehomeownersformHO-1,HO-2orHO-3toyouifyouqualifyasanyofthefollowing:

anowner-occupantofadwelling;

theintendedowner-occupantofadwellinginthecourseofconstruction;

oneco-ownerofaduplex,wheneachdistinctportionofatwo-familydwellingisoccupiedbyseparateco-owners;

apurchaser-occupantwhenthesellerretainstitleunderaninstallmentcontractuntilpaymentsarecompleted;and

anoccupantofadwellingunderalifeestatearrangement,

whendwellingcoverageisatleast80percentofthecurrentreplacementcost.

Ifyouareaco-owner,apurchaser-occupantoranoccupantunderalifeestate,theownerorremainingco-owneralsowillhavewhattheinsurancecompaniescallaninsurableinterestinthedwelling,otherstructures,premisesliabilityandmedicalpaymentscoverage.ThisinterestcanbeinsuredbyattachinganAdditionalInsuredEndorsementtoyourpolicy.However,thatco-owner'spersonalpropertywillhavetobeinsuredseparately,onanotherpolicy.

MobilehomesalsoqualifyforcoverageunderanHO-2orHO-3form,butonlywhenamobilehomeendorsementisattachedtothepolicy,whichalterscertainprovisions.Tobeeligible,amobilehomemustbedesignedforyear-roundliving,anditmustbeatleast10feetwideandatleast40feetlong.Mobilehomesalsomaybecoveredwithseparate,stand-aloneinsurancepolicies.

Typically,homeownersformHO-4isusedtoinsureaco-oporcondominium,andformHO-6isusedforrenters.FormHO-8isavariationonHO-1thatisavailableinsomestates.Intherestofthischapter,wewillfocusonthetypicalhomeownerspolicies:HO-1,HO-2andHO-3.

WhataHomeownersPolicyCovers

Ahomeownerspolicyincludesanumberofdifferentcoverages,whichprovideasortofloosechecklistofthekindsofexposuresyoumayface:

CoverageADwellingcoverageisthemostsignificant.Thiscoverageappliestothehouseitself,attachedstructures(suchasanattachedgarage),andmaterialsandsuppliesonoradjacenttothepremises.Thisincludesmaterialsusedforrepairorconstruction.

Ahomeownerspolicywillshowaspecificamountofinsuranceforthedwelling.Thiswillbeanamountseparatefromliabilityorpropertycoverage.

Dwellingcoveragealsoissoldseparately.Becausethesestand-alonepoliciesdon'tcoverliabilityorotherrisks,theyarebestusedinadditiontoastandardhomeownerspolicyforsecondhomes,vacationcondos,etc.Note:Somestate-runhomeinsuranceplansaredwelling-onlycoverage.

CoverageBOtherstructurescoverageisalsoincluded.Itappliestobuildingsonthepremisesthatareseparatedfrom

thehousebyaclearspace,orconnectedonlybyafence,utilitylineorsimilarconnection(suchasadetachedgarageorworkshed,orevenaguesthouse).Thestandardamountofinsuranceforotherstructuresis10percentoftheamountwrittenforthedwellingcoverage,anditisprovidedasanadditionalamountofinsurance.(Inotherwords,ifyouhavea$200,000policyforthedwelling,youautomaticallygetanadditional$20,000ofcoverageforotherstructures.)

If10percentisn'tenough,youcanbuymoreotherstructurescoverage.

CoverageCPersonalpropertycoverageisanotherkeycomponentofahomeownerspolicy.Personalpropertymeansjustaboutanyhouseholdpossessionthat'sfinanciallyvaluablefromanearringtoarefrigerator.

Thiscoverageappliestopersonalpropertyownedorusedbyyouoranyoneelsecoveredunderyourpolicywhileitisanywhereintheworld.Italsoincludescoveragefortheft.Atyourrequest,otherpeople'spersonalpropertyalsomaybecoveredwhileitisonyourpremises.Thiscoverageusuallyisanadditionalamountofinsuranceabovethepolicy'sface50percentoftheamountwrittenforthedwelling.Ifthat'snotenough,youcanincreasethelimitandyoualsocanchoosetodecrease.

PersonalPropertycoverageappliesinmanysituationsincludingwhenthingsarestolenfromyourcarwhileyou'retravelling.Thisisthetypeofprotectionthatpeoplesometimesoverlookorforgetabout.Makesureyoudon't:Personalpropertycoverageisoneoftheprimaryreasonstobuyacomprehensivehomeownerspolicy.

CoverageDLossofuseoflivingspacecoveragewillkickinifacoveredlossmakesyourhomeuninhabitable.Mosthomeownerspoliciescovereitheradditionallivingexpensesrelatedtomaintainingyournormalstandardoflivingorthefairrentalvalueofthepartoftheresidencewhereyoulive(it'syourchoice).Ifacoveredpropertylossmakesthepartofyourresidencethatisrentedtoothersuninhabitable,policiesalsocoverthelossoffairrentalvalue.

CoverageELiabilitycoverageunderahomeownerspolicyisdesignedtoprotectyourassetsifyouaresued.Itcoversinjuriesordamagecausedbyyou,amemberofyourfamilyorapet.Itappliestoinjuriesthatoccuronyourpropertyoranywhereintheworld.We'llconsiderthiscoveragelaterinthischapter.Thiscoveragehasalimitseparatefromthedwellinglimit.

CoverageFMedicalpaymentscoveragealsoisincludedinahomeownerspolicy.Itcoversnecessarymedicalexpensesincurredbyothers(notmembersofyourhousehold)withinthreeyearsofanaccidentthatcausesbodilyinjury.(Anaccidentiscoveredonlyifitoccursduringthepolicyperiod.)Medicalexpensesincludereasonablechargesformedical,surgicalanddentalcare,X-rays,ambulanceservice,hospitalbills,professionalnursing,prostheticdevicesandfuneralservices.

Thiscoveragedoesnotapplytomedicalexpensesrelatedtoyourowninjuriesorthoseofanyonewholiveswithyou,exceptyouremployees.Thiscoverageoftenhasa$1,000limit.

Theadditionalcoveragesportionofastandardpolicyincludescoverageforclaimexpenses,firstaidanddamagetothepropertyofothers.

Astheabovelistimplies,ifyouhavea$200,000homeownerspolicy,that'snotallyou'llgetifyourhomeisdestroyed.The$200,000limitusuallyappliesonlytothecostofreplacingthephysicalstructure.Typically,apolicywillpayhalfofthefaceamountinthiscase,upto$100,000toreplaceyourhome'scontents,includingvaluables.

Atypicalpolicyalsowillcoverlegalcostsrelatedtoaliabilitylawsuit.Inotherwords,ifyouhavea$200,000face-valuepolicy,youcouldget$200,000torebuildthehouse,$100,000forpersonalitems,

$10,000tore-landscape,$10,000torebuildafreestandinggarageand$25,000tocovertemporarylivingexpenses.That'satotalcoverageofnearly$350,000ona$200,000face-valuepolicy.Andthecostofyourdefenseinaliabilitylawsuitcouldaddanother$50,000or$100,000.

APrettyCompletePackage

Homeownersinsurancehasevolvedintoarelativelycompletepackageofcoverages.However,someperilsgenerallyarenotcoveredorcovered

sufficientlybystandardhomeownersinsurancepolicies.Chiefamongthesearehurricanes,floodsandearthquakes.

Buyingahomeownerspackagepolicyusuallyisabetterdealthanbuyingeachcoverageindividually.However,somehomeownersprefertobuyjustoneortwotypesofinsuranceforexample,onlyadwellingpolicy.

Purchasingseparatecoveragesbecomesaparticularconcernifyourhomedoesnotqualifyforahomeownerspackagepolicy.Formoreonwhichtypesofhomesqualify,readon.

WhoIsCoveredUnderthePolicy?

It'simportanttoknowwhowillandwillnotbecoveredunderyourpolicy.Thedefinitionspageofahomeownerspolicywillprovidethisinformation.Typically,youthenamedinsuredyourspouseandanyfamilymemberswholivewithyouarecovered.Someoftheotherfactorsmayseemfamiliar(whichisproofyou'rebecominganinsuranceexpert).

Thedefinitionspagemayexpressthisinthefollowingway:

Insuranceonthedwellingandanyotherstructuresisprovidedforthenamedinsuredandtheinsured'sspouse,ifthespouselivesinthesamehousehold.

Personalpropertycoverageandpersonalliabilityinsuranceareprovidedforthenamedinsuredandallresidentsofthesamehouseholdwhoarerelativesoftheinsured,orwhoareunderage21andareinthecareoftheinsured'sfamily.

Ifthenamedinsuredorthespousedies,coveragecontinuesforlegalrepresentatives.Untilalegalrepresentativeisappointed,atemporarycustodianofthenamedinsured'spropertyalsowouldbe

covered.Allhouseholdmemberswhoareinsuredatthetimeofthenamedinsured'sdeathwillcontinuetobecoveredwhiletheyliveattheresidencepremises.

Upontherequestofthenamedinsured,thepersonalpropertyofothersmaybecoveredwhileontheresidencepremises,andthepersonalpropertyofguestsoraresidenceemployeemaybecovered.

Aresidenceemployeeusuallymeansahousekeeper,gardeneroranyotheremployeewhoperformsdutiesrelatedtothemaintenanceanduseof

yourresidencepremises,orwhoperformshousehold,domesticorsimilardutieselsewherethatarenotconnectedtoahome-basedbusiness.

Knowingwhoisandisn'tcoveredisvital.Notonlydoesittellyouwhosepersonalpropertyisinsured,butsomecoveragesapplyonlyifoneoftheinsuredpartiesdoesnotcausethedamage.

RealProperty,PersonalPropertyandLand

Whenaninsurancecompanytalksaboutpropertycoverages,itmeansinsurancethatisusedtocoverrealpropertyandpersonalproperty.

Realpropertyincludesbuildingsandstructures,butnotthelandonwhichtheyarelocated.Whilelandusuallyispartofthepurchasepriceofrealproperty,itisnotsubjecttolossordestructioninthesamewaybuildingsare,soitisnotcoveredbyinsuranceinthesameway.

Onewaytocalculatethevalueofthestructuresonyourpropertyistouselocaltaxassessmentvalues.Butthemostcommonwaypeopleestimatehowmuchinsurancetheyneedisbycoveringatleasttheamountofanymortgageorotherloansontheproperty.

Onecaveathere:Theamountoutstandingonyourhomeloanoreventheoriginalfullamountofthatloanmaynotbeenoughtorebuildyourhouseifit'sdestroyed.

Personalpropertyincludesallformsofpropertyotherthanrealproperty.Onahomeownerspolicy,personalpropertycoverageprotectshouseholdgoods,indoorandoutdoorfurniture,mostappliances(butnotbuilt-ins),linens,drapes,clothingandotherpersonalbelongings,whichmayrangefromtoystohomecomputers

andsmallboats.

WhichPropertyandLossesAreNotCovered?

Homeownersinsurancecoversalotbutitcan'tcovereverythingyouownoreverythingyoudo.Mosthomeownerspolicieslistspecificpropertyandspecifickindsoflossesthatarenotcovered.Insuranceisdesignedtocoversuddenandaccidentallosses.Therefore,gradual,preventableorexpectedlossesmustbeexcluded.

Thefollowingtypesofpropertyandlossesarenotcoveredbyanyhomeownerspolicy,andtheyserveasakindofreversechecklist:

land,includingthatunderaninsuredresidence;

structuresusedsolelyforbusinesspurposes;

structuresorproperty(otherthanaprivategarage)thatarerentedorheldforrentaltosomeonewhoisnotatenantoftheinsureddwelling;

articlesthatarespecificallycoveredbyotherinsurance(since,youcanonlycollectonceforaloss);

animals(pets,livestockandanyothercritters);

aircraftandparts,otherthanmodelorhobbyaircraft;

propertyofroomers,boardersandothertenantswhoarenotrelatedtoanyinsured(they'llneedtogettheirownrentersinsurance);

accounts,drawings,paperrecords,electronicdataprocessingtapes,wires,records,disksorothersoftwaremediacontainingbusinessdata(blankrecordsormediaarecovered,andsoaremusicCDs);

lossescausedbyperilshavingcatastrophicpotentialtheseincludeflood,hurricane,tornado,nuclearandwarriskexclusions;

lossescausedbyoff-premisespowerfailure;

lossesresultingfromenforcementofanybuildingordinanceorlaw;

lossescausedbytheneglectofaninsuredpersontouseallreasonablemeanstosaveandpreserveproperty(forinstance,ifyouhaveaholeinyourroofandyoudon'tcoveritanditrains,theinsurancecompanywillnotpayforwaterdamage);

anyintentionallossarisingoutofanactcommittedbyoratthedirectionofaninsured(forinstance,ifyoudrivethroughyourfencewhiletryingtorundownyourneighbor'sdog,youcan'tgettheinsurancecompanytopaytofixit);

lossescausedby,resultingfrom,contributedtooraggravatedbyearthmovement(earthquake,landshockwavesfromavolcaniceruption,landslide,minesubsidence,mudflowandearthsinking,risingor

sliding);and

lossestoamotorvehicleandanyelectronicapparatusdesignedtobeoperatedsolelybyuseofthepowerfromthemotorve-

hicle.(However,homeownerspoliciesdocovervehiclesthatarenotsubjecttomotorvehicleregistrationandareusedtoserviceyourresidenceorassistthehandicapped.)

Ifyou'rehopingtoinsureanyoftheseitemswithhomeownerscoverage,you'llbeoutofluck.Theoperatingassumptionhereisthattheinsurancecompanywillprovidecoverageagainstlossesthatarelikelytooccurinaperson'sordinaryexperience.

Inmanycases,youwillbeabletouseendorsementsorriderstoadaptstandardpoliciestoyourspecificneeds.Endorsementsandridersserveasaddendaaddingcoverageorconditionstostandardinsurancecontracts.

Certainperils,orrisks,areexcludedfromstandardpoliciesbecausetheycanbecoveredbetterunderdifferentinsurance(forexample,aseparateearthquakeinsurancepolicy),becausetheyareanaturalchangethatoccursovertimeorbecausepayingforthemmighttemptpeopletocommitfraud.Amongtheexclusionsthatfallintothiscategoryaredamagecausedby:

wearandtear;

deterioration;

depreciation;

moldandmildew;

wetordryrot;

contamination;

smogorsmokefromindustrialoragriculturaloperations;

mechanicalbreakdown;

settling,cracking,shrinkage,bulgingorexpansionofpavement,patios,foundations,walls,roof,floorsorceilings;and

birds,insects(includingtermites),verminordomesticanimals.

Paycloseattentiontotheinsectandtermiteexclusion.It'sthereasontermiteinspectionsaresuchacriticalpartofsellingahouse...andthereasonoldhousessometimesneedtobefumigated.Also,mostpoliciesdonotcoveranydamagefromsewerback-uporseepagebelowground,aroundwindowsorthroughfoundations.Butthisexclusionisoneofthemostfrequesntlylitigatedpartsofhomeownersinsurance.Policyholderswillusuallytrytoprove

waterdamageresultedfromsomethingotherthansewerback-up.Theyusuallylosetheirargument.

PerilsCoveredUndertheBasicForm

Whileeveryhomeownerspolicyprovidesliabilityandpropertycoverage,HO-1isaverylimitedpolicy.That'sbecausethisbasicformonlyinsuresthedwelling,otherstructuresandpersonalpropertyagainstdirectlossbyspecificnamedperils.Theseperilsare:

fireorlightning;

explosion;

riotorcivilcommotion;

aircraft(e.g.,ifaplanecrashlandsonyourhouse);

vehicles(butnotvehicledamagecausedbyanyvehicleownedoroperatedbyanyresidentoftheinsuredpremises);

smokedamage(fromafirebutnotsmokefromfireplacesorfromagriculturalsmudgingorindustrialoperations);

vandalismormaliciousmischief(knownasVMM),butnotifthedwellinghasbeenvacantfor30consecutivedaysormore;

theft(butnottheftcommittedbyaninsured,theftfromapartofaresidencerentedtosomeonewhoisnotaninsured,ortheftinortoadwellingunderconstruction;andtheftcoverageforpropertyawayfromtheresidencepremisesissubjecttolimitations);

glassbreakage;and

volcaniceruptionexcludinglossescausedbyearthquake,landshockwavesortremors.

EventhoughHO-1isthemostbare-boneshomeownerspackagepolicy,itstillprovidesbroadercoveragethanastripped-downdwellingpolicy.Forinstance,alloftheextendedcoverage(EC)perils(everythinglistedabove,withtheexceptionoffirecoverage)andvandalismandmaliciousmischiefperilsareautomaticallyincludedwhereastheyareoptionalonthebasicdwellingform.

Windandhailcoveragedoesnotapplytowatercraftthatareoutside,butthepolicycoversotheroutdoorproperty,suchasawningsandantennas.

Coverageforvehicledamageisalsobroaderunlikedwellingcoverage,ahomeownerspolicydoescovervehicledamagetofences,driveways,walksandoutsidelawns,shrubs,treesandplantswhencausedbyanon-resident.(Allvehicledamagecausedbyaresidentisexcluded.)

Allhomeownersformsincludecoveragefortheftofpersonalproperty.Dwellingpoliciesdon't.Thishomeownerscoverageincludesprotectionforthelossofpropertyawayfromaresidence,butfromaknownlocation,whenitislikelythatthepropertyhasbeenstolen.Propertystolenfromanunattendedwatercraftormotorvehiclealsoiscovered.However,coveragefortheftofpropertyawayfromtheresidencepremisesdoesnotincludethelossoftrailers,campers,watercraft(includingfurnishingsandequipment)orpropertyatanotherresidenceowned,rentedtooroccupiedbyaninsuredpersonexceptwhileyou'reresidingthere.

Aninsuredstudentiscoveredwhileataresidenceawayfromhome,butonlyifheorshehasbeenthereatsomepointduringthe45daysimmediatelybeforeatheftoccurs.

Homeownersformsdonotspecificallyrefertodamagecausedbyburglars,butcoverageisautomaticallyprovidedundertheVMMperil.

ThebasiccoverageofferedunderanHO-1policyis:

CoverageA

Dwelling $8,000minimum

CoverageB

Otherstructures

10percentoftheamountofCoverageA

CoverageC

Personalproperty

50percentoftheamountofCoverageA

CoverageD

Lossofuse 10percentoftheamountofCoverageA

CoverageE

Personalliability

$100,000minimum

CoverageF

Medicalpayments

$1,000minimum

TheproblemwithanHO-1policyisthatpersonalpropertyisnotcoveredifitisdamagedindirectlybyaninsuredperil.So,ifalightningbolthitsyourhouseandshortsoutyourhometheaterorbrandnewiMac,youwon'tbeabletomakeaclaimforthatequipment.

Don'tthinkindirectlossesareabigproblem?AccordingtotheInsuranceInformationInstitute(III),lightningstrikesmorethan30,000U.S.homesandbusinesseseachyear,throughdirecthitsandlinkstopowerlines.

PerilsCoveredbytheBroadForm

FormHO-2offersbroadercoveragethanHO-1.That'swhyHO-2isknownasthebroadform.

Thebroadforminsuresthedwelling,otherstructuresandpersonalpropertyagainstlossbyallofthebasicformperils.Anditaddssixadditionalperilsoftencalledbroadformperils.(Thebroadformisstillnarrowerthantheall-riskform,becauseitofferscoverageonanamed-perilsbasis.)

Thesixadditionalbroadformperilsare:

damagecausedbyfallingobjects(butdamagetoabuilding'sinteriororitscontentsiscoveredonlyifthefallingobjectfirstdamagestherooforanexteriorwall);

damagetoabuildingoritscontentscausedbyweightofice,snoworsleet(however,damagetoanawning,fence,patio,pavement,swimmingpool,foundation,retainingwall,pier,wharfordockisnotcovered.);

accidentaldischargeoroverflowofwaterorsteamfromaplumbing,heatingorairconditioningsystem,oranautomaticfireprotectionsprinklersystem,orfromahouseholdappliance(thisdoesnotincludelosscausedbyfreezing,orlosstothesystemorappliancefromwhichwaterorsteamescapedandcoverageissuspendedwheneveryourhomehasbeenvacantformorethan30consecutivedays);

suddenandaccidentaltearingapart,cracking,burningorbulgingofasteamorhotwaterheatingsystem,anairconditioningsystem,anautomaticfireprotectionsprinklersystemoranapplianceforheatingwater;

freezingofaplumbing,heatingorairconditioningsystem,oran

automaticfireprotectionsprinklersystem,orofahouseholdappliance(thiscoveragealsoissuspendedwheneverthehomeisvacant,unoccupiedorbeingconstructed,unlessreasonablecarewastakentomaintainheatinthebuilding,ortoshutoffthewatersupplyanddrainsystemsandappliances);and

suddenandaccidentaldamagefromartificiallygeneratedelectricalcurrent(butnotdamagetoatube,transistororsimilarelectricalcomponent).

Inadditiontoaddingcoverageforthesesixperils,HO-2policiesexpandsomeofthebasiccoveragesfoundonHO-1policies.Forinstance,vehicledamagetoabuildingiscovered,evenwhenitiscausedbyaresident(butvehicledamagetoafence,drivewayorwalkcausedbyaresidentisstillexcluded).And,smokecoverageonallformsotherthanHO-1includessmokefromfireplaces.

Further,underanHO-2policy,lossofusecoverageisdoubled,to20percentoftheamountofdwellingcoveragepurchased.However,indirectlossesasinthecaseoflightningshortingoutyourVCRorcomputerstillarenotcovered.

CoverageUndertheSpecialForm

HO-2offersbroadercoveragethanHO-1,butHO-3isthebroadestofthethree.Itisknownasanall-riskpolicyorthespecialformanditisthemostpopularandthoroughcoverageyoucangetforyourhome.Ittypicallycosts10percentto15percentmorethantheHO-1policy.

Insteadofnamingtheperilsthatarecovered,theHO-3formnamestheperilsthataren'tcovered.Ofcourse,thisisstillalonglist,becauseinsurancecompaniesliketobeveryspecificaboutwhattheywillandwillnotpayfor.Thisprotectsthemintheeventyousueforcoverage.

Whilestructuresareinsuredforallrisksunderanall-riskpolicy,personalpropertyisinsuredonanamed-perilsbasis.Thispolicyinsurespersonalpropertyagainstlossbyalloftheperilsincludedonthebroadform,HO-2andexpandsthecoverageabityoucanalsoendorseittospecialform.HO-3alsocoversvehicledamagetoafence,drivewayorwalkevenwhenitiscausedbyaresident.AndHO-3alsodoesnotsuspendcoverageforpersonalpropertyfromcertainperils,asHO-2does,wheneveryourhomehasbeenvacantfor30ormoreconsecutivedayswhichisimportantifyoutravelforextendedperiodsoftime.(However,coverageforthedwellingandother

structuresisstillexcludedafter30daysofvacancy.)

HO-3providesthemostcompletecoverageforyourhomeandotherstructures.InadditiontowhatiscoveredunderanHO-2policy,anHO-3policycovers:

removalofdebrisfromcoveredpropertyifthedebriswascausedbyacoveredperil(forinstance,ifyourhouseburnsdownandthedebrisneedstoberemovedbeforeyoucanrebuild);

reasonablerepairstoprotectyourhomefromfurtherdamage

(thiswouldincludecoveringaholeintheroof,sorainorsnowcan'tcomeinandcausefurtherdamage);

trees,shrubsandotherplantsforupto5percentoftheamountofdwellingcoveragethoughnomorethan$500canbespentonanysingletree,shruborbush;

upto$500foranychargesthefiredepartmentbillsyouforbeingcalledtoyourhome;

damagethatoccurswhileyoutrytoremoveyourpersonalitemswhenyourhomehasbeendamagedbyaninsuredperil;

upto$500ifyourcreditcard,fundtransfercard,etc.,isstolenandusedandthecard'sissuerwantsyoutopaytheoutstandingdebt;

upto$1,000foryourshareoflossassessmentschargedtoyoubyahomeowners'associationorcorporation;and

propertylostduetothecollapseofeitherallorpartofthebuilding,aslongasthecollapseiscausedbyperilsinsuredagainstunderHO-2orduetohiddendecay;hiddeninsectorvermindamage;weightofcontents,equipment,animalsorpeople;weightofrainthatcollectsontheroof;oruseofdefectivematerialormethodsinconstruction,remodelingorrenovation(aslongasthecollapseoccursduringtheconstruction,remodelingorrenovation).

Ascomprehensiveasitis,HO-3doesnotcovercertainkindsofassetss.Theseexclusionsinclude:

property,lossesandperilsnotcoveredduetolimitationsoftheinsuringagreementandthegeneralexclusions;

lossinvolvingcollapse,otherthanthosedescribedabove;

freezingofaplumbing,heatingorairconditioningsystem,oranautomaticfireprotectivesprinklersystem,orahouseholdapplianceor

discharge,leakageoroverflowduetofreezingwhilethedwellingisvacant,unoccupiedorbeingconstructed,unlessreasonablecarewastakentomaintainheatinthebuilding,ortoshutoffthewatersupplyanddrainthesystemsandappliances(suchdamagebyfreezingofanoccupiedpremisesiscovered);

damagecausedbyfreezing,thawing,pressureorweightofwateroricetoafence,pavement,patio,swimmingpool,foundation,retainingwall,bulkhead,pier,wharfordock;

theftinortoadwellingorstructureunderconstruction,ortheftofanypropertythatisnotactuallypartofacoveredbuildingorstructure(theftofpartofafinishedbuildingiscovered);

vandalismandmaliciousmischiefifthehomehasbeenvacantformorethan30consecutivedaysatthetimeofloss;

wearandtear,deterioration,latentdefect,rust,mold,wetordryrot,contamination,smog,smokefromagriculturalsmudgingorindustrialoperations,birds,vermin,insects,domesticanimalsorthesettling,cracking,shrinking,bulgingorexpansionofpavements,foundations,walls,floors,roofsorceilings;

lossescausedbyweatherconditionstotheextentthatweathercontributestocausesfoundinthegeneralexclusions(i.e.,powerfailure,flood,etc.);

lossescausedbyfaulty,inadequateordefectiveplanning,zoning,surveying,siting,design,specifications,workmanship,repair,construction,renovation,remodeling,grading,repairorconstructionmaterials,ormaintenance;and

lossescausedbyacts,decisionsorthefailuretoactordecidebyanyperson,group,organizationorgovernmentbody(forexample,iftheNationalGuardcomesintoyourneighborhoodafterastormandaccidentlytrashesyourgarage,you'llhavetosuethem).

Forthehomeandotherstructures,ifanyexcludedlossisfollowedbyalossthatisnotexcluded,theadditionallossiscoveredbyHO-3.

PlacingaValueonThings

Manyinsurancepolicieshaveavaluationclause,whichdescribeshowthevalueofdifferenttypesofpropertywillbedeterminedintheeventofaclaim.Thevaluationclausemayusesuchtermsasactualcashvalueandreplacementcost.

Actualcashvalue(ACV)isthebasisforrecoveryundermanypropertyandliabilitycontracts,regardlessofthepolicyamount.ACVgenerallymeans

''thereplacementcostofdamagedordestroyedpropertyatthetimeofloss,lessdepreciation."

Forexample,ifyourbedroomsetwascompletelydestroyedbyacoveredperil,theinsurancecompanywilllookfirstatthecurrentreplacementcost,thenaccountforthelengthoftimeyou'vehadit.So,ifanewsetis$10,000,buttheinsurancecompanyfiguresthattheonewhichwasdestroyedhaddepreciated30percentduetoageanduse,apolicyprovidingACVrecoverywouldpay$7,000.

Itisbettertopurchaseapolicythatwillgiveyouthefullreplacementcostforyourpersonalproperty,withoutdeductingfordepreciation.Thiscanbedone,foranadditionalpremium,byaddinganendorsementtoguaranteepaymentofthereplacementcost.

Ifyouownanolderhome,youmaynotbeabletogetguaranteedreplacementcostcoverage,becausemanyofthebuildingtechniquesusedindecadespastaremoreexpensivethantechniquesusedtoday.So,youmayhavetosettleforamodifiedreplacementcostpolicy.Withthissortofcoverage,insteadofrepairingorreplacingplasterwallswithsimilarmaterials,forinstance,thepolicywouldpayforrepairsusingwallboard.Completereplacementcostcoveragemaybedifficulttoobtainifyouhaveextensiveceilingmoldingsandotherfinecraftsmanshipthatwouldbedifficulttoreplacetoday.

Homeownerspoliciesalsowillpayyouthefullreplacementcostforyourhouseandotherinsuredbuildingsonlyifyoumaintainaminimumamountofinsuranceusually80percent.Inotherwords,ifitwillcost$200,000torebuildyourhomeandyouonlyhave$100,000worthofinsurance,noinsurancecompanyisgoingtopayyouthefullreplacementcost.

Forthisreason,mostinsurersrequirethatyourinsurancebeequalto

atleast80percentofthereplacementcostatthetimeofloss.

Animportantnote:Insurancecompaniesdon'twanttoencourageyoutofileaclaimandpocketthemoney.So,forbothbuildingandcontentslosses,mostpoliciesstatethatfullreplacementcostswillbepaidonlyifthepropertyisactuallyrepairedorreplaced.Ifitisnot,claimswillbepaidonanACVbasis.

Anotherconceptworthnotingisthevaluedpolicy.Itprovidesforpaymentofthefullpolicyamountintheeventofatotallosswithoutregardto

actualvalueordepreciation.Valuedpoliciestraditionallyhavebeenusedwhenitwouldbedifficultorimpossibletoestablishavalueafteralossoccurs,orwhenitisdesirabletoagreeonaspecificvalueinadvance.Forinstance,cargotravellingbyshipwouldbeinsuredonavaluedpolicybasis,sinceitmightbedifficulttoestablishcargovaluesafterashipsinks.

Inrecentyears,somestateshavepassedvaluedpolicystatutesthatapplytorealproperty,suchashomes.Ifthereisatotallosscausedbyaspecificperil,usuallyfireorwindstorm,thestatutescallforpaymentofthefullpolicyamount,regardlessoftheactualvalueofthepropertyatthetimeofloss.Thisisawayforstatutestolimitthesubjectivedeterminationofvalue.

Animportantissueinmanypropertyinsurancepoliciesisthepairandsetclause.Thisiswritteninbecauseasetcanbeworthmorethanthesumofitspieces.Forinstance,anantiquepairofcandelabrasmightbeworth$1,000.Butifoneislostordestroyed,theremainingcandelabramightbeworthonly$200.Inthissituation,thevalueofthelossofonepartofapairisnotequalto50percentofthevalueofthecompletepair.

Forthisreason,manypropertyinsurancepoliciesgivetheinsurertheoptionofrepairingorreplacinganypartofapairorsettorestoreitsvalue,orofpayingthedifferencebetweentheACVofthepropertybeforeandaftertheloss.Intheaboveexample,theinsurancecompanymightbeabletoreplacethelostitemorobtainacompletepairofequalvaluetoexchangefortheremainingitematalessercostthanmakingacashsettlement.OrtheinsurermightpaythedifferenceinACVbeforeandaftertheloss($800),ifreplacementwasnotpossibleatalessercost.

Onelastpointaboutthewayinsurancecompaniesvalueyour

property:Sayyourhouseisworth$100,000,andyou'veinsureditforthatamount.Ifyouhaveafirethatcauses$50,000worthofdamage,theACVofthebuildingwouldbereducedto$50,000.Ifyoushouldhaveanotherclaimbeforeyourepairthedamagefromthefire(anambulancerespondingtothefireandcrashesandwipesouttherestofthehouse),youcanfileaclaimforonlythe$50,000ACV.

Ontheotherhand,ifyoucompletelyrepairthefiredamage,beforetheambulancecomesalongandwipesyouout,yourcoverageisrestoredtothefull$100,000(althoughyou'llprobablywanttomove,atthatpoint).

Animportantpartofanypolicyandsomethingyoushouldalwayscheckishowdisputesarehandled.Ifyouandtheinsurancecompanycannotagreeonthevalueofsomethinglikeyourhouseyoumaybeabletotakeadvantageofanappraisalconditioninyourpolicy,ifyouhaveone.Eitheryouortheinsurancecompanymaymakeawrittendemandforanap-

praisal.Nomatterwhomakestherequest,eachsideisallowedtobringinanimpartialappraiser(atitsownexpense),andthetwoappraisersselectanumpire.Theappraisersseparatelystatethevalueofthepropertyoramountofloss.Iftheydon'tagree,thedifferencesaresubmittedtotheumpire.Youandyourinsurerthenmustabidebythevaluationseteitherbythetwoappraisersiftheyagreeorbytheumpire.

TheOtherMajorComponent:LiabilityCoverage

Earlierinthiscentury,governmentregulationspreventedpropertyinsurancecompaniesfromsellingliabilityinsurance.Bythesametoken,liabilityinsurancecompaniescouldn'tsellpropertyinsurance.So,ahomeownerhadtopurchasetwoormorepolicies,fromdifferentinsurancecompanies,toobtaintotalprotection.

Startinginthe1940s,theseregulationshavechanged.Now,theHomeownersPolicyProgram(ofwhichHO-1,HO-2andHO-3areapart)providesliabilityautomatically,inadditiontopropertycoverage.Bycombiningpropertyandliabilitycoverages,theinsurancecompanyisabletoreduceprocessingcosts,determinelossesmoreaccuratelyandpassthesesavingsontoyouintheformoflowerpremiums.

Theliabilityportionofthehomeownerspolicyisdesignedtoprotectyourassetsifyouaresuedbysomeonewhoisinjuredphysically,mentallyorotherwisewhileonyourproperty.

Mosthomeownerspoliciesofferyouliabilityprotectionforbodilyinjuryandpropertydamage.Itcoversnotonlythecostoftheclaim,butalsothecostofyourdefenseifyouaresued,andalimitedamountofcoverageforbailbondsandotherbondsrelatedtoaclaim.

Thestandardpolicy'sliabilityprotectioncoversinjuriesordamage

causedbyyou,amemberofyourfamilyorapet.Itappliestoinjuriesthatoccuronyourpropertyoranywhereintheworld.

It'simportanttopointoutthattheliabilitiescoveredbyhomeownersinsurancearisefromcivilnotcriminallaw.Ifyouorafamilymemberareindictedinacriminallawsuit,homeownersinsurancewon'tcoveranyresultingfinanciallosses.

TheJargonofLiabilityIssues

Onceagain,whoisinsuredunderyourhomeownerspolicybecomesanimportantissue.Whenthepolicysaysaninsured,itmeansthenamedin-

sured(you),aspouseandanyrelativesresidentinthehousehold,asdefinedonthedefinitionspageofyourpolicy.

Butwhenitcomestoliability,thecoverageisbroaderthanforproperty.Inthiscase,aninsuredalsoincludesanypersonororganizationlegallyresponsibleforanimalsorwatercraftownedbyahouseholdmember.Forexample:Youboardyourdogatakennelwhileyouareaway;whenoneoftheemployeestakesFidoforawalk,heorsheisinsuredifFidobitesanotherdog.

Ifyouoryourspousedies,allhouseholdmemberswhoareinsuredatthetimeofyourdeathwillcontinuetobecoveredwhiletheycontinuetoliveatyourhome.Butonlypropertycoveragecontinuesforlegalrepresentativesliabilitycoverageisnotextendedtolawyersoratemporarycustodians.

Whatiscoveredisjustasimportantaswhoiscovered.Whenitcomestoliability,bodilyinjurymeansharm,sicknessordisease,andincludesthecostofrequiredcare,lossofservicesordeathresultingfromtheinjury.Thisisoneofthemainkindsoflossthatconstitutesacivilliability.

Propertydamagemeansinjurytoordestructionoftangiblepropertyandincludeslossofuseoftheproperty.Lossofuseisanotherofthekeykindsoflossthatconstitutesacivilliability.

Occurrencemeansanaccident,includingcontinuousorrepeatedexposuretoconditions,thatresultsinbodilyinjuryorpropertydamage,neitherexpectednorintendedbyaninsuredperson.Asituationmustbedeemedanoccurrencebeforeinsurancewillapply.

TwoImportantLiabilityCoverages

Therearetwokindsofcoverageprovidedundertheliabilitysectionofahomeownerspolicynomatterwhichpolicyformyoubuy.

Thefirstliabilitycoverageispersonalliability.Thispaysaninjuredpersonusuallyathirdpartyforlossesthatareduetothenegligenceofaninsuredandforwhichaninsuredisliable.

Example:Macktakeshisdogoutforawalkwithoutaleash.Fornoapparentreason,Mack'sdogattacksEthelbert,whoisjoggingnearby.Ethelbert'sinjuriescosthim$10,000inlostincomeduringrecovery.MackispersonallyliabletoEthelbertforthis$10,000.

Thesecondliabilitycoverageismedicalpaymentstoothers.Thiscoversnecessarymedicalexpensesincurredwithinthreeyearsofanaccidentthatcausesbodilyinjury.(Anaccidentiscoveredonlyifitoccursduringthepolicyperiod.)

Medicalexpensesincludereasonablechargesformedical,surgicalanddentalcare,X-rays,ambulanceservice,hospitalbills,professionalnursing,prostheticdevicesandfuneralservices.

Intheexampleabove,afterMack'sdogbitesEthelbert,Mackalsowillbeliableforthestitches,shotsandothermedicaltreatmentEthelbertmightneed.

Medicalpaymentscoverageappliesonlytopeoplewhoareonthepremiseswiththepermissionofaninsuredperson.Someonewhocomesontoyourpropertytorobyourhouseandisattackedbyyourdogcannotcollectdamagesunderyourhomeownerspolicy.Thiscoveragedoesnotapplytomedicalexpensesrelatedtoyourinjuriesorthoseofanyonewholiveswithyou,exceptresidenceemployees.

Awayfromyourhome,coverageappliesonlytopeoplewhosufferbodilyinjurycausedby:

youranimalownedbyorananimalinyourcare(ifyouhappentobepet-sitting);

aresidenceemployeeinthecourseofemploymentbyyou;or

aconditionintheinsuredlocationorthewaysimmediatelyadjoining.

Insomecases,thesecostsaresimplydetermined;inothercases,thefactsmaybeunclearandtheinsuredpersonmayormaynotbelegallyliable.Inthesecases,theinsurancecompanyoftenwillpaymedicalcostsasagoodwillgesturetoavoidlegalaction.

Forinstance,sayavisitortoMack'shomeslipsandfallsonthefrontsteps.Theseinjuriesresultinmedicalexpensestothevisitorintheamountof$275.Later,thevisitorsuesMackfor$10,000,claiming

damagesfornegligence.Aninsurancecompanywilloftenpaythe$275quickly,inhopesofpreventingthelargerlawsuit.

Theinsurancecompanyhasplentyofincentivetoavoidlawsuits.Underthestandardhomeownerspolicy,itisobligatedtoprovidealegaldefenseagainstclaimseveniftheclaimsaregroundless,falseorfraudulent.Thecompanyalsomaymakeanyinvestigationorsettlementdeemedappropriate.

Allobligationsoftheinsurancecompanyendwhenitpaysdamagesequaltothepolicylimitforanyoneoccurrence.Bothpersonalliabilityand

medicalpaymentscoveragehavelimitsmedicalpaymentsisusuallymuchlowerthanpersonalliability.Unlessyourequestsomethingelse,youwillgetthebasiclimitsofthesecoverages,whicharetheminimumamountswritten.Buthigherlimitsofliabilitycanusuallybepurchasedforahigherpremium.

Personalliabilityinsuranceappliesseparatelytoeachinsuredperson,buttotalliabilitycoverageresultingfromanyoneoccurrencemaynotexceedthelimitstatedinthepolicy.Howdoesthiscomeintoplay?IfMackandhissisterarebothwalkingthedogwhenitbitesEthelbert,theybothmightbenamedinalawsuit.However,theirhomeownersinsurancewillcoverthemonlyuptothesinglelimit.

Ofcourse,ifMackwasinvolvedinonedogbiteincidentandhissisterwasinvolvedinanother,theinsurancewouldcovereachincidentseparatelyuptothelimit.

AdditionalLiabilityCoverageIssues

Personalliabilitycoverageprovidesthreekindsofinsurance,inadditiontothestatedlimitsofliability:

claimexpenses;

firstaidtoothers;and

damagetothepropertyofothers.

Claimexpensecoverageincludesthecostsofdefendingaclaim,courtcostschargedagainstaninsuredpersonandpremiumsonbondsthatarerequiredinalawsuitdefendedbytheinsurancecompany.

Expensesincurredbythecompanysuchasinvestigationfees,attorneys'fees,witnessfeesandanytrialcostsassessedagainstyoualsowillbecoveredbythepolicy.

Ifbondsarerequiredinthecourseofthelawsuit,suchasreleaseofattachmentorappealbonds,thecompanywillpaythepremiumbutitisundernoobligationtofurnishthebonds.Thatisyourresponsibility.

Claimexpenseinsurancealsocoverspost-judgmentinterest:Ifacourtjudgmentisrenderedagainstyou,thereusuallyisatimelapsebetweentherenderingofthejudgmentandthepaymentofthedamagesawarded.Thecompanywillpayanyinterestchargesaccruingonthedamageawardduringthistimeperiod.

Expensesforfirstaidtoothersarecoveredwhenthechargesareincurredbyyouandwhenthechargesresultfrombodilyinjurythatiscoveredbythepolicy.Expensesforfirstaidtoaninsuredpersonarenotcovered.

Ifdamagetothepropertyofothersiscausedbyaninsuredperson,thepolicywillprovidereplacementcostcoverageonaperoccurrencelimit.Thismeanseachliabilitysituationwillbetreatedseperatelyandthemaximumpolicycoveragewillapplyseparatelyeachtime.

Thisadditionalcoveragewon'tpayfor:

damagecausedintentionallybyaninsuredpersonwhoisatleast13yearsofage;

propertyownedbyyou(becausethiscoverageisdesignedtocoverpropertyownedbyothers);and

propertyownedandrentedtoatenantorapersonwhoisresidentinyourhousehold.

So,ifyouborrowacamerafromyourneighborandaccidentallydropitinyourswimmingpoolwhiletakingpictures,thiscoveragewillprovideupto$500toreplacethecamera.Butitwouldn'tprovidecoverageifyouweretodropyourowncamerainyourpool.(Personalpropertymight.)

MiscellaneousLiabilityConditions

Theliabilitycoverageinahomeownerspolicyincludesanumberofotherconditions,whichcanlimititsapplicability.Theseconditionsincludethefollowingparameters:

Ifyoudeclarebankruptcy,thisdoesnotrelievetheinsurancecompanyofitsobligationsunderthepolicy.

Personalliabilitycoveragewillbetreatedasexcessoveranyothervalidinsuranceunlesstheotherinsuranceiswrittenspecificallytobetreatedasexcessoverthepersonalliabilitycoverage.Thismeansthattheotherinsuranceautoinsurance,forexamplehastopayouttoitslimitbeforethepersonalliabilityunderthehomeownerspolicykicks

Yourdutiesintheeventofanoccurrenceincludeprovidingwrittennoticetotheinsurancecompanythatidentifiestheinsuredpersoninvolved,theinsurancepolicynumber,thenamesandaddressesofclaimantsandwitnesses,andinformationaboutthetime,placeandcircumstancesoftheoccurrence.

Youarerequiredtopromptlyforwardeverynotice,demandorsummonsrelatedtotheclaimand,whenrequested,toassistintheprocessofcollectingevidence,obtainingtheattendanceofwitnessesandreachingsettlement.

Youarenotcoveredifyouassumeanyobligationsormakeanypaymentsotherthanfirstaidtoothersfollowingabodilyinjuryexceptatyourownexpense.

Paymentofmedicalcoststoothersisnotanadmissionofliabilitybyyou.So,ifyourautoinsurancepaysformedicalcareforsomeoneinjuredwhileridinginyourcarwhenyoursonisdriving,yourhomeownersinsurancemightnotpayaliabilityclaim.Theinjuredpartymayhavetosubmittoaphysicalexamination,ifrequestedbytheinsurancecompany,andauthorizethecompanytoobtainmedicalreportsandrecords.

Thepolicyalsowillpayupto$1,000foryourshareofaneighborhoodhomeownersassociationorcondominiumlossassessmentmadebecauseofbodilyinjuryorpropertydamagesufferedbyapersononjointlyownedproperty.(Higherlimitsareavailable.)However,ifalocalgovernmentmakesachargeagainstyourassociation,yourshareofthelossisnotcovered.

Coveragealsowillapplyifyou,asavolunteerofficeroftheassociation,aresuedindividually.

WhenLiabilityCoverageDoesNotApply

Therearethreemajorcircumstancesunderwhichhomeownersliabilitycoveragedoesnotapply.Ifanyofthesecircumstancesappliestoyou,you'llprobablyneedseparateliabilityorothertypesofinsurance.

Thefirstcircumstanceisbusinessactivity.Personalliabilitycoverageisnotabusinesspolicyitwillonlycoverpersonalactivitiesandexposures.Thestandardpolicyformitselfstates:

Anyliabilityarisingpurelyoutoftheinsured'soccupationorbusinessand/orthecontinualorpermanentrentalofanypremisestotenantsbythe

insuredisexcluded.

Thesecondmajorcircumstanceunderwhichliabilitycoveragedoesnotapplyisinjurytomembersoftheinsuredhousehold.Beforethisexclusionwasaddedtothestandardpolicy,somecourtspermittedfamilymemberstosueotherfamilymembersandcollectdamages.Asaresult,peoplewouldusehomeownersliabilitycoverageasareplacementforotherkindsofinsuranceofteninsteadofhealthcoverage.

Thehomeownerspolicyisnotmeanttobeasubstituteforaccidentandhealthinsuranceandthisexclusionmakesitclearthatthereisnocoverageforaninjurysufferedbythenamedinsuredorotherfamilymemberswhoresideinthesamehousehold.

Thethirdcircumstanceunderwhichliabilitycoveragedoesnotapplyistheintentionalactofaninsuredperson,oractsthatcanbeexpectedtoproducebodilyinjuryorpropertydamage.Inotherwords,ifyoumeantohurtsomeone,yourhomeownersinsurancewon'tcoverdamages.

Inadditiontothesethreeexclusions,thereareanumberofothercircumstancesinwhichhomeownersinsurancedoesnotcoverliabilities.Theseincludethefollowing:

warorwarlikeaction(mostpolicieshaveawarriskexclusionlossesduetowararecatastrophicandsimplytoomuchforinsurancecompaniestoprotectagainst);

renderingorfailuretorenderprofessionalservices(again,businessactivitiesarenotcovered);

transmissionofacommunicablediseasebyaninsured;

sexualmolestation,corporalpunishmentorphysicalabuse;

theuse,sale,manufacture,delivery,transferorpossessionofcontrolledsubstances(illegaldrugs),otherthanthelegitimateuseofprescriptiondrugsorderedbyaphysician;

entrustmentbyaninsuredpersonofanexcludedvehicle,watercraftoraircrafttoanyperson,orvicariousparentalliability(whetherornotstatutorilyimposed)fortheactionsofaminorusinganyoftheseitems.

LifeinaFloodZone

Whileyourstandardhomeownerspolicywillcoverwaterdamagecausedbyheavyrains,mosthomeandbusinessownerscouldnotgetactualfloodinsuranceuntil1968,whenCongressvotedtocreatetheNationalFloodInsuranceProgram(NFIP).Priortothattime,the

federalgovernmenthadfocuseditseffortsonfloodcontroltechniques,suchasbuildingdams,leveesandseawallsandondisasterreliefforfloodvictims.

TheNationalFloodInsuranceActof1968tookanewtack.Itcreatedafederalprogramtoprovidefloodinsurancetocommunitiesinfloodzonesaslongasthecommunitiesreducedfuturefloodriskstonewconstruction.

Participationintheprogramisrequiredonacommunitybasisratherthananindividualbasisbecauselocalzoninglawsandbuildingcodesseriouslyaffecttheamountofdamageanareawillsufferduetoflooding.ThefederalgovernmentrealizedthatthewholecommunitywouldhavetogetbehindeffortstoreducedamageandfederalreliefcostsinordertomaketheNFIPwork.

Tobeeligibleforfloodinsurance,acommunitymustrequirepermitsforallconstructioninhigh-riskareas,andensurethatthematerialsandtechniquesusedinthenewconstructionwillminimizeflooddamage.

Butobtainingfloodinsuranceisn'ttheonlyreasoncommunitiesparticipateintheNFIP.Ifanareadidnotparticipateandthepresidentweretodeclarethatareaadisasterduetoflooding,thecommunitywouldnotbeeligibletocollectfederalaidfortherepairorreconstructionofinsurablebuildingsinSpecialFloodHazardAreas.Peopleinthosecommunitiesstillcouldreceiveotherformsofdisasterassistance,suchasfoodandemergencyshelter,buttheywouldn'tgetthegovernment'shelpinrebuildingtheirhomesandbusinesses.

Needlesstosay,thisisaprofoundincentiveforcommunityparticipationandalmostallofthecommunitieswithseriousfloodpotentialhavejoinedtheNFIP,whichisadministeredbytheFederalInsuranceAdministration,orFIA,acomponentoftheFederalEmergencyManagementAgency(FEMA).

Ifyoubuyahomeinafloodzone,themortgagelenderprobablywillrequirethatyoupurchasefloodcoverage.

WhatQualifiesforFloodInsurance?

Today,youcaninsurealmostanyenclosedbuildinganditscontentsagainstfloodlossifyourcommunityisparticipatingintheprogram.Ifyouliveinanareathatispronetoflooding,youprobablyknowthatyoursisoneofthemorethan18,000communitiesthatparticipate.Ifyou'renotsure,youcancontactalocalinsuranceagentorbrokeroryourlocalgovernment.

NFIPinsurancecanbewrittenonanybuildingthat:

hastwoormoreexteriorrigidwalls;

hasaroof;

isfullyanchoredtopreventflotation,collapseorlateralmovement;and

isprincipallyaboveground.

Mobilehomesthatareanchoredtopermanentfoundations,condos,condominiumassociationsandhomesthatareunderconstructionalsocanbecoveredbytheNFIP.

Buildingsthatarelocatedoverwaterorthatareprincipallybelowgroundcannotbeinsuredunderthisprogramandneithercantraveltrailersandconvertedbusesorvans.

WhataFloodInsurancePolicyDoesn'tCover

Manyfloodinsurancepolicyprovisionsaresimilartothosefoundinafireinsurancepolicy.Floodpoliciesdonotcover:

accounts,bills,currency,deeds,evidencesofdebt,money,securities,bullionandmanuscripts;

lawns,trees,shrubs,plants,growingcrops,petsandlivestock;

aircraft,self-propelledvehiclesandmotorvehicles;

fences,retainingwalls,outdoorswimmingpools,bulkheads,wharves,piers,bridges,docks,andotheropenstructuresonoroverwater;

undergroundstructuresandequipment,suchaswellsandseptictanks;

roads,machineryorequipmentintheopen;

newlyconstructedbuildingsthatarein,onoroverwater;and

structuresthatareprimarilycontainers,suchasgasorliquidstoragetanks(butsilosandgrainstoragebuildings,includingcontents,maybecovered).

Whatabouttheelementsofyourhomethatarebelowground?NFIPcoverageincludesprotectionforfoundationelements(includingposts,pilings,piersorothersupportsystemsforelevatedbuildings),utilityconnectionsandmechanicalequipmentnecessaryforthehabitabilityofthebuilding(suchasfurnaces,hotwaterheaters,clotheswashersanddryers,foodfreezers,airconditioners,heatpumps,electricaljunctionsandcircuitbreakerboxes).

HowMuchFloodInsuranceCanYouGet?

Theamountoffloodinsuranceyoucanpurchasedependsonthevalueofyourhome.However,themaximumlimitforfloodinsuranceis

$185,000forahouse,andanother$60,000foritscontents.Formanypeople,thismaynotbegintocovertheirlosses.

Ifyouliveinafloodareaandhaveahomethatisworthmorethantheselimits,youmaywanttoexploresurpluscoveragetoinsurethebalance.

Thetypesofitemsthatusuallyreceivelimitedcoverageinastandardhomeownerspolicy(art,jewelry,furs,gold,silver,etc.)receiveevenlesscoverageunderafloodpolicy.Themaximumcoverageforalloftheseitemsisjust$250.Coverageforbusinessequipmentinyourhomealsoislimited

to$2,500.Butyoucanpurchaseadditionalinsurancetoprotectallofthesethings.

BUILDINGCOVERAGE

AdditionalAmountsAvailable

RegularProgram

EmergencyProgram

Single-familydwelling*

$35,000 $150,000 $185,000

Otherresidential* $100,000 $150,000 $250,000Non-residential $100,000 $100,000 $200,000Smallbusiness $100,000 $150,000 $250,000CONTENTSCOVERAGE(perunit)Residential $10,000 $50,000 $60,000Non-residential $100,000 $100,000 $200,000Smallbusiness $100,000 $200,000 $300,000*HigherlimitsofbasiccoverageareavailableundertheemergencyprograminHawaii,Alaska,theU.S.VirginIslandsandGuam.

Inadditiontocoverageforthehouseanditscontents,thedwellingformofthestandardfloodinsurancepolicyalsoincludescoverageupto10percentofthepolicyamountforgaragesandcarports.Youalsocanschedulecoverageforupto10additionalbuildingsonyourproperty(ifyouhaveaworkshoporaguesthouse,forinstance).

BuyingFloodInsurance

WhiletheNFIPisafederalprogram,floodinsuranceissoldlocallythroughinsurancecompanies.Morethan200insurancecompaniescurrentlysellandservicefloodinsuranceundertheirownnames.

However,nomatterwhichcompanyyoubuyfloodcoveragefrom,theratewillbethesame,becauseitissetbytheNFIP.

Foronce,youdon'thavetoworryaboutthequalityofthecompanythatissellingyoutheinsurancepolicybecausethefloodinsurance

policyisbackedbytheNFIP.Themoneyforclaimscomesfromtheprogram,too.

However,youdohavetohavesomecontactwiththeinsurancecompanyfromwhomyoubuycoverageintheeventyouneedtofileaclaim.Thecompany'sadjusterwillvisityourpropertyandpassalongtheinformationgatheredtotheNFIP.

Yourrateswilldependonyourhome'sage,whereitislocatedandhowitwasbuilt.Howmuchyourcommunityhasdonetoreducetheriskoffloodingalsowillimpactyourrates.(This,inturn,mayinfluencethewayyouvoteinlocalelections.)

Ifyourhouseisonhighgroundandwasbuiltaccordingtocurrentstandards,yourratesmaybeaslowasafewhundreddollarsayear.Ontheotherhand,ifyouliveinahigh-riskarea,yourpremiumscouldbe10timesthatamountormore.

Deductiblesforfloodinsurancetypicallyarequitereasonable(especiallywhencomparedwiththedeductiblesforearthquakeinsurance)inthe$500to$750range.

Ifyouarebuildingahomenearthewater,itshouldbebuiltonadeep-pilefoundationtosurviveafloodoramajorhurricane.Frequently,homesbuiltonslabfoundationsaredestroyedinadisaster,whileneighboringhomesbuiltonpilingssurvive.Inanycase,iftheareainwhichyouareconsideringbuildinghasaproblemwitherosion,you'reaskingfortroublewhetherit'sMalibuorMississippi.

TodeterminetherelativeriskoffloodingforaparticularsitewhichobviouslyprofoundlyaffectsyourinsuranceratescheckaFloodInsuranceRateMap(FIRM).Eachcommunity'sFIRMisissuedbyFEMA,usuallyafteraFloodInsuranceStudyhasbeenperformedtoanalyzeriskzonesandelevations.

WhetheryourhomewasbuiltbeforeorafterFEMAcameinandcreatedthelocalfloodmapalsoimpactsyourrates.That'sbecausepre-existingstructuresinfloodzonesreceivesubsidizedratesandstructuresthatareshownbyafloodmaptobeoutsideofseriousfloodzonesbenefitfromevenlowerrates.Newerhomesoutsideofseriousfloodzonesgetthebestratesofall.

Becauseratesarerigid,theonlywayyoucansavemoneyonfloodinsuranceistoraiseyourdeductible,rebuildusingmoreflood-resistantmaterialsandtechniques,ormovetoalessflood-proneneighborhood.

Butevenmovingtoalessflood-proneareaisnoguaranteethatyou'llbesafe.Historically,aboutone-thirdofallclaimspaidbytheNFIPareforflooddamageinareasidentifiedashavingonly''moderate"or"minimal"riskofflooding.(Floodingintheseareastypicallyisaresultofinadequatedrainage.)What'smore,floodsandflashfloodsoccurinall50states.

Ifyourcommunitydoesn'tparticipateintheNFIP,youmaystillbeabletobuysomeleveloffloodcoverage.ContacttheNFIPfordetailsonyourarea.Youalsomaybeabletohavesomefloodcoverageaddedbyendorsementtoyourhomeownersordwellingpolicy.

IFeeltheEarthMove...

Earthquakeinsuranceisquitedifferentfromfloodinsurance.Foronething,itwasandstillis,insomecasesunderwrittenbyinsurancecompa-

nies,ratherthanafederalagency.Thismeanstheratesandpoliciesdifferfromcompanytocompany.

Sincethebeginningof1997,however,Californiansalsohavebeenabletopurchasecoveragethroughastateprogram,calledtheCaliforniaEarthquakeAuthority(CEA).CEApoliciesarelikefloodinsurancepoliciestheyaresoldbyinsurancecompanies,butclaimsarepaidbytheCEA.

TheCEAwascreatedbecauseofthe1994Northridgeearthquake,whichcausedsome$12.5billionindamagesmorethantheinsuranceindustryexpectedtopay.

BecauseCalifornialawrequiresinsurancecompaniestoofferearthquakecoveragewitheveryhomeownerspolicy,thevastmajorityofinsurancecompanieseitherstoppedsellingnewhomeownersinsurancepoliciesintheGoldenStateortheyscaledbacktheireffortsconsiderablyrestrictingnewpoliciestoareasunlikelytobeaffectedbyanearthquake.Onecompany20thCenturyevenmademovestowardgettingoutofthehomeownersinsurancefieldinCaliforniaentirely(thoughitlaterdecidedtocontinueofferingcoverage).

Meanwhile,thestatelegislaturewaslookingforwaystomakeearthquakecoverageaccessibleandaffordableandtoencourageinsurancecompaniestowritehomeownersinsuranceinthestate.Aftermuchdebate,inSeptember1996,anactcreatingtheCEAwassignedintolaw.

TheCEAisfundedinlargepartbyinsurancecompanieswhichmustpaytojoin,iftheywanttosellCEApoliciesalongwiththeirownhomeownersinsurance.Therestoftheupto$10.5billioninfundingcomesfrominvestorsandCaliforniaconsumers,viatheirpremiumdollars.

CEApoliciesarebare-bonesthey'recertainlymorerestrictivethanthe

policiesinsurancecompanieshadbeenofferingpriortotheNorthridgequake.AndCEApoliciesaren'tcheap,either.ThishaspromptedsomeconsumergroupstofighttheCEAandtodecrytheplanas"corporatewelfare"forlargeinsurancecompanies.Somescientistsandconsumershavebeenfightingthewayrateshavebeenset,aswell.Meanwhile,homeownersarelefttryingtodecideifthecoverageisworththemoney.

Unfortunately,CEApoliciesarequicklybecomingtheonlygameintown.WhiletheCEAwasbeingcreated,thelegislatureauthorizedinsurancecompaniestooffermorebare-bonescoveragetoCaliforniansallowingthemtowritepoliciesremarkablyliketheonethatisnowofferedbytheCEA.Mostinsurancecompaniesmodifiedtheirexistingearthquakepolicieswhentheycameupforrenewalrestrictingthecoverageandraisingthedeductible.NowthattheCEAisinoperation,mostinsurancecompanieshavesimplyconvertedtheirpoliciestoCEApoliciesonrenewal.

TheCEAPolicy

EarthquakeinsurancefromtheCEAorfromaprivateinsurancecompanyiswritteninadditiontoahomeownersordwellingpolicy.Thisisimportanttonote,becausetheamountofcoveragethatyouhaveonyourhomeunderanearthquakepolicyislimitedtotheamountofcoverageyouhaveonyourhomeunderyourhomeownersordwellingpolicy.

TheCEApolicyalsoincludesa15percentdeductible.So,ifyouhavea$100,000homeownerspolicy,youhavetopaytorepairthefirst$15,000worthofdamagetoyourdwellinganditscontentsafteranearthquake.Thentheearthquakecoveragekicksin.(Rentersonlyhavea$750deductibleonearthquakepersonalpropertycoverage,sincetheydon'thavedwellinginsurance.Rentersmaywantanearthquakepolicy,becausetheirlandlord'scoverageextendsonlytothebuilding;itdoesnotprotecttheirbelongings.)

However,theCEAearthquakepolicydoesnotcoverdamageto:

detachedgarages;

pools;

driveways;

masonrywallsorchimneys;

fences;or

landscaping.

Condoandco-opownerscanonlypurchasecoverageuptoa$25,000limit.

Coverageforyourpersonalpropertyalsoisquitelimited,whetheryouareahomeowner,condoownerorrenter.TheCEApolicywillonly

payupto$5,000foryourbelongingsandtherearerestrictions.

TheCEApolicyalsowillpayupto$1,500forlivingexpenses,ifyourhomebecomesuninhabitableduetoaquake.

Ifyouhavesubstantialdamagetoyourhomefromanearthquake,includingatremendousnewholeinyourroof,yourinsurancecompanywillexpectyoutosealitoffsorainwillnotcausemoredamage.Also,ifaftershocksdamagetherepairsinprocess,yourinsuranceshouldpayforthesemultiplerepairs.

Clearly,CEApoliciesdon'tofferalotofcoverage.Unlessamajorearthquakehits,yourhomeprobablywon'tevensustainenoughdamagetocoveryourdeductible.Thesearetruecatastrophicinsurancepoliciesdesignedtocoveryouonlyintheeventofacatastrophe.

ThegoodnewsisthattheCEApolicydoesatleastofferreplacementcostcoverage.

IfyouwantmorecoveragethanthatofferedbytheCEA,yourchoicesarelimited.Youmaybeabletopurchasewhattheinsuranceindustrycallswraparoundcoverage.Withthissortofcoverage,youwouldbuyaCEApolicyandawraparoundpolicytopaypartofthedeductible,forexample,ortogiveyoumorecoveragethanthemaximumlimitsallowedbytheCEA.

However,onlyoneinsurancecompanyUSAAwasplanningtoofferwraparoundcoverageinthemonthsaftertheCEAprogramwasputinplace.Itswraparoundcoveragewaslimitedtoadditionalinsuranceforpersonalpropertyandlivingexpenses,raisingthoselimitsto$25,000and$5,000(respectively),or$50,000and$10,000,or$100,000and$20,000.

MostinsurancecompaniesthathavejoinedtheCEAdonotplantoofferwraparoundcoveragebecausethey'retryingtolimittheirlossesfromearthquakesnotincreasethem.

BuyingCEAEarthquakeInsurance

TopurchaseaCEAearthquakepolicy,yourbestbetistocontactthecompanywhowritesyourhomeownersinsurance.IfthatcompanyisparticipatingintheCEA,itcanwritetheadditionalcoverageforyou.Ifyouarenewtothemarket,youwillneedtofindaninsurancecompanythatisparticipatingintheCEA.

ToqualifyforCEAcoverage,youmusthaveahousethatwasbuiltin1960orlater.Or,ifyourhousewasbuiltbefore1960,itmustbeanchoredtothefoundation,itmusthavestructurallysoundweight-bearingwallsbracedwithplywoodoritsequivalent,anditshotwaterheatermustbesecuredtothebuildingframe.

Ifyouhavebeenunabletopurchasehomeownersinsurancethroughaninsurancecompany,youcangethomeownerscoverageandearthquakeinsurancethroughCalifornia'sFAIRPlan.Atonepoint,theFAIRPlansolditsownearthquakepolicies,buttheywereconvertedtoCEApoliciesinMarch1997.

HowMuchDoesItCost?

Ratesforcoveragedependonwhereyourhomeis,whenitwasbuiltandwhetheritisofframe(woodorstucco-coveredwood)ormasonry(brick,stone,adobeorconcreteblock)construction.(Masonryratesareusuallysignificantlyhigherthanframerates.)Earthquakeretrofitting(bringinganolder

homeuptocurrentbuildingcodespecifications)alsowillreduceyourratesandyourriskofdamage,ofcourse.

TheaverageCEArate,statewide,is$3.29peryearforevery$1,000ofcoverage.However,therangeofratesisquitebroadvaryingasmuchas60percentfromonepartofthestatetoanother,andevenwithinagivencounty.

Oddlyenough,someareasthattraditionallyhavebeenconsideredhigh-riskzoneshavelowerratesthansomeareasthattraditionallyhavebeenconsideredlowerrisk.Howdidthishappen?Forthemostpart,theratesweredevelopedbyEQEInternational,aSanFranciscofirmthatspecializesinhelpingcompaniesandhomeownersidentifyandreducerisksthatcouldleadtomajordamageduringanaturaldisaster,suchasanearthquake.

Todeterminetherisksinvariousareasand,therefore,theratesthatshouldbechargedEQElookedateverysingleCaliforniaearthquakepolicyinforceandranitthroughacomputermodel.Thefirmconsideredsoiltypes(whichrangefrombedrockthesafesttothekindofsoft,siltysoilyouwouldfindatthebottomofariverbed,whichisthemostpronetodamage).

Italsolookedattheageofthehomesinagivenareabecauseearthquakecodeshavechangedovertheyears,asfolkshavelearnedwhattypesofconstructiondoanddonotwithstandquakes.And,finally,thecompanylookedatthekindoffoundationvarioushomeshadandhowthosehomeswereattachedtothefoundation.

EQEthendevelopedratesbasedonZIPcodesbrokendownwithineachZIPcodefordifferenttypesofconstruction,age,andkindofdwelling(includinghouses,apartments,condosandmobilehomes).Thisresultedin5,000differentrates.

Then,theCEAhadanactuaryworktoreducethetotalnumberofrates.Actuariesarethenumber-cruncherswhodoalotofthebackgroundworkforinsurancecompanies(andotherfirms).Theyfigureouthowmuchofariskisposed,howtogrouprisksinameaningfulway,howtoaddthecostsofoverheadintotheratesandsoon.

Theratesforthese19differentterritoriesrangefromabout$1to$5.25per$1,000ofinsuranceperyear.

PolicyholdersalsomaywinduphavingtopaymorethanjusttheirpremiumsunderaCEApolicy.Ifyoureadthefineprint,you'lldiscoverthatyoumaygethitwithapolicyholderassessment,whichsaysthatifamajorearthquakestrikesandtheCEA'sbillionsofdollars'worthofresourcesarewipedout,theagencycanbillyouagain.

Butthepolicyholderassessmentcannotexceed20percentofyourannualearthquakeinsurancepremium.

WarrantyInsurance

Ifyou'rebuyinganewhome,youalsomaywanttopurchasewarrantyinsurance.Why?Mosthomeownersinsurancepoliciesexcludecoverageforthecostofdefectiveconstructionorunforeseenrepairstonewhomes.

Insuredwarrantypoliciesusuallycostseveralhundreddollars.Theycovermajorstructuralrepairsforasmanyas10yearsandlesssevereproblemsforoneortwoyears.Butaseriesoflawsuitshasraisedconcernsaboutwhetherownersofthesepolicieshavebeengettingtheirmoney'sworth.

Withgrowingfrequency,particularlyincaseswherethehomebuilderhasgoneoutofbusiness,warrantiesareleadingtodisputesbetweenthenewhomeownersandtheinsurancecompanyoverwhetherthecoverageappliesunderthecontract.Usually,suchdisputesareheardbyarbitrators.

Oneoftheproblemswithbuyinganewhomeisthat,ifthebuildergoesoutofbusiness,itwon'tbearoundtomakegoodondefects.Warrantyinsuranceisexpensiveonastrictlyactuarialbasisbecausesofewpeoplemakeclaimsonit.Butitmakessenseforpeoplewhohavedoubtsabouttheviabilityoftheirbuilder.

Conclusion

It'salmostaclichéthoughperhapsatrueonetonotethatmanypeoplehavemostoftheirfinancialwell-beingtiedupintheirhomes.That'swhyit'ssoimportanttohaveabasicunderstandingofhowhomeownerscoverageworks.Whilethekindsofcoverageofferedby

homeownerspoliciesarefairlystandard,theamountsofcoveragemayvary.

Traditionally,liabilitycoveragehasbeenoneofthedistinguishingcharacteristicsofhomeownersinsurance.It'swhatseparateshomeownerscoveragefromstand-alonedwellingorfirecoverage.Butliabilityinsurancehasbecomesoimportantthateventhisdistinctionisfading.Increasingly,liabilitycoverageisbeingaddedtodwellingandfirepolicies.Whenliabilitycoverageisnotattachedtoadwellingpolicydirectly,itsometimesiswrittenasaseparatepolicy.

Liabilitycoveragehastwoparts:personalliabilitycoverageandmedicalpaymentscoverage.Ifdamagewascausedbyyou,yourspouse,yourchildrenoryourpetstoanotherpersonorpersonsonthepremisesofyourhome,you

canbeheldliable.

Propertycoverageisthemostcommoncoveragepeoplethinkofwhentheyshopforhomeownersinsurance.Thisisinsuranceforfiresanddamagesthatcandestroyyourhouse.Theamountsofcoverageofferedbythissectionofthepolicycanvarywidelyonlocationandinsurancecompany.

Itisimportanttoknowthedifferentdefinitionsofcoverageandhowtheyapplytoyoulegally.Itisalsoimportanttoknowwhenlimitsofcoverageoccurinyourinsurancepolicy,andwhentheinsurancecompanystopspaying.

KeyQuestions

Thisistheinformationyou'llneedtodecidewhetheryouwanttogethomeownersordwellingcoverage.You'llalsoneedthisinformationbeforeyoucallaninsuranceagentorothersalespersontopurchasedwellingcoverage.

1)Isthiscoverageforyourprimaryresidence?No YesNo

Ifyouansweredyes,you'llprobablywanttopurchasehomeownersratherthanstand-alonedwellinginsurance.However,

answeringafewmorequestionswillhelpyoudecide.

2)Isyourhomeineligibleforhomeownerscoveragebecauseofitsage,locationorvalue?

3)Isyourhomeineligibleforhomeownerscoveragebecauseitisnotasingleortwo-familyresidentialproperty?

4)IfyouansweredyestoQuestion3,isthishomeatriplexorafour-familydwelling?

Ifyouansweredyestothethreequestionsabove,youprobablyneeddwellinginsurance,sinceyourhomecannotqualifyforahomeownerspackagepolicy.

5)Isthisarentalproperty? YesNo

Ifyes,youmaywanttopurchasedwellinginsuranceinsteadofhomeowners(e.g.,ifthisisasecondhomethatyourentoutmostorallofthetime).However,rentalandotherinvestmentpropertiesmaybebetterservedbyacommercialinsurancepolicy.

6)Isthiscoverageforadwellinginthecourseofconstruction? YesNo

Again,youmaynotneedallofthecoveragesavailableonahomeownerspropertyifyoualreadyhaveliabilitycoverageonanotherinsurancepolicy(e.g.,forthehomeyouliveinwhileyou'rebuildingthisone,oronyourrentersinsurancepolicy).Ifyouaregoingtogetdwellingcoverage,here'swhatyouneedto

knowbeforeyoucallanagentorsalesperson:

1)Howmuchdwellingcoveragedoyouneedforyourhouse?(Remembernottoincludethevalueofthelandyourhomeisbuilton.)_______________________________________

2)Doyouwanttogetabasicpolicy,abroadpolicyoranall-riskpolicy?_______________________________________

3)Howmuchcoveragedoyouneedforotherstructures(adetachedgarage,aguesthouse,atoolshed,aworkshop,etc.)?_________________________________________________

4)Howmuchcoveragedoyouneedforyourpersonalproperty?(TheHouseholdPropertyInventoryinChapter7willhelpyoucalculatethis.)_________________________________

5)Howmuchcoveragedoyouneedforlossoffairrentalvalue?(Ifyourentoutaportionoftheproperty,howmuchareyoucharging?)_______________________________________

6)Doyouneedanyofthefollowingendorsements?

a)Dwellingsunderconstruction YesNo

b)Ordinanceorlaw YesNo

c)Sinkholecollapsecoverage YesNo

d)Waterbackupthroughsewersordrains,overflowofsumppump

e)Inflationguard YesNo

f)Broadtheftcoverage YesNo

g)Off-premisestheftcoveragE YesNo

h)Watercraftcoverage YesNo

7)Doyouwanttoaddpersonalliabilitycoverage? YesNo

8)Howmuchliabilitycoveragedoyouneed?__________________________________________________Doyouwanttopurchaseadditionalmedicalpayments YesNo

9)coverage?

Ifyes,howmuch?____________

Catastropheinsurancequestions.

1)Doyouliveinafloodzone? YesNo

2)Hasthereeverbeenaflashfloodinyourarea? YesNo

3)Doesyourhousequalifyforfloodinsurance? YesNo

4)Doyouneedsurplusfloodcoverage,ontopofthe$185,000maximumforyourhomeand$60,000foritscontents?

5)Doyouneedadditionalfloodcoverageforart,jewlery,furs,silver,etc.?

6)Doyouliveinanearthquake-pronearea? YesNo

7)IfyouliveinCalifornia,canyougetcoverageunderwrittenbyaninsurancecompany,orareyoulimitedtoaCEApolicy?(Youmayhavetocallafewagentstofindout.)

8)DoyouneedwraparoundcoveragetosupplementaCEApolicy?

9)Doyouneedwindstormcoverage? YesNo

10)Doesyourhousemeetthelatestbuildingcodes?(Thismaysaveyoumoneyonyourpremiums.)

11)Canyoutolerateahigherdeductible?(Thisalsoshouldsaveyoumoneyonpremiums.)

12)Canyouaffordtogowithoutcatastrophecoverage? YesNo

Chapter7GettingtheHomeownersInsuranceYouNeedNowthatyouhaveabasicunderstandingofhowhomeownersinsuranceworks,it'stimetofigureouthowmuchcoverageyouneed.

Yourchoiceofwhichcoverageandhowmuchcoveragetopurchasewillbeinfluencedbyanumberofmarketfactors.Eventhoughinsuranceisaregulatedindustry,therecanbealotofdifferencebetweentwoinsurancecompaniesfromthewaytheychargepremiumstothewaytheysettleclaims.

So,you'llwanttocomparepoliciesfromatleasttwoorthreedifferentcompanies,tobesureyougetthebestpossiblecoverageandthebestpriceforthecoverageyouwant.Butdon'tshoppricealone.Youalsowillwanttocompareinsurancecompanies,becauseyou'llwantthecompanytobearoundandfinanciallystableifyoueverneedtofileaclaim.Andyou'llwantyourratestoremainstable,too.

StartWiththeValueofYourHouse

Becauseinsurancecompanieswritecoveragebasedonthevalueofyourhome,thisistheplacetostartwhenyouaredeterminingyourhomeownersinsuranceneeds.Youalsoknowhowmuchitcosttobuyyourhouseandhowmuchyouoweonit.Andyouprobablyhaveagoodideaofthecurrentmarketvalueofyourhome.

Butremember:Themarketvalueofyourhomeincludesthevalueofthelandanditslocationsuchthingsasthequalityoflocalschoolsandpolice,thecrimelevelinyourareaandthequalityoflifein(ordesirabilityof)thearea.Thesethingscan'tbereplacedbyinsuranceonlythevalueofyourhomeandpersonalpropertycan.Therefore,thevalueoftheseotherfactorsshouldnotbeincludedin

theamountofhomeownersinsuranceyoupurchase.

Todecidehowmuchinsuranceyouneedtobuy,agoodplacetostartisfiguringouthowmuchitwillcosttorebuildyourhouse.That'sthebasevaluethatdefinesthefinalamountyourhomeownersinsurancewillpayforrealpropertydamage.

Todeterminetherebuildingcost,youcanaskaninsurancecompany,realestateagentorappraisertocalculatethecurrentcostofconstructionforahouselikeyours.Theappraisalwilldependonobjectivecriteriasquarefootage,numberofbedroomsandcomparablevaluesinthearea.It'sanimpersonalprocess,evenmoresothansellingahouse.

Beingasaccurateaspossiblewiththisfigureisimperative.Why?Becauseoftheco-insurancepenaltyweconsideredinthepreviouschapter:Ifyoupurchaseanamountofinsurancethatislessthan80percentofthecosttorebuild,youforfeittherighttocollectthefullreplacementvalueforyourproperty,evenifyouonlysufferapartialloss.

Example:Ifthereplacementcostofyourhouseis$100,000andyouhaveafireinthekitchenthatcauses$10,000indamage,you'llcollect$10,000aslongasyouhaveatleast$80,000ininsurance.

Anotherexample:Youbuy$100,000ofcoveragetheestimatedreplacementcostonyournewhome.Afewyearslater,thehouseburnstotheground.Atthattime,it'sdeterminedthatthefullreplacementcostis$110,000.Inordertocollectforthislossonareplacementcostbasis,youmustbecarryingatleast80percentof$110,000,whichis$88,000.Sinceyou'vegot$100,000,youwillgetfullreplacementcost.

Ifbuildingcostshadskyrocketedinyourarea,youmaynothaveenoughcoverage.Clearly,itisimportanttokeepcurrentwiththelocal

coststorebuild,soyoucanbesureyouhavesufficienthomeownersinsurance.

WhatIfYouHaveLessthan80Percent?

Ifyou'reinsuredforlessthan80percentofthecosttorebuild,youhaveputyourselfinariskysituation.Thisriskiscalledimpliedco-insurance.Whyisthissuchabigrisk?Becausetheinsurancecompanywillnotpayoffinfullwhetheryourhouseiscompletelyoronlypartiallydestroyed.

Instead,itwillmaketwoestimates.Thefirstistheactualcashvalue(ACV)ofthepartofthehouse(orotherstructure)thatneedstoberebuilt.Theactualcashvalueisthereplacementcost,lessdepreciation.

Example:Ifyourkitchencabinetswerecompletelydestroyedbyacoveredperil,theinsurancecompanywouldlookfirstatthecurrentreplacementcost,thenaccountforthelengthoftimeyou'vehadthosecabinets.So,ifnewcabinetscost$10,000andtheinsurancecompanyfiguresthatyourshaddepreciated30percentduetoageanduse,apolicyprovidingACVrecoverywouldpay$7,000.

Thesecondestimateisbasedonhowmuchinsuranceyou'vepurchased.Ifyour$100,000homeisinsuredfor$60,000,youhaveaninsurancepolicyworthonlythree-fourthsoftherequired80percent.Ifyoufilethat$10,000claimforyourcabinets,theinsurancecompanywillpaythelargeroftwoamounts:eitherthree-fourthsofthe$10,000repairbill($7,500,lessyourdeductible)ortheactualcashvalueofthepartofthebuildingthatwasdestroyed($7,000).Youwillberesponsiblefortherestoftherepairbill.

StrategicOptionsforBuyingHomewonersInsurance

Ifyouarecautious,youmaywanttopurchaseahomeownerspolicythatwillpayfor100percentoftherebuildingcosts.Sayyouhavea$100,000homethatsuffers$90,000indamage.Witha100percentreplacementpolicy,theinsurancecompanywillpay$90,000.

Ifyouarewillingtotakeonsomerisk,buyapolicythatpays80percentoftherebuildingcosts.Ifyour$100,000homeisinsuredfor80percent,themaximumvalueofthepolicyis$80,000.Ifyouhadapartialclaim,theinsurancecompanystillwouldpayoffinfull.Butifyourhomesuffered$90,000indamage,theinsurancecompanywouldpayonly$80,000.

Thesurestwaytoarrangefullcoverageistobuyaguaranteedreplacementcostpolicy,whichwillpayupto50percentmorethanthefacevalueofthepolicytorebuildyourhome.(Afewcompaniesofferunlimitedcoverage.)

Withaguaranteedreplacementcostpolicy,theinsurancecompanyautomaticallyadjuststheamountofinsuranceeachyeartokeepupwithrisingconstructioncostsinyourarea.Thepolicyalsoprotectsyouagainsttheunexpected,suchasasuddenincreaseinconstructioncostsduetoashortageofbuildingsupplies(aproblemthatoccurred

whenHurricaneAndrewravagedFlorida'sAtlanticCoastafewyearsback).

Companiesthatofferguaranteedcoverageusuallyrequirethatyouinsureyourhousefor100percentofitsreplacementcost.(Ownersofhigh-riskorolderhomesmaynotbeeligibleforthistypeofpolicy.)

IfYouHaveaMortgage

Ifyouhaveamortgageonyourhouseandthefaceamountofyourhomeownerscoverageisbasedonyourmortgage,makesureitissufficienttocoverthecurrentcostofrebuilding.

Somehomeownersgetintoautomaticinsurancepackagesthatlimittheamountofhomeownerscoveragetotheamounttheyoweontheirmort-

gages.Ifyouhavethiskindofinsuranceandespeciallyifyou'vepaidoffagoodpartofyourloantakesometimetoreviewitscoverage.Ifyourhouseisdestroyed,yourmortgagecompanywillbepaidoff,butyoucouldbeleftwithoutmoneytorebuild.

BuildingaHome?

Whatifyou'reinthemiddleofbuildingorextensivelyrenovatingorremodelingyourhome?Willahomeownerspolicycoverit?Thatdepends.

Insurancecompaniesareverystrictwhenitcomestostructuresthatarevacant(ithasneitheroccupantsnorcontents),unoccupied(ithascontents,butnooccupants)orunderconstruction.Somepropertyinsurancecoveragesmaybesuspendedautomaticallywhenabuildingisvacantorunoccupied,orwhenithasbeenvacantorunoccupiedbeyondaspecifiednumberofdays.

However,buildingsthatareunderconstructioneitherwhentheyarefirstbeingerectedorwhentheyarebeingremodeled,renovatedorrepairedextensivelyarenotconsideredvacantorunoccupied.So,ifyouhavecoveragealready,itshouldnotbesuspended.Nonetheless,it'salwaysagoodideatodiscussthesituationwithyourinsurancecompanyoragent.Askifthepolicyyou'rebuyinghasanyunusualtermsforcoverageofbuildingsthatareunderconstructionorbeingremodelled.

Ontheotherhand,ifyouarebuildinganewhouse,youreallydon'tneedacompletepackageofhomeownersinsurance.Itdoesn'thaveanypersonalpropertyinityet,andyouprobablyhaveliabilityprotectionunderanotherpolicy(yourexistinghomeownersorrentersinsurance).Inthiscase,considerbuyingonlyacauseofconstruction(COC)policy,whichissoldasastand-alonepolicy.(SeeChapter3.)

Eitherway,theamountofinsuranceshownforadwellingunderconstructionisaprovisionalamount,usuallybasedontheexpectedcompletedvalue.Theamountofcoverageactuallyineffectonanygivendateisapercentageoftheprovisionalamount,basedonhowclosethedwelilngistocompletion.

OtherStructures

Onceyou'vefiguredouthowmuchrealpropertycoverageyouneedforyourhouse,youneedtoconsidertheamountofcoveragerequiredforanyotherstructures.

Buildingsthatarenotattachedtothehouse(garages,guesthouses,toolsheds,etc.)areinsuredseparately,andthestandardamountofcoverageisa

percentageofthefacevalueofthepolicyusually10percentwhichisprovidedasanadditionalamountofinsurance.Forexample,ifyouhavea$100,000policyforthedwelling,youautomaticallygetanadditional$10,000worthofcoverageontopofitforotherstructures.

Thisprobablyisenoughiftheotherstructureinquestionisaworkshedoraone-cardetachedgarage.Butaguesthouseoramoreextensiveprojectshopmayrequireadditionalcoverage.

Thiscanbepurchasedforalittlemoremoneybyrequestingeitherhigherlimitsfordetailedorlistedstructuresoradditionalcoverage(usuallycalledarider)fortheextralivingspace.

Pools,hottubs,gazebos,mechanicalwaterfallsandothervaluableoutsideitemsusuallyareincludedonthe''otherstructures"limit,aswell,andshouldbeconsideredwhenyoudetermineyourcoverageneeds.

KeepingTrackofYourPersonalProperty

Thenextareatoconsiderbeforeyoupurchasehomeownersinsuranceisthevalueofyourpersonalpossessionsorproperty.Astandardhomeownerspolicywillprovideanadditional50percentofthefaceamountofcoverageforyourpersonalproperty.Ifyouhavea$100,000policy,youwillgetanother$50,000tocoveryourpossessionsintheeventofatotalloss.

Willthatbeenough?

Personalpropertycanbetoughtovalueaccurately.Onesimplewaytocalculateyourinsuranceneedsistomakealistofeverythingyouownthatcouldgenerallybedescribedaspartofyourhouseholdincludingfurniture,carpets,drapes,artorotherdecorations,appliancesandclothes.Includetheserialnumber(ifapplicable)andabriefdescriptionoftheitem.Alsolistthepurchaseprice,alongwiththe

yearyouboughttheitem.

Toorganizethisinventory,it'seasiestifyoudividethelistintorelevantroomsinthehouse.Thechartonthefollowingpagesshouldhelp.It'sagoodideatohangontoreceiptsorbillsasbackupintheeventofaclaim,especiallyforexpensiveitems.

It'salsoagoodideatotakephotographsofalltheroomsinyourhomeandkeepcopiesofthosephotosalongwiththereceiptsandthisinventorylistinasafeplace,suchasasafedepositbox.Somepeoplegoasfarasphotographingeachwallofeachroomwithclosetorcabinetdoorsopentobackuptheirwritteninventory.Onthebackofeachpicture,theywritethedate,thegenerallocationandthecontentsshown.Anddon'tforgettoupdateyourinventoryregularly.

Thetotalvalueofallofyourpossessionswillgiveyouanideaofhowmuchpersonalpropertycoverageyouneed.Butit'snottheonlyconsideration.Therearealsoexclusionstocontendwith.

SomeKindsofPersonalPropertyareSpecial

Insurancecompaniesdon'tconsideralltypesofpersonalpropertyequal.Someitemsparticularlythosewithahighvaluewillhaveseparatelimitsunderahomeownerspolicy.

Thefollowingisalistofthekindsofitemsthataretreateddifferently,andtheirtypicallimits:

$3,000oncomputers;

$2,500onsilverware,silver-plate,goldware,teasets,gold/silver-platedtrophies,etc.(somepolicieshavesubstantiallyhigherlimits);

$2,500onfirearms;

$2,500forbusinesspropertykeptathome.

$1,000to$2,500onjewelry,watchesandfurs;

$1,000or$1,500onsecurities,deeds,manuscripts,passports,stampsandothervaluablepapers;

$1,000or$1,500onwatercraft;

$500or$1,000ontrailersnotusedforwatercraft;and

$200oncoincollections,gold,silver,medalsandcurrency.

Somepoliciesalsoplacealimitonthingslikegardentractors,ridinglawnmowers,etc.

Theselimitsapplytoeachcategoryofitem,noteachitem.Ifyouhaveasubstantialamountofjewelryorcomputerequipmentorcameragearoranythinglimitedunderthepoliciesyouareconsideringyouwill

wanttobuyadditionalinsurance.

Youcanraisethelimitsonanyofthesecategoriesoronspecificvaluables.Butyou'llhavetopayanadditionalpremium,ofcourse.

Youcanaddsomeitemstoyourpolicybyschedulingthemforspecialcoverage.Schedulingisusuallythecheapestwaytoobtainadditionalcoveragebutthisoptiondoesn'talwayscovervaluablepropertysufficiently.Oryoucanpurchaseafloater,whichisseparateinsurancebondedwithahomeownerspolicy.Thecostoffloatersisusuallyminimalandit'scertainly

bettertosecureadequateinsurancethantoriskleavingfamilyheirlooms,expensiveequipmentandprizedpossessionsuninsuredandunprotected.

CheckOuttheCoverageTermsYourself

Differenthomeownerspoliciesmayapplyvariouslosssettlementtermstodifferentkindsofproperty.Inotherwords,evenifthepolicyoffersfullreplacementvalueforthehouse,itmayofferonlyactualcashvalueforspecifickindsofproperty.

Hereareafewexamples,takenfromactualpolicies:

Personalpropertyandstructuresthatarenotbuildings(e.g.,aTVantennatower)arevaluedatactualcashvalue(replacementcostlessdepreciation)orthenecessarycostofrepair.

Awnings,carpeting,etc.,mightbeconsideredasbuildingitems,butaretobevaluedatactualcashvalueandnotreplacementcost,whichistheusualsettlementbasisforbuildings.

Youneedtolookforthesesortsofshiftswhenyou'rebuyinghomeownersinsurancethatyouthinkcoversfullreplacementvalue.Infact,youshouldbecarefulofpromisesorassurancesthatagentsgiveyouaboutpoliciesthatcoverfullreplacementvalue.Thistermisusedfreelybutitonlyappliesacrosstheboardinrelativelyfewpolicies.

WhatAboutLiabilityCoverage?

Mostpeopledecidehowmuchhomeownersinsurancetheyneedbasedonthecostofreplacingthehouseanditscontentsincaseoffireorotherdisaster.Buttheyoftenoverlookwhetherthepolicyprovidesenoughliabilitycoverage.Inthelastchapter,weconsideredthe

reasonsthatliabilitycoverageisimportant.

Howmuchliabilitycoveragedoyougetonyourhomeownerspolicy?Mosthomeownerspoliciespayupto$100,000eachtimesomeonemakesalegitimateliabilityclaimagainstyou.Iftheliabilityclaimagainstyouismorethan$100,000,youwouldhavetopaythedifference.

Theliabilityportionofthepolicyisdesignedtoprotectyourassetsifyouaresuedbysomeone.Anyonecansueyouanangryneighbor,theguywhoboughtyour'69Plymouth,theparentsofakidontheLittleLeagueteamyoucoach.Ifthepersonsuingyouwinsajudgmentincourt,youeitherhavetoreachacashsettlementorfacethepossiblitythatthecourtwillplacealienagainstwhateverequityyouhaveinyourhouse.

(pleaseturntopage165fortherestofthechaptertext)

Theclaimsagainstyoudon'tevenhavetoholdupincourttohurtyoufinancially.Thecostofhiringanattorneytodefendyouinacivillawsuitcaneasilyreach$10,000.Thisisanotherreasonliabilityinsuranceisvaluableitcoversthecostsofmountingyourlegaldefense.

Theassetsyouhavetoprotectincludemorethanjustthevalueofyourhouse.Theyincludethevalueofitscontents,aswellasthevalueofotherpropertythatyouownvacationhomes,cars,rentalproperty,investments,collectibles,etc.So,itprobablymakessensetobuyatleast$100,000ofliabilityinsurance.

Youcanalsobuyhigherliabilitycoveragelimitsandtheyarearelativelyinexpensiveandworthwhileadditionalinsurance.

Buthowmuchmoreshouldyoubuy?Somepeopleinsureagainstthenon-mortgagedequitytheyowninahome;othersinsureagainstthetotalassessedvalue.Thelatteristhesaferstrategy,andit'susuallyavailable.

Ifyourhouseisworthseveralhundredthousanddollars,youhavealargeenoughinvestmentthereandprobablyelsewhere,toothatitneedsasmuchcoverageasyoucanbuyatareasonableprice.

Evenifyoudon'thavemillionsofdollarsinvestedinstocksandbonds,youprobablydohavesomemoneyputawayinaretirementfund.Whetherthisinvestmentisanindividualaccount(suchasanIRAorKeogh)oragroupaccount(suchasatraditionalpensionplan,401[k]orESOP),itisanasset,andyoushouldprotectit.

Pensionbenefitsusuallyaren'texposedtolegaljudgments.Buttheyhavebeencalledintoquestion,occasionally,whencalculatingdamagesleviedagainstsomeone.Forthisreason,youprobablyshould

includepensionbenefitswhencalculatingyourinsurablenetworth.

CalculatingYourInsurableNetWorth

Todecidewhetheryouneedhigh-limitliabilityinsurance,youneedtocalculateyourinsurablenetworth.Theeasiestwaytodothisistoadduptheequityvalueyouhaveinyourhouse,anyotherpropertyyouown,majorpersonalpossessions(suchasjewelryorcollectibles),andsavingsorliquidinvestments.

Thefollowingchartshouldhelpyoureviewtheseassets.

PersonalAssetsInventoryFormarketvalue,listthemostrecentcomparablevalueorinsuredvaluefromothercoverages.Underdebtsandrestrictions,includemortgages,liensandotherencumbrancesonrealproperty.Alsoincludemarginloansoncapitalinvestments,andliquidationcostsorpenaltiesonaccessiblepensionfunds.Art,jewelryandothercollectiblesmaybecoveredseparately.Ifso,youmaychoosetokeepthemoutofthiscalculation.

MarketValueRelatedDebtandRestrictions NetValue

1)Home ______________________ ___________

2)Otherrealestate ______________________ ___________

3)Capitalinvestments(stocks,bonds,etc.)

______________________ ___________

4)Cashsavings ______________________ ___________

5)Accessiblepensionaccounts

______________________ ___________

6)Cars,boats,planes,etc. ______________________ ___________

7)Art,othercollectibles ______________________ ___________

8)Jewelry,furs,etc. ______________________ ___________

9)Recreationalequipment______________________ ___________

10)Otheritems ______________________ ___________

Total ______________________ ___________

Thetotalvalueofalltheseitemsevenifyoucouldn'traiseitbyselling

everythingtomorrowiswhatyouneedtoprotect.You'llneedtoeitherraisethelimitsofliabilitycoverageonyourhomeownerspolicytothisamountorbuystand-aloneliabilityinsuranceseparatefromyourhomeownerspolicy.

Specifically,youmaywanttobuyapersonalumbrellaliabilitypolicy.Theumbrellapolicypaysuptoapredeterminedlimit(usually$1million)forliabilityclaimsmadeagainstyouoramemberofyourfamily.

Astandardhomeownerspolicywillprovideaminimumof$1,000ofmedicalpaymentscoverageforvisitorsonyourpremises.Itcoverssuchmedicalexpensesasreasonablechargesformedicalcare,ambulanceservice,hospitalbills,professionalnursing,prostheticdevicesandfuneralservices.

Acaveat:Thiscoveragedoesnotapplytomedicalexpensesrelatedtoyourinjuriesorthoseofanyonewholiveswithyou,exceptyouremployees.Thismedicalcostscoverageisoneofthetwoprimarypartsofahomeownerspolicy'sliabilitycoveragewithseparatelimitsfromthepersonalliabilitycoverage.Andtheselimitsareusuallylow.

Ofcourse,it'spossibletobuyhigherlimitsformedicalcostscoveragebutthiscoverageisn'tintendedtoserveascompletehealthinsuranceforsomeoneinjuredonyourproperty.Plus,ifaninjuryleadstoanykindoflegalactions,thepersonalliabilitycoveragecomesintoplay.Ifyou'reconcernedabouthavingsufficientcoverageforpeoplevisitingyou,you'reprobablybestservedbybuyinghigherliabilitylimits.

Medicalpaymentstootherspaysfornecessarymedicalexpensesincurredwithinthreeyearsofanaccidentthatcausesbodilyinjury.Anaccidentiscoveredonlyifitoccursduringthepolicyperiod.

Attheinsuredlocation,coverageappliesonlytopeoplewhoaretherewiththepermissionofaninsured.

Awayfromtheinsuredlocation,coverageappliesonlytopeoplewhosufferbodilyinjurycausedbyaninsured,causedbyananimalownedbyorinthecareofaninsured,causedbyaresidenceemployeeinthecourseofemploymentbyaninsured,orbecauseofaconditionintheinsuredlocationorthewaysimmediatelyadjoining.

Thepolicystatesthatpaymentofmedicalpaymentstoothersisnotanadmissionofliability.Whenmedicalpaymentsaremade,youorsomeoneactingonyourbehalfisrequiredtoprovidewrittenprooftosupporttheclaim,andtoauthorizetheinsurancecompanytoobtainmedicalreportsandrecords.Theinjuredpartymustsubmittoaphysicalexamination,ifitisrequestedbytheinsurancecompany.

YouMayNeedtoAddEndorsements

Togetthekindofcoverageyouwant,youmayneedtoaddoneormoreendorsementstoabasicpolicy.Endorsementslikefloatersareadditionallevelsandtypesofinsuranceaddedtoastandardpolicy.Someofthemorecommonendorsementstoahomeownerspolicyinclude:

GuaranteedReplacementDwelling.Thisisanimportant

modificationtostandardcoverage.Itissupposedtoexpandcoveragetoincludeallcostsrelatedtorebuildingyourhouse.Manycompaniessetlimitsforthiscoverage,however,payingonlyupto120percentor150percentofthepolicy'sfacevalue.Agoodendorsementwillhavelimitsinthe150percentto200percentrange.Thebestendorsementwon'tincludepercentageoffacevaluelimits.

GuaranteedReplacementContents.Let'ssaythatfiveyearsafteryoubuya32-inchTVandanexpensiveleathercouch,theyarestolenfromyourhouse.Underanormalpolicy,theinsurancecompanywilldeductfiveyears'worthofdepreciationfromthereplacementcostofthepieces,payingyoufortheiractualcashvalue.Ifyouwantthecompanytocutyouacheckforthefullreplacementcost,insteadofdeductingfordepreciation,you'llneedtobuyaguaranteedreplacementcontentsendorsement.Thiscoveragealsomaybelimited,howevertypicallyto75percentofthehome'sreplacementcost,asopposedtothestandard50percentonotherpolicies.

SpecialComputerCoverage.Ifthevalueofyourcomputerhardwareandsoftwareexceedthestatedlimitonyourpolicy,youcanaddtheextracoverageyouneedwiththisendorsement.Itusuallywillcomewithascheduleddollarlimit.

ScheduledPersonalProperty.Wherethelimitsofcoverageforspecificpersonalitems(jewelry,silverware,etc.)ends,aschedulekicksin.Schedulingpersonalitemsprovidescoverageattheiractualappraisedvalue.(You'llhavetoprovidetheappraisal,andkeepupdatingitastheitemsappreciateordepreciate.)Ascheduleditemalsoisprotectedforthingsthattypicallyarenotcoveredunderahomeownerspolicy,suchaslostormisplaceditemsandgemstoneslostfromapieceofjewelrybecauseofalooseordamagedsetting.Also,depreciationisnotsubtractedfromaclaimiftheitemisscheduled.Thedownsideofschedulingisthatitcanbeexpensive.

PersonalPropertyBlanketEndorsements.Ablanketendorsementismuchlikescheduling,exceptthatitcoversseveraldifferenttypesofitemsunderasingleendorsementandatasingleadditionalcharge.Ratherthanlistingthevalueand

payingforeachitemseparately,ablanketpolicyendorsementcancoverjewelry,silverware,art,furs,golfequipment,musicalinstruments,postagestamps,rareandcollectiblecoins,andsomeotheritems,dependingonwhataparticularinsurancecompanyoffers.

OrdinanceofLaw.Let'ssaythatyouownahomethatwasbuiltin1910.Ifitburnsdown,thetownwillrequireyoutorebuilditaccordingtothelatestbuildingcodeswhichisusuallysubstantiallymoreexpensive.That'swheretheordinanceoflawendorsementcomesin.Forexample,ifyourpolicyprovides$100,000ofdwellingcoverage,butit'sgoingtocostanadditional$20,000torebuildaccordingtothenewbuildingcodes,ordinanceoflawcoveragewillprovidetheadditional$20,000.

In-HomeDayCareCoverage.Ifyouhaveadaycarecenterinyourhome,youmustcarrythisadditionalcoverage.Astandardpolicydoesnotcoverin-homedaycareliability.

InflationGuard.Inflationprotectionincreasesyourdwellingcoverageautomaticallyeachyear.Theamountoftheincreaseisdeterminedbyanindustryinflationindex.

Earthquake.Thisendorsementwillcoveranylosstoyourhomeanditscontentscausedbyanearthquake,tremorsoraftershocks.Earthquakecoveragecarriesitsowndeductible.Anearthquakeendorsementdoesnotcoverdamagesdirectlyorindirectlycausedbyafloodduetoanearthquake.

PersonalInjury.Thisendorsement,whenaddedtoastandardhomeownerspolicy,allowsthepolicytocoverpersonalinjurycausedbyyouorsomeonewholiveswithyouincludinglibel,slander,invasionofprivacy,defamation,andwrongfulevictionorentry.However,thisendorsementdoesnotcoverpersonalinjuryarising

fromcontracts,violationofthepenallaworbusiness-relatedactivities.

Watercraft.Thisendorsementprovidesliabilityprotectionforcertaintypesofwatercraft.

WaystoLowerYourPremiums

Nowthatyouhaveaprettygoodideahowmuchcoverageyouneed

andwhichendorsementsyoumightliketoaddyou'rereadytogoshopping.Butbeforeyoumakethosecallstoinsurancecompaniesoragents,considerafewofthewaysyoucankeepyourcostsdown.

Thefollowingareafewofthefactorsthatinsurancecompaniesusetoadjusttheirrates:

location;

fire-protectionclass;

typeofbuilding;

ageofbuilding;

constructioncosts;and

numberofunits.

Residentsofareaswithtraditionallyhighincidencesofcrime,fireornaturaldisasterscanexpecttopaymorethanresidentsoflow-riskareas.Andtheratesforwood-frameconstructionarehigherthanforstoneorbrickbuildings,sincewoodismorevulnerabletofire.So,ifyouhaven'tpurchasedahomeyet,youmaywanttoconsiderhowahome'slocationandthetypeofconstructionaffectthecostofinsuringit.

Evenifyoualreadyownthehomeyouwanttoinsure,thereareseveralwaystohelpkeepcostsdown.Whenyoutalktoanagentorinsurancecompany,askaboutthefollowingissues:

Raisingyourdeductibles.Thedeductibleistheamountyoupayintheeventofaclaim,beforetheinsurancecompanypaysadime.Inastandardhomeownerspolicy,deductiblesapplyonlytocertainkindsofcoverage.Increasinga$250deductibleto$500cancutyourinsurancecostsbyasmuchas12percent.

Double-checkingyourfire-protectionclass.Thecloseryouaretoafirestationandthebetterthefirefightersaretrained,theloweryourpremiumshouldbe.TheInsuranceServicesOfficeassignseveryneighborhoodintheU.S.afire-protectionclass,basedonthequalityoffireprotectionandthedistanceofhomesfromawatersource.(Somecompaniesusetheirownratingsystems.)Ifyourassignedclassisn'tright,youmaybepayingtoomuchforyourinsurance.

Gettingsecurityconscious.Manyinsurancecompaniesofferdiscountsofatleast5percentifyouhaveasmokedetector,

burglaralarmorevenjustdeadboltlocksonyourdoors.Youmaybeabletocutyourpremiumsevenmorebyasmuchas20percentifyouinstallasprinklersystemandafireorburglaralarmthatringsatthepolicestationorothermonitoringfacility.(Thesesystemsarenotcheap,soit'sagoodideatomakesuretheoneyou'reconsideringqualifiesforadiscountunderyourhomeownerspolicybeforeyouinstallit.)

Stayingwiththesameinsurancecompany.Somecompanieswillreducetheirpremiumsby5percentifyoustaywiththemforthreetofiveyearsandby10percentifyouremainapolicyholderforsixyearsormore.

Gettingyourhomeownersandautoinsurancefromthesamecompany.Manyinsurersoffermulti-policydiscounts.

Notmakinglotsofsmallclaims.Don'tfileanyclaimsifyoucanaffordtopaythecostsyourself.Manyinsurancecompaniesofferadiscounttopeoplewhohavenotfiledahomeownersclaimforthreeyears.

Notsmoking.Believeitornot,youcansavemoneyonyourinsuranceifyoudon'tsmoke.That'sbecausesmokingisthecauseofmorethan23,000residentialfiresayear.

Lookingintogroupcoverage.Youmaybeabletogethomeownersinsurancethroughabusinessassociationoranalumniassociationatareducedrate.(Thisistheinsuranceequivalentofbuyinginbulk.)

Usingseniordiscounts.Insurancecompaniesofferretireesandolderhomeownersabreakofupto10percentontheirpremiums.That'sbecauseiftheyarehome,theyaremoreapttospotafire,lessapttoberobbedandmayevenspendmoretimemaintainingtheirhomes.

ShopAround

Itisimportanttocomparisonshopforanymajorpurchaseyouwillmake.Youprobablyshoppedaroundextensivelybeforebuyingyourhouse.Shouldn'tyouputatleastsomeeffortintomakingsureitisadequatelyandaffordablyprotected?

Asyou'veprobablynoticedbynow,allpoliciesarenotcreatedequal.Notonlyshouldyoucomparecoveragesfromdifferentcompaniesbeforeyou

buy,butyoushouldalsoreadthepolicy'sexclusionsverycarefullybeforeyousignonthedottedline.Remember,theagentmayhavesaidthatitwasaparticularkindofpolicy,butitain'tnecessarilyso.

Evenifyouarecomparingnearlyidenticalpolicies,theratesaresuretobedifferent.That'sbecausesubjectivefactorssuchasthecompany'sclaims-payingproceduresandinvestmentincomehavebeguntoplayagreaterroleinpremiumprices.

Thesechangesalsomakethefinancialstrengthoftheinsurancecompanymorecrucialthanever.

Don'trelyontheinsurancecompanyoryouragenttotellyouthatyoustillhavesufficientcoverageunderyourhomeownerspolicy.Eachyear,whenit'stimetorenew,you'llneedtogobackandupdateyourinventoryandphotos.Theideaistoensurethatyourlimitsarestillappropriate.Youalsomayneedtoadditemstoyourschedules.

Ifyoudoanyremodelingorrenovating,don'twaituntiltheyear'supandit'stimetorenewyourpolicy.Informyouragentassoonaspossible.Ifyourrenovationsareextensiveandsignificantlyincreasethevalueofyourhome,youmayexceedthereplacementcostthresholdofyourcurrenthomeownerspolicy,leavingyourinvestmentunderinsured.Infact,moststandardhomeownerspoliciesstipulatethatcoveragewillnotapplyifyoufailtonotifyyourinsurerofsubstantialimprovementswithinaspecifiedperiodoftime(usually30days)aftertheworkhasbeencompleted.

Whetherornotyouhavemadeimprovementstotheproperty,thecosttorebuildmayhaveincreasedsubstantiallyinyourarea.Therefore,youmaywanttohireanoutsideappraisertomakesurethatyoustillhavesufficientcoveragewhenit'stimetorenew.

DwellingCoverage

Insomecases,yourinsuranceneedsmaynotbeasbroadasthecoveragesthatthestandardhomeownersinsurancepackageoffers.Youmaynotneedliabilityorpersonalpropertyinsuranceespeciallyifyouareinsuringasecondhomeorcertainkindsofinvestmentrealestate.Inthesesituations,youmayprefertobuythemorelimitedandlessexpensivedwellinginsurance.

Youalsomayneeddwellinginsurancesimplybecauseyoucan'tgetahomeownerspolicyforyourhome.Aswehaveseenbefore,somedwellingsareineligibleforhomeownerscoveragebecauseofthestructure'sage,loca-

tionorvalue,buttheymaystillqualifyfordwellinginsurance.Also,ahomeownerspolicymaybewrittenonlyforsingle-andtwo-familyresidentialproperty,whileadwellingformmaycoverastructurecontaininguptofourlivingunits.(Dwellingpoliciesareissuedprimarilytocovernon-owner-occupiedbuildings.)

Homeownerscoverageisbroaderthanstand-alonedwellingcoverageinanumberofways.Themostimportantdistinctionisthatadwellingpolicydoesnotincludeliabilitycoverage.

Adwellingpolicyalsowillnotcoveroutdoorproperty,suchasawningsandantennas.And,coverageforvehicledamagetothepremisesisbroaderunderahomeownerspolicy.Dwellinginsurancedoesnotcovervehicledamagetofences,driveways,walksandoutsidelawns,shrubs,treesandplants.

Therearemanysimilaritiesbetweenthetwokindsofpolicies.That'sbecausedwellinginsuranceisaportionofastandardhomeownerspolicy:thepartthatcoversthedwellingstructureandattachedstructuresonyourproperty.

Likehomeownersinsurance,dwellinginsurancecomesinthreeformsbasic,namedperils(alsocalledbroad)andallrisk(alsocalledspecial).Again,allriskisthemostgenerouscoverage.Italsoshiftstheburdenofproofofthecauseofalossfromyoutotheinsurancecompany.

It'simportanttopointoutthat,thusfar,wehavedescribedtraditionaldwellinginsurance.However,withsomerecentpolicyrevisions,thegapbetweendwellingandhomeownerscoverageshasbeguntoclose.Personalliabilityinsuranceandothercoveragesthatareassociatedwithhomeownerspoliciesnowhavebecomeoptionsunderdwellingpoliciesatleastinthemajorityofstates.

Adwellingpolicythatincludestheftandpersonalliabilitycoverageisverysimilartoastandardhomeownerspolicy.Infact,manyofthecoveragesandthebasiclimitsofinsuranceareidentical.However,theappealofthedwellingpackageisthatitprovidesflexibility:Youcanincludeonlyrealpropertycoverageorgetthefullpackageorgetsomethinginbetween.

WhatKindsofHomesAreEligible?

Toqualifyasadwelling,abuildingmustbeaprincipallyresidentialstructurethatcontainsnomorethanfourapartmentsorisoccupiedbynomorethanfiveroomersorboarders.Single-familyhomes,duplexesandtriplexesareeligibleforcoverageondwellingforms.Townhousesorrowhousesalsoareeligible,ifeachbuildingdoesnotcontainmorethanfourunits.

Dwellingsinthecourseofconstructionalsoareeligiblefordwellingcoverage.Permanentlylocatedmobilehomesareeligible,buttheycanonlybeinsuredunderthebasiccoverageform.Farmdwellingsarenoteligible.(Coverageforfarmhousesmustbewrittenonseparatefarmforms.)

Underthesepolicies,dwellingsneedonlybeprincipallyresidential;eligibledwellingpropertyneednotbeexclusivelyresidential.Certainincidentalbusinessandprofessionalusesareallowed.Theseoperationsmustbeconductedbyyouoramemberofyourhousehold,theymustprovideserviceratherthansales,andtheymustinvolvenomorethantwopeopleworkingonthepremisesatanyonetime.Thekindsofhomebusinessespermittedincludebeautyparlors,photographicstudiosandprofessionaloffices.

Justasinahomeownerspolicy,animportantpartofthedwellingpolicyisdistinguishingwhoisandisnotcoveredunderthepolicy.Generally,becausethedwellingpackagedoesn'tincludeliabilityinsurance,itscoverageextendstofewerpeople.

Insuranceonthedwellingandanyotherstructuresisprovidedforthenamedinsured(you)andforthenamedinsured'sspouse,ifthatspouseisaresidentofthesamehousehold.

Ifpersonalpropertyisinsured,thenamedinsuredandallmembersofhisorherfamilyresidingatthedescribedlocationarecoveredforpropertythattheyownoruse.Thepersonalpropertyofguestsanddomesticemployeesmaybecoveredbyanendorsement.

Ifyoudie,coveragecontinuesforyourlegalrepresentatives.Untilalegalrepresentativeisappointed,atemporarycustodianoftheestatealsowouldbecovered.

ThreeDwellingForms

Aswe'vementioned,threedwellingpolicyformsareavailable.Likethedifferentkindsofhomeownersinsurance,thesedifferentformsprovidedifferentdegreesofcoverage.

Insurancecompaniesusuallyrequirethatyoupurchaseminimumamountsofinsuranceforthebroadandspecialforms.Thisisbecausepeoplesometimeschooseverysmallamountsofcoveragefordwellinginsurance.(Sincethepoliciestypicallyonlycoverthevalueofbuildingswhichusuallyaren'tprimaryresidencesminimizingdwellingcoveragecanmakesense.)

Thethreeformsofdwellinginsuranceare:

thebasicformwhichinsuresagainstfire,lightning,removalandinternalexplosion(apackageofoptionalcoverages-called

extendedcoveragecanbeaddedforanadditionalpremium,andinsurancecompaniesdon'trequirethatyoupurchaseacertainminimumamountofcoverage);

thebroadformwhichinsuresagainstallofthestandardandoptionalperilsavailableonthebasicformandexpandsseveralofthem(theminimumamountofinsuranceofferedis$12,000forthedwellingor$4,000ifthepolicyiswrittenforpersonalpropertyonly);and

thespecialformwhichinsuresagainstanyrisksthatarenotexcluded(minimuminsuranceis$15,000forthedwelling).

Manyinsurancecompaniesofferthesamethree-levelvariationintheirhomeownerspolicies.Thebasicformwhichmaynotbethefirstpolicytheinsurancecompanyoffersusuallywillcost20percentto30percentlessthantheothers.Thestandarddeductibleondwellingformsrangesbetween$250and$500.

InsuringaHome-BasedBusiness

Morethan43millionAmericansoperatefull-orpart-timebusinessesathomeandthisnumberincreaseseachyear.

However,ahomeownersinsurancepolicyprovidesverylimitedprotectionforbusinesspropertycoverageforsuchitemsascomputers,faxmachines,filingcabinets,toolsandinventoryusuallyislimitedto$2,500inyourhomeand$250awayfromhome.Anditprovidesnoprotectionforbusinessliability.So,ifyouoperateabusinessoutofyourhome,andyoudon'thaveabusinessinsurancepolicy,youmaybesubstantiallyunderinsured.

Anotheroptionistosecureadditionalcoverageforahome-basedbusinessbyaddinganendorsementtoyourhomeownerspolicy.Theapplicableendorsementsare:

BusinessPursuits.Ifyoudonotownthebusiness,butyoudoconductsomebusinessfromhome(e.g.,ifyoumakesalescallsandkeepfilesthere),thisendorsementprovidescoverageforthebusinesspropertyandextendsliabilitycoverageonastandardhomeownerspolicy.

PermittedIncidentalOccupancies.Ifyouownabusinessandconductitoutofyourhome,thisendorsement(alsoknownastheincidentalbusinessendorsement)eliminatestheexclusionofbusinesspursuitsonthepremisesandallowsliabilitycover-

age.However,thebusinesshastotakeupaverysmallpartofyourhome.Forexample,thisendorsementwouldcoveryouifyougivepianolessonsinyourlivingroom.Butifyouusethesecondfloorforlivingandthewholedownstairsforbusiness,itwouldbenecessarytogetaseparatebusinesspolicy.

Ifyourbusinessdoesn'tqualifyforeitheroftheseendorsements,youcanpurchasecoverageforyourhome-basedbusinessunderabusinessownerspackagepolicy,referredtoasaBOP,whichprovidespropertyandliabilitycoverage.Someinsurancecompaniesevenofferapolicythatisspecificallytailoredtomeettheneedsofanin-homebusiness.

Thesepoliciesprovidebothbusinesscoverage,suchasbusinessliabilityandreplacementoflostincome,andhomeownerscoverages,suchasfire,theftandpersonalliability.Theyaredesignedtoeliminatebothgapsandduplicationsinyourcoverageandtheyaregenerallyquiteaffordable.

Conclusion

Thischapterhasconsideredsomeofthecriticalquestionsthatyouwillneedtoaskwhenyouareconsideringwhatkindofhomeownersinsuranceyouneed.Byadjustingsomeoftheparametersofyourhomwoenersinsurance,youcanincreaseordecreasetheamountyoupayforthecoverage.

Also,ifyouhavespecificneedsandahome-basedbusinessisagoodexampleofthisyoucanbuyadditionalcoverageswhichwillexpandtheinsuranceprotection.Ofcourse,theseadditionswillusuallycostsomeextramoney.

Youdontneedtobeaninsuranceorlegalexperttoadjustthescopeandcostoftheinsuranceyoubuy.Anyreasonableinsurancecompanyshouldbeabletomodifythepolicyitisofferingyou.

KeyQuestions

Thisistheinformationyou'llwanttogatherbeforeyoucallaninsuranceagentorothersalespersontodiscusshomeownerscoverage.Youwillhaveconsideredandputtogetherthisinformationasyoureadthroughthischapter.

1)Howmuchdwellingcoveragedoyouneedforyourhousealone?(Remembernottoincludethevalueofthelandyourhomeisbuilton.)______________

2)Doyouwantguaranteedreplacementcost,fullreplacementoractualcashvaluecoverage?_____________

3)Howmuchcoveragedoyouneedforotherstructures(adetachedgarage,aguesthouse,agazebo,etc.)?__________

4)Howmuchcoveragedoyouneedforyourpersonalproperty?(RefertotheHouseholdPropertyInventory.)____________

5)Howmuchliabilitycoveragedoyouneed?(RefertothePersonalAssetsInventory.)____________

6)Howmuchmedicalpaymentscoveragedoyouneed?________

7)Checktheendorsementsyou'dlike:

GuaranteedReplacementDwelling Yes NoGuaranteedReplacementContents Yes NoSpecialComputerCoverage Yes NoScheduledPersonalProperty Yes NoForwhat?______________________PersonalPropertyBlanketEndorsemenT Yes No

OrdinanceofLaw Yes

In-HomeDayCareCoverage YesInflationGuard YesEarthquake YesPersonalInjury YesWatercraft Yes

8)Doyouneedtoinsureahome-basedbusiness? Yes

You'llalsowanttoaskthecompanyorsalespersonaboutthefollowingwaystoloweryourpremiums,whereapplicable.

1)WhathappensifIraisemydeductible?_________________

2)Whatfire-protectionclassamIin?________________

Doesthisqualifyforadiscount? YesIfso,howmuch?_________________

3)HowmuchofadiscountcanIgetfor:

a)Smokedetectors? ________________

b)Aburglaralarm? ________________

c)Analarmthatringsatthepolicestationoramonitoringcenter?

________________

d)Deadboltlocks? ________________

e)Asprinklersystem? ________________

f)Anyothersecuritydiscounts? ________________

g)Stayingwiththisinsurancecompanyforafewyears?

________________

HowlongdoIneedtostaywiththecompanytoqualifyforadiscount?

________________

h)Notfilingaclaimforthreeyears? ________________

i)Beinganonsmoker? ________________

j)Buyinghomeownersandautoinsurancefromthesamecompany?

________________

k)Beingasenior? ________________

Chapter8InsuranceforHard-to-InsureHomesManyhomeownerscanpurchaseexactlythecoveragetheywantandneed.Alltheyhavetodoispickupthephoneandcallafewagentsorinsurancesalespeopletomakesuretheygetthebestpolicyfortheirpremiumdollars.

Butforsomehomeowners,findinginsuranceismuchmoreofachore.Infact,insurancecompaniesmaynotevenwanttospeaktothem.

Whatmakesthedifferencebetweenaninsurancesearchthat'sabreezeandonethat'sabother?Mainly,whereyourhouseislocated.

Ifyouliveinanareathatispronetobrushfires,hurricanes,floodsorearthquakes,manyinsurancecompanieswillnotwanttosellyouhomeownersinsurance.Theyconsideryoutoorisky.Insurancecompaniesalsoprefernottowritehomeownerscoverageforoldhomeswithlowvalues,andtheytendtoshyawayfrominner-cityhomeowners,too.

Whyisfindinghomeownerscoverageinurbancentersaparticularproblem?Partofthereasonstemsfromtheoutbreakofriotingincitycentersduringthemid-andlate1960s.Untilthemid-'60s,riotcoverageforhomeownerspropertylosseshadbeenwidelyavailableaspartofstandardhomeownersinsurancepackages.Thatsoonchanged.Insurancecompaniesbegantoexcluderiotdamagefromstandardpoliciesandsomestoppedwritinghomeownersinsuranceatallinurbancenters.

Inadditiontoconcernabouttheriotrisk,insurancecompanieswereincreasinglyunwillingtoinsurepropertyinneighborhoodscharacterizedbycongestionanddeterioration.Inner-cityhomeowners

andbusinessownerssoonfoundthatpropertycoveragewasbecomingunavailableorunaffordable.

Unfortunately,theabsenceofinsuranceusuallyacceleratestheprocessofeconomicdecline.Banksandotherlendersrequireinsurancecoveragetoprotecttheirloans.Wheninsuranceisnotavailable,lenderswillnotmakeloansformortgagesornewconstruction.Realestatetransactionsthereforecease,constructioncomestoahalt,jobsarelost,andthelocaleconomystagnatesordeteriorates.

Itdidn'ttakelongforCongresstoidentifythisgrowingurbanproblem.Toremedythesituation,legislatorscreatedtheUrbanPropertyProtectionandReinsuranceAct.ItmaderiotreinsuranceavailabletoinsurancecompaniesthroughtheNationalInsuranceDevelopmentFund,whichisoperatedundertheDepartmentofHousingandUrbanDevelopment(HUD).

Reinsuranceislikeinsuranceforaninsurancecompany.Youpurchaseinsurancetoprotectyourassetsintheeventofaclaim.Aninsurancecompanypurchasesreinsurancetoprotectitsassetsintheeventitreceivestoomanyclaims.

FAIRPlans

Howdoesmakingriotreinsuranceavailabletoinsurancecompanieshelpyougethomeownerscoverage?Well,it'sabitindirect.

Bylaw,anyinsurancecompanythatwishestobuyriotreinsurancemustparticipateinaHUD-approvedFAIRplan.ThetermFAIRstandsforFairAccesstoInsuranceRequirements.Manystatescreatedtheseplanstomakeessentialpropertyinsuranceavailabletoconsumersinareaswherecoveragehadbecomeunavailableoratleastextremelydifficulttoobtainduetoconditionsthatarebeyondthecontrolofpropertyowners.

FAIRplansarestate-supervisedinsurancepoolsthatprovidebare-

boneshomeownersanddwellinginsuranceinhigh-riskareas.Theplansareinoperationinabout30states.

Insomestates,theseprogramsarereferredtoastheFAIRPlan.Inothers,theyareknownasJointUnderwritingAssociations(JUAs).Somepeoplealsocallthemassignedriskprograms.Whateverthename,thepremiseisthesame.

Althoughtheyareadministeredbythestates,FAIRplansareoperatedbyparticipatinginsurancecompanies.Insurersthatdobusinessinastateusuallyhavetoparticipateinthatstate'sFAIRplaninproportiontotheamountofinsurancetheywriteinthevoluntarymarket(thatis,everythingthattheyarenotbeingforcedtowriteinthatstate).

Forexample,ifStateFarmwrites10percentofthestandardhomeownersinsuranceinagivenstate,itwillberequiredtowrite10percentofthehigh-riskpoliciesinthestate'sFAIRplan.

ConsumerswhoqualifycanbuyFAIRplaninsurancejustastheywouldbuyinsurancefromacompanydirectlyorthroughlicensedagentsrepresentingtheparticipatingcompanies.FAIRplansmakecoverageavailableonlyindesignatedareas,whichmayincludeentirecitiesorcounties,ormaybedefinedbyZIPcodeorothergeographicalboundaries.Insomecases,thedesignatedareaincludestheentirestate.

BecauseeachstatesetsupitsownFAIRplanandcanregulatetheplanasitchooses,thereareslightvariationsinhoweachplanisrun.However,itispossibletoprovideanoverviewofhowtheseplansworkandwhysomeofthemmaycausetroubleforhomeowners.

WhoQualifiesforFAIRPlanPolicies?

Inmoststates,youmusttrytogetcoverageforyourhomethroughinsurancecompaniesbeforeyoucanapplyforcoverageunderaFAIRplan.Theassignedriskprogramsaremeanttobetheinsurersoflastresort,sincethestatewouldprefernottobeintheinsurancebusinessandinsurancecompanieswouldprefertochoosetheirowncustomers,ratherthanreceivingassignedrisks.

RulesconcerningwhichhomesdoanddonotqualifyforFAIRplancoveragevarysomewhatfromstatetostate.Foranexampleofhowtheyarestructured,we'lltakealookattheIndianaBasicPropertyInsuranceUnderwritingAssociation.Itwasestablishedin1968tomakepropertyinsuranceavailabletohomeownerswhowereunabletosecurecoveragethroughthenormalinsurancemarket.Unlikemoststates'FAIRPlans,theIndianaprogramallowsinsurancecompanies

toparticipateonavoluntarybasis,althoughthestate'sinsurancecommissionerstronglyencouragescompaniesthatwritepropertyinsuranceinthestatetoparticipate.

LikeallFAIRplans,theIndianaprogramwillnotturndownahomeownerbecauseofthehouse'sneighborhoodorlocation,orbecauseofanyenvironmentalhazardbeyondtheowner'scontrol.However,inIndiana,thepropertymustbeatleast50percentoccupied.

Todeterminewhetherahouseisinsurableundertheprogram,aninspectorwillconsiderthehome's:

physicalcondition,includingthesoundnessoftheconstruc-

tion,heatingandwiring,evidenceofunrepairedpriordamageorgeneraldeterioration;

usagethatis,whetherornotitisvacant,andwhetheritexhibitssubstandardhousekeeping,overcrowdingorstorageofrubbishorflammablematerials;

characteristicsofownership,meaninganycondition,includingoccupancyormaintenance,thatisinviolationoflaworpublicpolicy,orthatresultsinanincreasedriskofloss.

Theseinspectionsarefreeinmoststates,soifaninspectorasksformoney,callthelocalFAIRplanofficetoverifythatapaymentisrequired.Aninspectionisrequiredbeforeanewpolicyiswritten,andperiodicinspectionsarerequiredforrenewalsinIndiana,aswell.

TheIndianaFAIRPlanwillnotprovidecoverageformobilehomes,unlessthewheelshavebeenremovedandthehomehasbeensetinapermanentfoundation.Italsowillnotwritepoliciesforfarmdwellingswithactiveoperations,vacantorunoccupiedhomes,andnewhomesthatareunderconstruction.Ifyouarerenovatingahome,theprogramwillconsiderthepropertyanddeterminewhetherornottheplanwillprovidecoverage.

WhatKindofCoverageDoYouGet?

IntheIndianaplan,themaximumcoverageavailableforasinglebuilding(whichdoesnothavemorethanfourapartments)is$250,000.Thislimitisforboththedwellingandpersonalpropertycombined.

TheCaliforniaFAIRplanoffersmuchhigherlimits.IntheGoldenState,themaximumavailablelimitforallcoveragesdwelling,otherstructures,personalpropertyandanyendorsementsis$1.5millionper

location.Thesepoliciesarewrittenwithastandarddeductibleof$250peroccurrence.Higheroptionaldeductiblessuchas$500,$1,000or$2,500areavailable.

InIndiana,intheeventofaloss,theplanwillpayyoutheactualcashvalue(inotherwords,thedepreciatedvalue)ofanypropertythathasbeendamagedordestroyed.Youcannotpurchasereplacementcostcoverage.

InCalifornia,youcanchoosefromthreetypesofcoverage:

ActualCashValueCoverage.Ifthereisacoveredlosstoyourhome,theplanwillpayeitherthedepreciatedvalueofthedamageddwellingatthetimeoflossorthecostofrepairingorreplacingthepropertywithlikeconstruction,butonlyupto

thepolicy'slimitofliability.IfACVcoverageapplies,coverageforbuildingcodeupgradesisnotavailable.

ReplacementCostCoverage.Ifyouchoosethisoptionandthereisacoveredlosstoyourhome,theplanwillpaytorepairorreplacethepropertywithlikeconstruction,butonlyuptothepolicy'slimitofliability.Tobeeligibleforreplacementcostcoverage,thedwellingmustbeinsuredfor100percentofitsreplacementcostatthetimeofloss.Replacementcostcoveragedoesnotapplytopersonalproperty.

BuildingCodeUpgradeCoverage.Thisoptionisavailableonlyifthereplacementcostcoverageoptionhasbeenselected.Buildingcodeupgradecoveragealsoknownasordinanceorlawcoverageprovidesupto$10,000ofcoveragefortheadditionalcostsrequiredtobringadamageddwellinguptocurrentbuildingcoderequirements.Withoutthiscoverage,apolicywouldpayonlytheamountneededtorepairorreplacethedamageddwellingtorestoreittotheconditionitwasinpriortotheloss,andwouldnotcoveranyadditionalcostsduetochangesrequiredbycurrentbuildingcodes.

UndermostFAIRplans,thecoverageprovidedistheequivalentofthebasichomeownerspolicy.Youcannotpurchaseall-riskcoverage.Forinstance,theriskscoveredundertheIndianaplanare:

lightning;

internalexplosion

windstormorhail;

explosion;

aircraft;

vehicles;

smoke;

volcaniceruption;and

vandalismormaliciousmischief.

NotethatFAIRplansdonotprovideliabilityinsurancetheyonlyprovidebare-bonesdwellingandpersonalpropertycoverage.However,inIndiana,youcanapplyforpersonalliabilitycoverageforahomethatyouoccupy,andyoualsocanapplyforon-premisestheftcoverage.Somestatesaremorerestrictiveintheirofferings.However,someinsurancecompanieswilloffer''wraparoundcoverage"togowithaFAIRplanpolicypersonalliabilityortheftcoverage,forexample.

FAIRplanpoliciesdonotusuallyprovidefloodorearthquakecoverage.Youwillneedtopurchaseastand-alonepolicytoaddresstheseexposuresifyouareinanat-riskarea,andyouwillneedtobesureyouhaveadequatehurricanecoverage,too.(Indianaisdifferentinthisrespect,becauseearthquakecoveragecanberequestedundertheFAIRplan.)

Don'tExpecttheBestService

FAIRplansarenotusuallyasservice-orientedastraditionalinsurancecompaniesafterall,theyaren'ttryingtokeepyourbusiness.Theyalsotypicallyhavelessinthewayofresourcesthanafor-profitinsurancecompany.

Forbothofthesereasons,FAIRplanstypicallywillnotissuequotesoverthephone.Inmoststates,quotesareprovidedonlythroughthemailafteracompletedapplicationforcoveragehasbeensubmittedandreviewed.Thisisgenerallyacceptable,becausepeopledonotcomparisonshopFAIRplanspeopleonlypurchaseinsurancethroughthemwhentheycan'tgetitthroughthelower-pricedvoluntarymarket.

ServicedoesbecomeanissuewithFAIRplanswhenyoufileaclaimespeciallyifthere'sbeenadisasterandthousandsofother

peoplearefilingclaimsatthesametime.

AfterHurricaneFranhitin1996,manyNorthCarolinaresidentscomplainedabouthowslowtheNorthCarolinaJointUnderwritingAssociation(NCJUA)wastorespondtotheirclaims.Whileinsurancecompanieswerebusysettlingclaimsasquicklyaspossible(andtakingadvantageofthepublicrelationsopportunitiestheireffortspresented),theNCJUAwasstrugglingtofindenoughadjusterstovisitpolicyholders'homesandevaluatethedamage.Threeweeksafterthehurricane,theNCJUAhadpaidoutjust$6,700inclaimswhiletheagencyexpectedtohave$100millionto$200millionintotalHurricaneFranclaims.

Incontrast,NationwideInsurancehadpaidout$74.1million,orroughlyhalfoftheclaimsithadreceived.AndNorthCarolinaFarmBureauMutualInsuranceCo.,whichhadreceivedmorethan45,000claimswithanesti-

matedvalueof$125millionto$175million,hadmadesignificantpaymentson25percentofthoseclaims.

PartoftheproblemwiththeNCJUA'sservicewas,again,alackofresources.Atthetime,theNCJUAhad54full-timeemployees.Ithired18temporaryworkerstohelpprocessclaims;butitcouldnotcalluponemployeesinotherstatestocomehelpoutinacrisis,asthenationalinsurancecompaniesdo.Andithadtorelyonindependentadjusterstovisititsinsuredsandevaluatethedamagedonewhichleftitatthemercyofthemarketplace.

AsmanyunhappyFAIRplancustomershavenoted,whenyou'restuckintheassignedriskpool,youpaymoreandgetless.Butatleastyougetsomethingintheeventyouneedtofileaclaimwhich,ofcourse,iswhytheprogramswerecreatedinthefirstplace.

BloatedFAIRPlans

Unfortunately,FAIRplansinsomestatesarevirtuallyoverflowing.Ashugehurricaneandearthquakelossesinrecentyearshaveforcedinsurancecompaniestorethinktheirunderwritingstrategies,manyhomeownersarenolongerabletorenewtheirexistingpolicies.Iftheycan'tfindothercoveragethroughnormalinsurancesources,thesepeopleareforcedintotheFAIRplaneveniftheyhaveaverynice,well-built,newhomeinagoodarea.

TheCaliforniaFAIRplanisagoodexampleofwhysomeoftheseprogramsarefilledtothebrim.FollowingtheNorthridgeearthquakeinJanuary1994,insurancecompaniesbecamereluctanttowritedwellingandhomeownerscoverageinCaliforniaduetoastatelawwhichrequiredthatearthquakecoveragebeofferedinconnectionwithresidentialpropertyinsurance.Coveragerapidlybecameunavailableformanyconsumers.So,theinsurancedepartment

expandedtheareasthatwereeligibletoapplytotheFAIRplanmakingtheplanopentohomeownersstatewide.

Aspeopleboughthomesforthefirsttimeorwerenotrenewedbytheirexistinghomeownersinsurancecompanies,theFAIRplangrew.Bymid-1996,itwasprovidingabout236,000peoplewith$13.5billionworthofcoverage.However,theplanhadcollectedonlyabout$40millioninpremiumsandmanypeopleworriedaboutitsabilitytopayclaimsintheeventofacrisis.

Theplanwasfundedbyassessmentsleviedonprivateinsurancecompanies(accordingtosizeandtheamountofbusinesseachdidinCalifornia)tohelppayclaims.ButInsuranceCommissionerChuckQuackenbushworriedthatintheeventofamajordisaster,thestate'sassessmentswouldforcesomecompaniesintoinsolvency.

So,amidgreatcontroversy,thecommissionerseverelyrestrictedthenumberofnewpoliciesthatcouldbewritteninthestate.AsofJune1,1996,theFAIRPlanwouldonlysellpoliciesindesignatedbrushfireareasandinunder-served,innercityZIPcodes.(ConsumerscurrentlyinsuredthroughtheFAIRPlancanstillrenewtheirpolicies,regardlessoftheirhome'slocation.)

Themovesentrealestatepeopleandhomebuyersintoapanic,astheypredictedthatthemarketwouldstagnateandpeoplewouldbeleftwithoutanycoverageatall.Thebestadviceagentsandotherprofessionalsweregivingatthetimewasthatpeopleshouldbuystripped-downfireinsurance,whichmostcouldfindthroughsomesource(iftheywereinabrushfirearea,theystillqualifiedforFAIRplancoverage).Fortheirpersonalliabilityneeds,manyofthesepeoplecouldaddaseparatepersonalliabilitypolicytheso-calledwraparoundcoverage.

Unfortunately,CaliforniaisnottheonlystatewithaswellingFAIRplanandafranticpublic.InAugust1997,Florida'sResidentialPropertyandCasualtyJointUnderwritingAssociation(JUA)wasconsideringwaystotrimthenumberofagentsthatcouldsellitspolicies.Theproblem,accordingtotheDepartmentofInsurance,wasthatmanyagentswerenottryingtosecureprivateinsurancecoveragefortheirclients.TheywereignoringstaterulesandgoingstraighttotheJUA.

Meanwhile,FloridaInsuranceCommissionerBillNelsonwastryingtoshrinktheJUAandshiftmoreofthehomeownersinsurancebacktotheprivatesector.Hehadtransferred300,000policiesbacktoinsurancecompaniesearlierintheyear,bycreatinganincentiveprogramandallowingcompaniestopickandchoosetheJUApoliciesthattheywouldtake.

TolimitaccesstotheFloridaJUA,theassociation'sofficialsrecommendedrestrictingthesaleofpoliciesin19inlandcounties.Undertheproposedplan,theJUAwouldn'trenewpoliciesinthosecountiesuntilhomeownersprovedthatatleasttwoinsurancecompanieshadturnedthemdownwhentheytriedtofindothercoverage.Italsowouldnotwritenewpoliciesinthoseareasuntilapplicantscouldprovethattheyhadbeenturneddowntwiceinthevoluntarymarket.

However,criticspointedoutthattheinsurancecompaniestookthepoliciesthatpresentedthelowestrisks,leavingtheJUAinworseshapethanever.AndtheJUA'stotalnumberofpolicieswasstillatmorethan600,000andclimbingmakingitthethird-largesthomeownersinsurerinthestate.

WhilesomearguedthattheJUAwasstillunderfunded,itdidsoonhavemorethan$3billionavailabletosupportitspolicies.However,theotherFlorida

state-runinsurancepool,theFloridaWindstormUnderwritingAssociation,wasgrowingevenmorerapidlythantheJUAandseemedpoisedtobeinevenworseshapeifamajorhurricaneweretostrike.

TherewassomegoodnewsoflateforFloridians,however,whoserateshadrisenbymorethan88percentinthefiveyearssinceHurricaneAndrewhadstruckin1992.MosthomeownersinsuredthroughtheJUAwouldseeaslightdecreaseintheirrates.Andmoreinsurancecompaniesweredoingbusinessinthestate,whichwouldleadtomorecoverageavailabilityandloweroverallrates.

StayOutorGetOut

Clearly,thegoalistoavoidbeingstuckinaFAIRPlan.Ifyoucanfindvoluntarymarketcoverageforyourhome,doso.TalktoseveralinsurancecompaniesbeforeyousettleforFAIRplancoverage.

Ifyoualreadyhavehomeownersinsuranceandyou'reinanareathatyourcompanymaynotfindtoodesirable(withinamileofthebeach,forinstance,ornearanearthquakefault),don'tfileanyunnecessaryclaims.Instead,raiseyourdeductibleandholdontothepolicyforaslongasyoucan.Manyhomeownershavefound,afterfilingtwoorthreesmallclaims,thatonceaninsurancecompanydropsthem,theycan'tfindothervoluntarymarketcoverage.

IfyouarestuckinaFAIRplan,doyourbesttogetout.Tofindoutifanythingwillmakeyourhomemorepalatabletoaninsurancecompany,askaround.Callacoupleofinsuranceagentsorcallthecompanydirectly.Askifthereareanyupgradesorimprovementsyoucanmaketoyourhometomakeitsaferandmoreinsurableintheireyes.

TipsifYouDoHavetoApplytoaFAIRPlan

Asisusuallythecase,alicensedagentcanhelpyoudeterminetheappropriateamountsofinsuranceandassistyouinobtainingsupplementarycoverages,whichmaynotbeavailablethroughtheFAIRplan,suchastheftandliabilitycoverages.

Bearinmind,whenapplyingforFAIRplancoverage,that:

Allinformationontheapplicationmustbecompleteandcorrect.Incompleteapplicationswillusuallybereturnedunprocessed.

Anapplicationmustbesignedbytheapplicantoranagentontheapplicant'sbehalf.

Adepositisusuallynotrequired,andnopremiumshouldbesubmittedwiththeapplication.

Initialquotationsmaybeprovisionalthatis,theFAIRplanmaydenycoverageonceitinspectstheproperty,oritmaychargeanadditionalpremiumonthebasisofaninspectionandratingreport.

InCalifornia,ifaresidenceappearstobeacceptableonthebasisoftheapplication,apremiumquotationwillbeissuedbytheFAIRplan.IfthepremiumisnotreceivedintheFAIRplanofficewithin60daysofthedateofthequotation,theofferofcoveragebecomesnullandvoidandanewapplicationmustbesubmitted.

AcommitmenttocoveragecanonlybemadebytheFAIRplanifitfindsthatyourhomesatisfiesitsgeneralunderwritingrequirements.

Occasionally,anagentorbrokerwillclaimthatheorshecangetyouFAIRplancoverageautomaticallyorimmediately.Thisusuallyisn'ttrue.Whileanagentmightbeabletogetinsurancewithatraditionalinsurancecompanythat'seffectiveimmediately(thetechnicaltermfordoingthisisbindingcoverage),that'snotpossiblewithassignedriskinsurance.

Animportantnote:TheonlypaymentyouhavetomaketoanagentorbrokeristhestandardcommissionsetbythestateforFAIRplanbusiness.AgentsusuallymaynotchargeadditionalfeesforhandlingFAIRplancoverages.Theyarenotpermittedtochargeanyfeesforinspectingproperty,providingserviceorassistinginthecompletionofFAIRplanapplicationsandforms.

PropertyInspections

WhenaproperlycompletedapplicationisreceivedbyaFAIRplan,

thepropertybecomeseligibleforaninspection.

Youhavearighttobepresentduringtheinspection.Youalsohavearighttorequestacopyoftheinspectionreport.

Aninspectionreportwillnoteanyhazardsordeficienciesintheproperty.Ifrepairsareneededandcoverageisnotineffect,theofferofcoveragemaybemadecontingentuponyoumakingtherepairs.Ifcoverageisineffect,theFAIRplanmayextendcoverageforaspecifiedperiodoftimeinwhichthenecessaryrepairsmustbemadeorelsethecoveragewillbeterminated.

Ifyourpropertyisfoundtobeineligibleforcoveragebecauseofseveredeficiencies,anycoverageineffectwillbecancelledandyouwillbeinformedofwhatrepairsarenecessaryorwhatdeficienciesmustbecorrectedinordertomakethepropertyinsurable.

IfanyinsuranceisrefusedorcancelledbytheFAIRplan,youmaysubmitanewapplicationforcoverageatanytimeafternecessaryrepairshavebeenmadeordeficiencieshavebeencorrected.

YouusuallyhavetherighttoappealanyactordecisionoftheFAIRplanwhichaffectsyouadversely.AppealsofanydecisionincludingrejectionofapropertyforcoverageshouldbemadetotheAppealsBoardorGoverningCommitteeoftheFAIRplan.

Conclusion

Assignedriskinsuranceisanimportanttoolformanypeoplewholiveinhigh-crimeorhigh-riskareasandotherwisecouldnotpurchasehomeownersinsurance.However,FAIRplancoverageusuallyismorelimitedthanastandardhomeownersinsurancepackageandthelevelofcustomerserviceisoftennotashigh.

Whenatallpossible,youarealwaysbetteroffstayingoutofyourstate'sFAIRplanorgettingoutassoonasyoucan.

KeyQuestions

1)Haveyoubeenturneddownforhomeownersinsurancebytwoormoreinsurancecompanies? YesNo

2)DoesyourstatehaveaFAIRplan? YesNo

3)DoesyourhomequalifyforcoverageundertheFAIRplan(basedonwhereyoulive,etc.)? YesNo

4)CanyougetsufficientdwellingandpersonalpropertycoverageunderaFAIRplanpolicy? YesNo

5)Ifnot,howmuchadditionalcoveragedoyouneed?_________________________________________________

6)Doyoualsowanttheftcoverage? YesNo

7)Doyoualsowantpersonalliabilitycoverage? YesNo

8)WillaninsurancecompanysellyouasupplementalorwraparoundpolicytogowiththeFAIRplanpolicy?(Youmayneedtocallseveralagentstofindthiscoverage.) YesNo

9)WhatcanyoudoshortofmovingyourhousetomakeyourhomeinsurableinthevoluntarymarketandgetoutoftheFAIRplan?(Youmayneedtocallseveralagentsorinsurancecompaniestofindtheanswertothisquestion.)

_________________________________________________

Chapter9CoverageforRenters,CondominiumOwners&OccasionalLandlordsYoudon'thavetoownafive-bedroomGeorgianintheleafysuburbsorahalf-million-dollarcondominiuminahipurbanenclavetoneedinsuranceontheplacewhereyouliveandthethingsyouown.Evenifyou'refreshoutofschoolandrentingyourfirstapartment,youmayhavethingsyouneedtoprotectcomputers,TVsandVCRs,stereoequipment,sportsequipmentandsoon.Thesethingscanbeworththousandsortensofthousandsofdollars.

So,it'ssurprisingthatfewerthanhalfofallrentersintheUnitedStatesbothertoprotecttheirpersonalbelongingsandfurnishingswithinsurance.Peopleunder40areparticularlyremiss.

TenantadvocacygroupsandotherssuchastheIllinois-basedCondominiumInsuranceSpecialistsofAmericaestimatethatasfewasoneinfourrentersintheirtwentiesandthirtiesbuyinsuranceeventhoughrentersinsuranceisrelativelycheapandeasytoget.

Rentersinsuranceisaspecialversionofhomeownersinsurance,writtenontheHO-4insurancepolicyformalsoknownas,therenterspolicy.It'savailablefrommostpropertyandcasualtyinsurancecompanies,andthecoverageisinexpensiveenoughtobeaworthwhileinvestmentforjustaboutanyrenter.

Thepolicydoesnotprovidethecompleterangeofcoveragesprovidedbytheotherstandardhomeownersforms.Why?Rentersdon'tusuallyneedtoinsurethebuildinginwhichtheylive.Andrenterswhodon'twanttopayforliabilityprotectioncanoptforapolicythatcovers

onlypersonalproperty.

TheImportanceofCoverage

Landlordssometimeswillrequirethattheirtenantscarrysomeformofrentersinsurance.(Thisusuallyappliestoluxuryapartmentsandrent-controlledunits.)Instateswithlargeurbancenters,insuranceandhousingregulatorshaveoutlawedtheserequirementsinthenameofconsumerprotection.

Unfortunately,theseprohibitionsmaysendthemessagethatrentersinsuranceisarip-off.That'sunfortunate,becauseit'snotso.Renters'policiescanbeabargain.

Forexample,inthemid-1990s,USAAtheTexas-basedinsurancecompanythatspecializesincoveringmilitaryandformerservicepersonnelandtheirfamiliesofferedatenantprotectionplanthatcost$169ayearinNewYorkCityandinsured$20,000worthofbelongings,witha$100deductible.Thepolicyalsoprovidedreplacementcostcoverageand$100,000ofpersonalliabilitycoverage.

Rentersinsurancecanbewrittenoneitheracomprehensiveformforallrisksthataren'texplicitlyexcludedorfornamedperilsonly.Named-perilscoveragegenerallyisabout20percentlessexpensive,becausethelossesitcoversaremorelimited.

Eveninsurancewrittenonanamed-perilsbasisshouldcoverfire,theftorwaterdamage.Thesearetheprimaryhazardsrentersface.

Generally,theperilscoveredontherenterspolicyarethesameasthosecoveredonacondoownerspolicy:

lightning;

volcaniceruption;

windstormorhail;

explosion;

aircraft;

vehicles;

smoke;

vandalism;

theft;

burstingofasteamorhotwaterheatingsystem;

fallingobjects;

collapsefromweightofice,snoworsleet;

freezingpipes;

damagetoappliancesbyartificiallygeneratedelectricity;and

leakageofaplumbingorheatingsystem.

WhatKindofCoverageAreWeTalkingAbout?

Theminimumcoverageyoucanbuyonarentersinsurancepolicyusuallyis$6,000worthofpersonalpropertycoverage.Abasicrenterspolicyalsoincludes:

lossofusecoverage(incaseyourresidenceisrendereduninhabitable),at20percentoftheamountofpersonalpropertycoverage;

personalliabilitycoverage,witha$100,000minimum;and

medicalpaymentscoverage,witha$1,000minimum.

Asever,foranextrapremium,youcanraisetheselimitsasnecessarytosuityourneeds.

Theliabilitycomponentisimportant.Ifyou'relikemanypeople,youmaybelievethatthelandlordisresponsibleifsomeonetripsinyourapartmentandishurt.Butthelandlord'spolicymayspecificallyexcludeliabilityforinjurytoanotherpersonordamagetoanotherperson'spropertyiftheincidentoccurredwithinyourapartment.Andthatmeansyoucouldbeheldliable.

Althoughitdoesn'tcoverthebuildingitself,anHO-4policydoesprovidealimitedamountofcoverageforbuildingadditionsandalterations.Thiscoverageisknownasleaseholdimprovement

insurance.Itmeansthatifyouspendmoneytoimprovetheapartmentorhouseyou'rerentingandhaven'tbeenreimbursedbyyourlandlordtherentersinsurancewillcovertheinvestmentsyou'vemade.

HowMuchCoverageDoYouNeed?

Whetheryou'rearenteroracondoowner,howmuchpersonalpropertycoverageyouneeddependsonthevalueofyourbelongings.Tohelpyoucalculatethis,you'llwanttotakeinventoryofyourpossessions.(RefertotheHouseholdPropertyInventoryinthehomeownersinsurancesectiontodeterminethevalueofyourpossessions.)

Onceyou'vecalculatedthevalueofthethingsyouown,yousimplyhavetoaskyourselfhowmuchyoucanstandtolose.

Ifyoudon'townmorethanafewhundreddollars'worthofanyspecifickindofpersonalproperty,youprobablydon'tneedrentersinsurance.Butifyoucareenoughaboutahobbyoractivitytoinvestthousandsofdollarsinrelatedequipment,orifyou'veinvestedincollectibles,high-qualityfurnishingsorevendesignerclothing,youprobablydowanttoinsurethosethings.

InsuringAgainstTheft

Onereasonrentersinsuranceissoattractiveisthatitcoverspersonalpropertyagainsttheft.Bycomparison,basicdwellingpoliciesdonotprovideanytheftcoverageforpersonalproperty.Abroadtheftcoverageendorsementhastobeaddedtoadwellingpolicyatanadditionalpremiumtoprovidesuchcoverage.

Formanyinsurancecompanies,thebroadtheftcoverageendorsementtoadwellingpolicysoldinaslightlydifferentversionasstand-aloneinsuranceisrentersinsurance.(Forthesepolicies,youwouldhavetoaddliabilitycoverageseparately,ifyouwantit.)

Theftcoverageprovidesinsuranceagainstlossonaccountoftheftorattemptedtheft,andonaccountofvandalismandmaliciousmischiefasaresultoftheftorattemptedtheft.(Vandalismcoveragedoesn'tapplyifyourhomehasbeenvacantformorethan30consecutivedaysimmediatelybeforetheloss.)

Rentersinsurance(orbroadtheftpoliciesorendorsements)containsthreedefinitionsthataffectthecoverage:

Insuredpersonmeansyouandresidentsofyourhouseholdwhoare

eitheryourrelativesorundertheageof21andinthecareofyouoroneofyourrelatives.

Residenceemployeemeansanemployeewhoperformsdutiesrelatedtothemaintenanceoruseofyourhome,includinghouseholdordomesticservices,orsimilardutieselsewherethatarenotrelatedtothebusinessofanyinsuredperson.

Businessmeansanytrade,professionoroccupation.

Propertyusedforbusinesspurposesisn'tconsideredpersonalpropertyand,therefore,isn'tcoveredincludingyourcameragear,ifyou'reaprofessionalphotographer.

Onlypropertythatbelongstoaninsuredpersoniscoveredso,ifthe$2,000leatherjacketyou'rekeepingforafriendgetsstolenfromyourtrendydowntownloft,youmayhavesomeexplainingtodo.Andifyourroommatesarenotlistedonyourpolicy,theirpossessionsaren'tcovered,either.(Manyinsurancecompaniesrecommendthatallofthepeoplesharingaresidenceinsuretheirpossessionseithertogetheroronindividualpolicies.)

Finally,propertyofresidenceemployeesiscoveredonlyifyouasktheinsurancecompanytodoso.Thismayraiseyourpremiumthoughmanycompanieswilladdthecoveragefornoadditionalcost.

TheLimitsofRentersCoverage

Rentersinsurancelimitscoverageeitherwithonegeneraldollaramountorarangeofdollaramountsapplicabletodifferenttypesofpersonalproperty.Inthefirstcase,apolicywouldinsureallyourpropertyregardlessoftypetoalimitof$20,000,forexample.Inthesecond,apolicywouldinsurecomputerequipmentupto$5,000,stereoequipmentupto$2,000,sportsequipmentupto$1,500,etc.

Evenifaparticularpolicyshowsoneoveralllimitasthemaximumamountofinsuranceforanyoneloss,specialsub-limitsusuallyapplytospecificcategoriesofproperty.Eachlimitisthemosttheinsurerwillpayforalossforallpropertyinthatcategory.

Anexampleofthespecialsub-limitsofliabilitymightbe:

$200formoney,banknotes,bullion,goldandsilverotherthangoldwareandsilverware,platinumandcoins;

$1,000forsecurities,accounts,deeds,evidencesofdebt,lettersofcredit,notesotherthanbanknotes,manuscripts,passports,ticketsandstamps;

$1,000forwatercraft,includingtheirtrailers,furnishings,equipmentandoutboardmotors;

$1,000fortrailersnotusedwithwatercraft;

$1,000forjewelry,watches,furs,preciousandsemipreciousstones;

$2,000forfirearms;and

$2,500forsilverware,silverplate,goldware,goldplateandpewterware,includingflatware,hollowware,teasets,traysandtrophies.

Limitssimilartothesearefoundonhomeownerspolicies.Theintentofallofthesepoliciesistoprovidebasiccoverageforspecialitemsofvalue.Mostpolicieswillnotallowthefulllimitofliabilitytobeappliedtoaspecifickindofproperty.However,somepeoplecollectparticularitems,andtheymayfaceagreaterexposurethanwhatistypicallycontemplatedwhensettinginsurancerates.

On-andOff-PremisesTheftCoverage

Allrenterspoliciesprovidecoverageforpersonalpropertythatisatyourhome.Somepoliciesalsoprovideoff-premisescoverage.

On-premisescoverageapplieswhileyourbelongingsare:

atthepartofthedescribedlocationoccupiedbyaninsuredperson;

inotherpartsofthedescribedlocationnotoccupiedexclusivelybyaninsuredperson,ifthepropertyisownedorusedbyaninsuredpersonorcoveredresidenceemployee(e.g.,yourclotheswhilethey'reinacommonlaundryroom);

placedforsafekeepinginanybank,trustorsafedepositcompany,publicwarehouseoroccupieddwellingnotowned,rentedtooroccupiedbyaninsuredperson.

Ifoff-premisestheftcoverageisavailable,itapplieswhilepersonalpropertyisawayfromyourhomeifthepropertyis:

ownedorusedbyaninsuredperson;or

ownedbyaresidenceemployeewhileinadwellingoccupiedbyaninsured,orwhileengagedintheemployofaninsured.

Example:Ifyourideyour$2,000mountainbikefromthehouseboatyou'rerentingtothemountainsnorthofSeattleandsomeonestealsitwhileyou'rewaitingtopayforacafelattetheinsurancecompanywillgetyouanewbike.

Anumberofconditionsapplytooff-premisescoverage:

youcanonlybuyitifyou'veboughton-premisescoverage;

aseparatelimitmustbeshownforoff-premisescoverage(thislimitusuallylowerthantheon-premiseslimitisthemosttheinsurerwillpayforanyoneloss);

off-premisescoveragedoesnotapplytopropertythatyoumovetoanewlyacquiredprincipalresidence(thatis,anewhome).

Oneofthewaysinwhichinsurancecompaniesshieldthemselvesfromthevolatilitythatsometimesaccompaniestherenter'slifestyleisbylimitingthetransferabilityofarenterspolicyfromonelocationtoanother.So,ifyoumovetoanewhomeduringthepolicyterm,thelimitofliabilityforon-premisescoveragewillapplyateachresidenceandintransitbetweenthemforaperiodof30daysafteryoubegintomovetheproperty.Whenthemoveiscompleted,on-premisescoverageappliesatyournewhomeonly.

PropertyNotCovered

Renterscoveragefortheftdoesnotapplytocertaintypesofproperty.Aswehaveseenbefore,thisbecomesusefulasanegativechecklistforcoverage:

aircraftandparts,otherthanmodelorhobbyaircraft;

animals;

creditcardsandATMcards;

motorvehiclesexceptmotorizedequipmentthatisdesignedtoassistthehandicappedorisnotsubjecttomotorvehicleregistrationandthatisusedtoserviceyourhome(suchasalawntractororevenanall-terrainvehicle);

motorvehicleequipmentandaccessories,andanydeviceforthetransmitting,recording,receivingorreproductionofsoundorpicturesthatisoperatedbypowerfromtheelectricalsystemofamotorizedvehicle,includingtapes,wires,discsorothermediaforusewithsuchdevices,whileinoruponthevehicle;

businessproperty;

propertyheldasasampleorforsaleordeliveryaftersale;

propertyoftenants,roomersandboarderswhoarenotrelatedtoyou;

propertyseparatelydescribedandspecificallyinsuredbyanyotherinsurance;

propertywhileatanyotherlocationowned,rentedtooroccupiedbyanyinsuredperson,exceptwhileaninsuredpersonistemporarilyresidingthere;

propertywhileinthecustodyofanylaundry,cleaner,tailor,presserordyer,exceptforlossbyburglaryorrobbery;

propertywhileinthemail.

Ifyou'vealreadyreadthepreviouschapters,you'llrecognizetheseexclusionsfromstandardhomeownersanddwellingpolicies.Anumberoftheserecurthroughoutthevariousformsofhouseholdinsurance.

However,itisimportanttorememberthatthebroadtheftformaddstwoconditionsthatcaninfluencewhetherornotproperty(whichwouldotherwisebecovered)iscovered:

inadditiontostandarddutiesafterloss,theftcoveragerequiresthatyounotifythepolicewhenatheftlossoccurs;and

theotherinsuranceconditionthatappliestohomeownersanddwellingformsischangedslightly:Ifatheftlossiscoveredbyotherinsurance,theinsurancecompanyisonlyobligatedtopaytheproportionofthelossthatthelimitofliabilityunderthetheftendorsementbearstothetotalamountofinsurancecoveringtheloss.So,ifyouhaveseparateinsuranceforyourbaseballcardcollectionandthecollectionisstolentherenterspolicywillonlypayapro-ratedportionoftheloss.

CondominiumCoverage

Owningacondominiumoratownhouseisnotthesameasrentingandit'scertainlydifferentfromowningahouse.Forstarters,youdon'thavetoworryaboutmowingthelawn,mendingtherooforfixingabrokengatewhenyouownacondo.Clearly,youhavelesstomaintain.

Youalsohavelesstoinsurethansomeonewhoownsahousebutmorethansomeonewhoisonlyrenting.Ifyouownorarethinkingofbuyingacondominium,yourprimaryinterestshouldbeininsuringyourselfandyourunit.

Thecondominiumassociationshouldtakecareoftheresteverything

frompurchasinginsuranceforthecommonareastofixingaleakyroof.Thecondoassociationmaintainsthefacilityincludingtheupkeepofthebuilding(orbuildings)andattachedgrounds.

WhatDoYouNeedtoInsure?

Whenitcomestoyourinsuranceneeds,youhaveyourpersonalpropertytoconsider,aswellasliabilityforanythingthathappenswithinyourunit.Youalsomayhavetoinsureallofthebuilt-inswithinyourunit(includingfixtures,cabinetsandappliances)oryoumayonlyhavetoinsureanythingthathasbeenmodified(byyouorapriorowner)sincethecondowasfirst

sold.Yourownershipandinsuranceresponsibilitieswillbedefinedinthecondoassociation'sMasterDeedorBylaws.

Becausecondominiumownershipisdifferentthanhomeownership,you'llneedaspecialsortofinsurancepolicy,knownashomeownersformHO-6.Itcoversco-opandcondominiumowners,andprovidescoverageforliabilityandpersonalproperty.

Youdon'thavetoinsurethecommonareasorexternalwallsofthebuilding.Insurancepurchasedbytheco-oporcondominiumassociationwillcoverthatalongwithwhateverelsetheindividualunitownersarenotrequiredtoinsure.

Mostcondoassociationscarryfireandcasualtycoveragefortheirrealpropertyandliabilitycoverageonthecommonareasofthecondominiumaswellasfortheirboardsofdirectorsandofficers.Thisdirectorsandofficers(D&O)liabilitybecomesimportantifsomeoneparticularlyanyoftheunitownerssuestheassociationforfailingtoperformitsdutiesproperly.

Condominiumownersinsurancepolicieshavebeendesignedtoworkasalayerofinsuranceabovewhatyourcondoassociationhas.Theyautomaticallyprovideonlyafewthousanddollarsofbuildingcoverage.Otherwise,thecondopolicyisverysimilartotherentersinsuranceform.

Thecondopolicytakesintoaccountthefactsthat:

condominiumownersownonlyaportionofthebuildinginwhichtheirunitsarelocated;

asamemberoftheassociation,eachindividualunitownerhassharedownershipinthebuildingstructure;and

disputesoversharedliabilitycanresultinlargelegaljudgments

againstindividualowners.

CommonWalls,CommonProblems

Common-interestcommunitiesincludingcondos,townhousesandclusterhomescanposesomeuniquecoverageproblems.

Forinstance,ifafirestartedbyyourneighbordamagedyouradjoiningcondo,yourneighbor'sinsurancecompanymightrefusetopayforyourdamage,claimingthatyourinsurancecompanyshouldpay.

Inmostcases,toavoidtheseproblems,condoownersbuyinsurancetocoverthecontentsoftheirunits,andcondominiumassociationsbuycoverageontherealproperty.

Still,problemsremain.Onecommonproblemisthatcondominiumpoliciesoftendon'tincludebroadwaterdamagecoverageforproblemslikeseweranddrainbackup.High-risebuildingsalsohaveproblemswithwind-drivenrainthoughmostcondoassociationsaren'tcoveredforthis.

Example:Youbuya30th-floorcondowhereyouplantoliveafewmonthseachyearforitsmagnificentviews.Youcomebacktothecondosixmonthslatertofindyourfurnituresoakedandthewallscoveredwithmildew.Aseriesofstormscauseddrivingraintoseepthroughthepicturewindowsinupper-levelunits.Unlessyourcondoassociationhasspecificcoverageforthisrain,youmaynotbecovered.

Claimsmadebyunderinsuredcondoownersareabigissuebetweencondoassociationsandtheirinsurancecompanies.Ifproblemsoccurandtheassociationfindsitdoesn'thaveadequatecoverageforthedamage,unitownersoftenwillsuetheboardoftheassociationforneglectingitsfiduciarydutytoprotectmembers.

Somestatesrequirethatcondoassociationsprovidecomprehensiveorblanketcoverageagainstliabilityandpropertydamageforallmembersbutmanystatesdon't.Condoownerslivinginbuildingsthatdon'thaveblanketcoverageusuallyhavetoprovidetheirowncoverage.

What'sCoveredonYourPolicy

Thecondoownerspolicy,formHO-6,coversmanyofthesamethingsasastandardhomeownerspolicyonlyitoffersfarlesscoverageforthedwellingitself.

Thebasiccoverageincludes:

CoverageADwelling,$1,000minimum;

CoverageCPersonalproperty,$10,000minimum;

CoverageDLossofuse,40percentofCoverageC;

CoverageEPersonalliability,$100,000minimum;and

CoverageFMedicalpayments,$1,000minimum.

Coveredperilsincludefire,lightning,removalofdebris,windstorm,hail,explosion,riot,civilcommotion,aircraft,vehicles,smoke,vandalism,glassbreakage,theft,burstingofasteamorhotwaterheatingsystem,fallingobjects,collapse,weightofice,snoworsleet,freezingpipes,damagetoappliancesbyartificiallygeneratedelectricityandleakageofaplumbingorheatingsystemjustliketherenterspolicy.

WhenYou'retheLandlord

Rentersaren'ttheonlypeoplewhoneedinsuranceinarentalsituation.Ifyou'rerentingoutanapartment,guesthouse,condoorhousethatyouown,youhavesignificantexposurestofinancialloss.However,youmayfindyourselfinanawkwardplacelostbetweenthelimitsofastandardhomeownerspolicyandthetechnicalcomplexityofcommerciallandlordcoverage.

Fortunately,youcanprotectyourselfagainstsomerentallosseswithoutgettingintocommercialcoverage.Withsomemodifications,acombinationofdwellinginsuranceandbroadtheftcoverageshouldmeetyourneeds.

Protectionagainsttenanttheftdeservesparticularattentionevenifyoufeelthatyouknowtherenterswell.Thechancesaregoodthatyouwon'tcollectonabasicdwellingpolicywhichinsuresthehouseandcontentsagainsttheftanddamagefromfire,wind,smoke,vandalismandotherhazards.

Ifitturnsoutthatyourtenantsarethethieves,you'llneedmorecoveragethanastandarddwellingpolicy.You'llneedthesametheftcoveragethattherentersthemselvesshouldbebuying.

Therealsocanbeproblemsifarenterforgetstodouble-latchthedoororsecureawindowmakingiteasyforaburglar.Ifyourinsurancecompanyfindsout,itcouldresistpayingforsomestolenitemsonthegroundsthatthelowpremiumratesforitsstandardcoveragewerebasedontheassumptionthatyouwillbearoundtohelpkeepthehomeandcontentssafe.Atbest,thecompanymightpayforsuchthingsasastolentelevisionsetandfurniturebutnotformissingjewelry,furs,silver,coinsandwatches.

So,reviewyourhomeownersordwellingpolicybeforeyouaccepta

renter'sdepositcheck.Inparticular,youneedtolookintheexclusionsorconditionssectionforaclausethatreadssomethinglike:

periloftheftdoesnotincludeanypartoflosswhenthepropertyisrentedbytheinsuredtoanotherparty.

Ifyourpolicyhaslanguagelikethis,youmaywanttoconverttoanall-riskhomeownerspolicy(formHO-3)orbuyanendorsementthatbroadensyourtheftcoverage.

Aswe'venotedbefore,youcanexpecttopayasmuchas20percentmorethanthecostofabasicpolicyforall-riskcoverage.Theendorsementtoaddbroadtheftcoverageusuallywillcostlessthanthisbutstill10percentto20percentmorethanastandardtheftpackage.

Ifyourentyourhomefrequently(orpermanently),youmayneedanevencostlierspecialmulti-perilpolicy.Thiskindofinsurancewhichisactuallyacommercialpolicyisdesignedforprofessionallandlords.Itcoversjustabouteveryexposurealandlordfaces,andcanbemodifiedtoinsureagainstvariousparticularrisks.Butifyou'rejustrentingoutonehouseorapartment,you'llprobablydobesttouseendorsementstoexpandthecoverageofastandardhomeownersordwellingpolicy.

Somepart-timelandlordsmaybetemptedtoavoidtheextrainsuranceand,ifthere'saninsurableloss,simplyfailtomentiontotheinsurancecompanythattheincidentoccurredwhilethepropertywasrented.Thismaywork,butthiskindofclaimcanprogressquicklyfromwhitelietooutrightfraud.Formostpeoplewhohaveassetstoinsure,it'sbettertotellthewholetruthandpayaslightlyhigherpremium.

ExchangingHomes

Thepracticeofexchanginghomeswhereyoustayinanotherfamily'shomewhiletheystayinyoursduringvacationscanpresentseveraldifferentkindsofproblems.

Forinstance,doestheexchangeincludeuseofthefamilycar?Whatifsomeoneusingyourhomehasanaccidentwithyourvehicle,oryouhaveacollisionasyoudriveanunfamiliarcarinaforeigncountry?

IntheUnitedStatesandCanada,yourcarinsurancecollisionandliabilityautomaticallyremainsineffectaslongasthedriverhasyourpermissiontogetbehindthewheel.Thisisnotthecaseeverywhereintheworld.

Youalsomaywanttoconsiderincreasingyourpersonalliabilityinsurancetosafeguardyourassetsjustincase,forexample,someone

who'sunfamiliarwiththatlowcellardoorwaysuffersaconcussionanddecidestosue.

Ifyou'rethinkingaboutturningyourhouseovertoguestsofanysortformorethanafewdays,youprobablywanttoexpandyourhomeownersordwellingpolicy.

Typically,anall-riskhomeownerspolicyprovidesupto$2millionworthofliabilityinsuranceyoumayneedthisifyourhousehasaswimmingpool,saunaorotherpotentiallydangerousamenity.

Damagecausedbyrentersorpeoplewhouseyourhouseinanexchangeusuallywillbeconsiderednormalwearandtear,andwillnotbecoveredbyabasicpolicy.Inthesecases,anall-riskorspecialformpolicymaybeworththeextrapremiumcost.

Conclusion

Overlookinginsurancecanbeabigmistake.Evenifyouarenotahomeowner,youprobablyhavebelongingsofvalue.Fortunately,therearepoliciesavailableforrenterstoinsureprotectioninthecaseoftheftorotherloss.

Andtherearepoliciesdesignedwithcondominium,townhouseandco-opownersinmind,too.

Unfortunately,thereisnopolicydesignedjustforpeoplewhorentoutahomeortradehomesoccasionally.Youwillhavetobeabitmorecreativeaddingtoyourhomeowners,dwellingortheftcoveragepolicytobesureyoudon'twindupunderinsured.

KeyQuestions

Forrenters.

1)Doyouhaveatleast$6,000worthofpersonalproperty?

Yes No

2)Howmuchpersonalpropertycoveragedoyouneed?(RefertotheHouseholdPropertyInventoryinthehomeownersinsurancesection.)__________________________________________________________

3)Doyouwantnamedperilsorallriskcoverage? ___________

4)Howlargeofadeductiblecanyoutolerate?(Themoreriskyouassumeandthemorecostyouabsorbintheeventofalosstheloweryourpremiumswillbe.Rentersdeductiblestypicallyarelessthan$500.) ___________

5)Doyouhaveanypropertythatneedstobecoveredunderafloater,ascheduleoranendorsement(e.g.,cameragear,computerequipment,collectibles,etc.)? ___________

6)Doyouwantoff-premisestheftcoverage? Yes No

7)Howmuchliabilitycoveragedoyouneed?Doyouneedany?(RefertothePersonalAssetsInventoryinthehomeownerssectiontohelpdeterminethisamount.)

___________

ForCondominiumOwners

1)Doesyourcondoassociationprovideblanketliabilityandpropertydamagecoverageforunitowners?

Yes No

2)Doyourcondoassociation'sbylawsrequireyoutoinsurebuilt-ins,suchasappliancesandcabinets?

Yes No

3)Doyourcondoassociation'sbylawsrequireyoutoinsureanyupgradesmade(byyouorapriorowner)sincetheunitwasfirstsold? Yes

4)Doesyourcondoassociationprovidecoverageforsewerbackuporwind-drivenrain? YesIfno,canyouaddthiscoveragetoyourownpolicybyendorsement? Yes

5)Howmuchdwellingcoveragedoyouneed?(Questions1,2and3willhelpyouanswerthis.) Yes

6)Howpersonalpropertycoveragedoyouneed?(RefertotheHouseholdPropertyInventory.) ______________

7)Howmuchliabilitycoveragedoyouneed?(RefertothePersonalAssetsInventory.)

______________

ForOccasionalLandlords1)Describethepropertythatisbeingrented(e.g.,guesthouse,mother-in-law'sapartment,secondhome,etc.)._________________________________________________

________________________________________________________________2)Doyoueveroccupythepropertypersonally?When?

________________________________________________________________3)Howmuchcoveragedoyouneedforthedwelling?________________________________________________________________

________________________________________________________________(Continuedonnextpage)

4)Howmuchpersonalpropertycoveragedoyouneed(foryourownpropertythatison-site,includingfurniture,carpetanddrapes,dishes,etc.)?(RefertotheHouseholdPropertyInventory.)_______________________________________

5)Doyouneedbroadtheftcoverage? YesNo

6)Willthepolicyinquestioncovertheftifthepropertyisrentedout?

7)Doyouneedliabilitycoverageforthisproperty? YesNo

8)Ifyouexchangehomes,willthispolicyprovidesufficientcoverage?

SOSUEME

Chapter10PersonalLiabilityPoliciesHavingfriendsoverforafewbeersseemsharmlessenoughunlessoneofthemdrivesoffandgetsintoaseriousaccident.Thenyoumaywindupincourt.Thesedays,youcanbeheldliableforthedamagesyourguestscauseafteryou''allowthem"toconsumealcoholatyourhomeandthen"allowthem"todrive.Somestateshavelawsthatmandateahost'sliability,muchlikeasaloonkeeper'sorabartender'sliability.

Youcouldberesponsibleforthepaymentofmedicalbills,vehiclerepaircosts,losttimefromworkand,intheworstcase,claimsforwrongfuldeaththatmayresultinhugemonetarysettlements.

Doyouhavecoverageforsuchasituation?CertainlynotunderyourPersonalAutoPolicy,eventhoughtheclaimmightbeauto-related.Youmayhavecoverageunderyourhomeownerspolicy.Butthiscoveragewillbelimited.

Inmostcases,youwouldneedapersonalumbrellaliabilitypolicytocoverthissortofproblem.(Ofcourse,youalsoshouldn'tletyourfriendsdrinkanddrive,butthat'sanotherstory.)

Whenelsewouldyouneedapersonalumbrellapolicy?Ifyou'rebeingsuedforlibelorslanderinanon-businesssituation,ifyourdogbitesanotherpersonoranimal,orifsomeonegetsinjuredatyourhomeandsuesyouformedicalbillsandpainandsuffering.

Whilecommonpersonalliabilitypolicies(suchasahomeownersorPersonalAutoPolicy)doprovidecoveragefortheirrespectiveliabilitysituations,oftenthelimitsaren'thighenoughtopayallthedamagesthatcouldbeawardedinevenamoderatelyseverecase.Whatifyouhavea$250,000limit

forautomobilebodilyinjuryandacourtentersajudgmentof$500,000againstyou?

Ifacourthandsdownaliabilityjudgmentthatexhauststhelimitsofyourhomeownersorcarinsurancepolicy,youareresponsibleforthebalance.Perhapsyourhousewillhavetobesold,yourIRAswillneedtobecashedout,orotherassetswillhavetobeliquidatedinordertomakepaymentonthejudgment.Ifyourassetsareexhaustedandajudgmentisnotfullysatisfied,futureearningsmaybeattachedinfurthersettlementoftheoutstandingjudgment.Amajorliabilitylosscanwipeoutassetsthattookalifetimetoaccumulate.

Isanyoneexemptfrompersonalliabilityexposures?Exceptforminors,thelegallyincompetentandtheindigent(whohavenoassetsatrisk),mostofushaveexposures.Howcananyonewhodrivesanautomobilebeabsolutelypositiveheorshewillneverbeinvolvedinanat-faultaccident?Howcananyhomeownerorrenterbecertainthatnovisitorwilleverbeinjuredonthepremises?Howcananyonebesurethatapersonalliabilityclaimwillneverariseoutofsomethingtheysayorsomethingtheydo?

Thesimpleansweris:Youcan't.

Anotherreasontoconsiderthiscoverage:Obtaininganumbrellapolicyisagoodwaytoloweryourhomeorcarorboatinsurancecosts,sincegettinganumbrellapolicytypicallyislessexpensivethangettingadditionalliabilitycoverageonahomeowners,boatownersorautopolicy.Andanumbrellapolicyprovidescoverageforallthreeareas,plusthingsthoseunderlyingpolicieswillnotcover.

UmbrellaLiabilityPolicies

Umbrellaliabilitypolicies,whichwerefirstwritteninthiscountryinthe1940s,servetwomajorfunctions:Theyprovidehighlimitsof

coveragetoprotectagainstcatastrophiclosses,andtheyusuallyprovidebroadercoveragethanunderlyingpolicies.

Umbrellasarewrittentoprovideinsuranceonanexcessbasis,aboveunderlyinginsuranceoraself-insuredretention(theequivalentofalargedeductible).

Mostofthevariouspersonalumbrellapoliciesonthemarketcanbeorganizedintotwocategories:

FollowingFormExcessPolicies.Theseprovidehighlimitsovertheexactsameperils,coveragesandexclusionsfoundinalloftheunderlyingpoliciesoverwhichcoverageisbeingprovided(e.g.,yourhomeownersandautopolicies).

TrueUmbrellaPolicies.Inadditiontohighlimitsofliabilitycoverage,theseprovidebroadercoveragethanisprovidedbytheunderlyingcoverages.

Trueumbrellacoveragewillprotectyourpresentandfutureincomestreamsmosteffectively.Itprovidesthreeessentialthings:

excesslimitsoverunderlyingpolicies;

broadercoveragethantheunderlyingpolicies;and

defensecostsinadditiontothelimitofinsurance.

Anumbrellapolicywillusuallydefendaclaimevenifitisgroundless.

Forlossesthatarecoveredbyyourprimaryinsurance,theumbrellacoveragebeginstoapplyonlyaftertheprimarycoveragehasreacheditslimit.Forlossesthatarecoveredbytheumbrellaandnotbyyourprimarypolicies,theumbrellacoveragebeginstoapplyafteralossexceedsyourdeductible.

Therearenostandardumbrellapolicies,soitisn'teasytogeneralizeaboutthem.Earlyumbrellapolicieswereextremelybroadandcontainedfewexclusions.However,carrierssoonlearnedthattheywouldneedtonarrowthecoveragebycreatingmorespecificinsuringagreementsandexclusions.

Theintentistoprovideaffordableandcomprehensivecoverageforcatastrophiclosses,incidentalexposuresandmodestinsurancegaps,butnottoprovideblanketall-riskcoverageinmultipleareaswherethereisnoprimaryinsurance.Forthisreason,insurancecompaniesusuallywillrequireyoutomaintainanadequaterangeofunderlyingcoveragesbeforetheywillsellyouumbrellaliabilitycoverage.

Theexclusionsandlimitationsofanumbrellaoftenaremuchlikethosefoundintheunderlyingpolicies.However,theumbrellausuallywillhavefewerexclusionsthanprimarycoverageandabroaderinsuringagreement.

TheLegalTheoryBehindLiabilityIssues

Whenyouviolatesociety'slaw,youhavecommittedacrime.Whenyouviolatetherightsofanotherperson,youhavecommittedatort.Thepersoncommittingatortisknownasthetortfeasor.

Itisimportanttonotethatliabilityinsuranceappliesonlytothefinancialconsequencesoftorts.Youcannotbuyliabilityinsurancetoprotectagainsttheconsequencesofcrimes.

Ifyouareangryatyourneighborandintentionallyburndownhishouse,youhavecommittedthecrimeofarsonandliabilityinsurancewillnotcoverthedamages.However,ifyouarehavingabackyardbarbecueandaccidentallystartafirethatburnsdownyourneighbor'shouse,liabilityinsurancemaycoverthedamages.

Themajorityofpersonalliabilitycasesinvolveunintentionaltorts.Thebasisforunintentionaltortsisusuallynegligence,sowehadbetterhaveaworkingdefinitionofnegligence.Inorderfornegligencetoexist,fourelementsmustbepresent:

Dutytoact.Thedutytoactinareasonablyprudentmannertowardanother(suchasdrivingyourcarsafelydownthestreetinamannerthatavoidshittingothercarsorpedestrians).

Breachofthedutytoact.Thetortfeasordoesnotactintheprudentmannerdescribedabove.

Occurrenceofinjuryordamage.Anotherpartyactuallymustsufferaninjuryordamage.

Negligenceistheproximatecauseoftheinjuryordamage.Thetortfeasor'sbreachofdutyisactuallywhatcausedtheinjuryordamage.

Ifanyoftheseelementsisabsentfromanevent,negligencedoesnotexistandyouwillnotbeheldliableduetonegligence.Butwhentherequiredelementsarepresent,theinjuredpartyusuallyhasavalidclaimfordamagesbasedonnegligence.

Damagesisanimportanttermtounderstandinanydiscussionofliability.Whensomeoneisheldliableforinjuryorpropertydamagetoanother,thatpersoncanberequiredtopaycompensationtotheinjuredparties.Forthesetypesofclaims,weneedtobeconcerned

withtwobroadtypesofdamages:

Compensatorydamageswhichsimplymeanscompensationforthelossincurred.Thesemayincludespecificdamages(thedocumentable,actualexpensesincurredbytheinjuredparty,suchasmedicalbills,wageslostandpropertyreplacementcosts)andgeneraldamages(monetaryawardsformoresubjective,lessquantifiableaspectsoftheloss,suchaspainandsuffering,orlossofconsortium).

Punitivedamagesthesearedamagesthatthecourtcancompelthetortfeasortopayinadditiontothecompensatory

damagesawarded.Punitivedamagesrepresentafine,orpunishment,foroutrageous,severeorintentionalconduct.

CommonKindsofLiability

Vehicle-relatedliabilityisthegreatestsinglesourceofpersonalliability.Youruseofavehiclegenerallycausesyoutobeintheproximityofmanyotherpeopleandvehicleoperators,whileoperatingaseveralthousandpoundmachinemovinginandaroundothersuchmachineoperators.Allinall,it'sawondertherearen'tmoreaccidents.

Vehicleliabilitycanarisefrompropertydamagetootherpeople'scars,injurytopeopleoccupyingothercars,injurytopedestriansanddamagetopropertyotherthancars(suchasaneighbor'sbrand-newfence).

Injuriesanddamagesrelatedtovehicleusealsomaybecausedoraggravatedbymanyfactors,suchasexcessivespeed,driverinexperience,disobedienceoftrafficlaws(suchasrunningastopsign),useofintoxicants(drugsoralcohol)orsimplecarelessnessbroughtonbyinattention(suchaswatchingthesceneryinsteadoftheroad).

Residence-relatedliabilityisthenextbigsourceofpersonalliability.Whetheryouownorrentyourhome,youmaybepersonallyliableforinjuryordamagetoothers.Suchsituationscouldinclude:

tripandfallincidentsduetoiceandsnow,debris,etc.;

accidentsrelatedtoswimmingpoolsorotherattractivenuisances,suchasjunglegymsandtrampolines;

propertydamagescenarios(forexample,arentercausingdamagetothepremisesbycarelesssmoking);

injuriessustainedby,orinjuriestootherscausedby,domesticworkers,suchasmaids,gardeners,etc.;

injurycausedbyanoverlyprotectivedog(ifFidobitesyourneighbor'slittleFifi,youcouldwinduppayingthevet'sbillsandalawyer'sandwatchoutifFidobitesyourneighbor'schild,nomatterhowmuchJuniorwasteasing).

Generally,apersonalumbrellapolicywillnotcoverbusinessliability.However,somebusinessexposuresmaybecoveredbypersonalliabilitypolicies.Forexample,anumbrellapolicymaycovercertainhomeofficeexposures.

Sofar,we'vediscussedunintentionaltorts.Intentionaltortscaninvolveinfringementofpropertyandprivacyrights(forexample,trespassing).Propertyrightsalsocanbeviolatedbynuisance-typeactivitiesthatinterruptapropertyowner'sabilitytousetheproperty(forexample,whenyoutestthevolumelimitonyournew2500-wattCDplayerwhileyourneighboristryingtorelaxonaSundayafternoon).Otherintentionaltortsinvolvepersonalinjury,whichincludesbodilyinjuryanddamagetoreputationthroughuntruestatements,libel(inprint)orslander(spoken).

Thesearebynomeanstheonlyexamplesofpersonalliabilityexposures.Yourchildren,yourpets,yourpremises,yourhobbies,yourcarandmanyofyourdailyactivitiescreateexposuretopersonalliability.

PersonalUmbrellas

Apersonalumbrellapolicy(asopposedtoabusinessumbrellapolicy)offerscoverageaboveandbeyondtheliabilitycoverageyouhaveonyourhomeownersorcarinsurancepolicy.AndsomepersonalumbrellapoliciesalsooffercoverageforboatsandJetSkiseitherwithorwithoutanunderlyingboatorspecialtyvehiclepolicy.

Formanypeople,apersonalumbrellapolicyiswellworththeextra$200or$300ayearespeciallyifyoucansavethatmuchonyourhomeownersandautomobilepoliciesbyreducingyourliabilitylimits.

However,bearinmindthatyoustillwillhavetohaveatleasttheminimumliabilitylimitsonyourautopolicythatarerequiredbylawinyourstate.Andmostpersonalumbrellapoliciesalsorequirethatyouhaveaminimumamountofunderlyinginsuranceinplace.Forinstance,Nationwideautopolicyholdersneedtocarryatleast$300,000ofcoverageperpersonandperaccidentinbodilyinjury

liability.Homeownersneedtocarryatleast$300,000incomprehensivepersonalliabilitycoverage.

Sincetheminimumliabilitycoverageavailableunderapersonalumbrellatypicallyis$1million,thismeansyou'dhave$1.3millionworthofautoliabilitycoverageand$1.3millionworthofcomprehensivepersonalliabilitycoverage.(Ineffect,theliabilitylimitsonyourautoandhomeownersinsurancepoliciesserveasadeductibleontheumbrellapolicy.)

Manyliabilitycoveragesarewrittenasacombinedsinglelimit,orCSL.Thismeansthatthesingledollarlimitismadeavailableforbothbodilyinjuryandpropertydamage(oranyothertypeofinjuryordamagecoveredbythepolicy)forwhichyouarefoundliableastheresultofacoveredacci-

dent,occurrenceorevent.Agoodpersonalumbrellapolicyprovidescoverageinthismanner.

Anothervariationisknownassplitlimitsofcoverage.Automobilepoliciescommonlyprovidesplitlimits,underwhichseparatelimitsarestatedforbodilyinjurycoverageperperson,themaximumamountofbodilyinjurycoverageperaccidentandpropertydamagecoverageperaccident.Whenanumbrellaprovidescoverageabovesplitlimits,itwillbegintoprovideexcesscoverageaboveeachofthestatedunderlyingsublimits.

Avariationprovidedbysomeinsurersisanumbrellawithwhatiscalledasmoothedlimit.Underthisapproach,theumbrellalimitisthetotalamountofcoveragethatwillbeprovided.Insteadofprovidingcoverageinadditiontothatprovidedbyanunderlyingpolicy,thesmoothedlimitpolicyonlyprovidestotalcoverageuptoitslimit.

Example:Oliverhasa$1millionumbrellapolicywrittenwithasmoothedlimitand$200,000ofunderlyinghomeownersliability.Theumbrellainsurancecompanywillonlyprovide$800,000ofexcesscoverageforlossescoveredbythesepolicies.

BroaderScopeofCoverage

Oneofthemostimportantfunctionsofatrueumbrellaisthatitprovidesbroadercoveragethantheunderlyingpolicies.Thetermdrop-downcoveragesisoftenusedtonamethecoveragesprovidedbythepersonalumbrellathatarenotprovidedbytheunderlyingliabilitypolicies.

Someoftheseinclude:

Personalinjurycoverage.Thetypicalunderlyinghomeownerspolicyprovidesliabilitycoverageforaccidentalbodilyinjury(meaning

physicalinjuryordeath),butnotforeventsinvolvinglibel,slander,falsearrestandthelike.Thepersonalumbrelladoescoveryouforliabilityarisingoutoftheseevents.

Regularlyfurnishedautos.ThestandardPersonalAutoPolicycontainslanguagethatprecludesliabilitycoveragefortheuseofvehiclesthatyoudonotownbutthataremadeavailableforyourregularuse(suchasacompanycar).Thepersonalumbrelladoesnotexcludesuchcoverage.

Contractualliability.Thestandardhomeownerspolicyseverelylimitscoverageforliabilityassumedbycontract.So,ifyousignaneasementagreementtobuildasharedaccessroad

withyourneighborandhesuesyoubecausetheroadisnevercompletedtheumbrellawillcoveryou.

Damagetopropertyofothers.Thestandardhomeownerspolicyexcludescoveragefordamagetopropertyofothersleftinyourcare,custodyorcontrol.Thepersonalumbrelladoesnotexcludecoveragefordamagetosuchproperty.

Animportantconceptthatcomesintoplaywhenapersonalumbrellacoversalossthatisnotcoveredbyanunderlyingpolicyistermedaself-insuredretentionorSIR.(It'scalledaretainedlimitinsomepolicies.)Whentheumbrellaaloneprovidescoverageforaloss,youpaywhatamountstoadeductibleby"retaining"thefirstsmallportionoftheloss(typically$250).

Losspaymentisadministeredsomewhatdifferentlythanwithtraditionaldeductibles.Inthiscase,youwriteachecktoyourinsurancecompanyfortheamountoftheSIR,anditpaystheinjuredpartytheentireamountforwhichitisliable.

DefenseCostsProvided:DutytoDefend

Anothermajorbenefitofpersonalumbrellacoveragewhichwehavediscussedbefore,butnotindetailisthatthepolicyprovidesforpaymentofdefensecosts.Whenyouareaccusedofbeingliablefordamagestosomeoneelseandaretakentocourtoverit,legalcostswillbeincurred,evenifthesuitistotallygroundlessandendsinyourfavor.

Fortunately,mostunderlyingliabilitypoliciesalsoprovidecoveragefordefensecosts,whetherornotthesuitisgroundless.Also,thesecostsarepaidinadditiontotheavailablelimitsofliability(inotherwords,theentireliabilitypolicylimitsareavailabletopaydamages).

Actually,theinsurancecompanydoesmuchmorethansimplypaydefensecostswhenasuitisbroughtagainstyou.

Inotherwords,theinsurancecompanystepsinandprovidesthedefenseanddoessoatitsownexpense.However,theinsurancecompany'sdutytodefendendswhenithaspaidorofferedtopayitsmaximumlimitofliability.

Forexample,youhaveahomeownerspolicyproviding$100,000ofpersonalliabilitycoverage,andyoualsohave$1millionofpersonalumbrellacoverage.Onedayyourpitbullbitesandseverelyinjuresavisitingchild,andthechild'sparentssuefor$500,000.

Iftheunderlyinginsurerbelievesadefensemaybesuccessful,itmaydefendtheclaimtoconclusion,regardlessoftheoutcome.(Theremaybenoliability,theliabilityawardedmaybelessthanthehomeownerspolicylimit,ortheawardmayexceedthatlimit.)Theumbrellainsurerobservesbutdoesnotparticipateinthedefense.Itwill,however,payitsshareofanyawardinexcessofthe$100,000homeownerslimit.

However,theunderlyinginsurermightnothavetoprovideadefense.Ifitbelievesasuccessfuldefenseisdoubtfulandthatanysettlementisgoingtoexceeditspolicylimit,itmightimmediatelyoffertopayits$100,000limitandavoiddefensecosts(itsobligationendswhenitexhaustsitslimit).Inthiscase,younolongerhavetheunderlyinginsurerdefendingitsclaim.

Thepersonalumbrellabecomesveryvaluableatthispointfortworeasons:First,theumbrellacompanywillstepinanddefendtheremainderoftheclaim;second,theumbrella'sliabilitylimitcanmakeuptheremaining$400,000ifthechild'sparentswintheirentiredemand.

Anumbrellapolicy'sdutytodefendclauseisalsoveryimportantwhenthereisnounderlyingcoverageforaparticularsuit.Forexample:Lilyhasahomeownerspolicy,butshedoesnothaveanendorsementtoprovidepersonalinjurycoverage.Lilyissuedbysomeoneforslander.ThereisnocoveragefortheclaimunderLily'shomeownerspolicytheinsurancecompanyisnotobligatedtoprovideadefenseorpaydefensecosts.Inthiscase,thepersonalumbrellacompanywillstepinandprovideadefense,paythedefensecostsandprovidedrop-downpersonalinjurycoveragefordamagesthatmaybeawardedinadditiontothedefensecosts.

Evenifyouhaveumbrellacoverage,youneedtobecarefulaboutdefensecosts.Manypoliciesdocoverdefensecostsinadditiontothe

limitofliability.Butbeawarethatunderthetermsofsomepersonalumbrellas,defensecostsareincludedinthepolicylimitandarenotadditionalcoverage.

BuyingCoverage

Typically,personalumbrellaliabilitycoveragecomesinincrementsof$1million,startingat$1millionandgoingupto$5millionforapremiumof$200to$600annually.(Itispossibletogetevenhigherlimits.Therearecompanieswriting$10millionpolicies.)

Yourpremiumwilldependonthelimitsyouselect;thenumberofcars,homes,boats,etc.,thatyouown;andtheareainwhichyoulive.

Tofigureouthowmuchumbrellaliabilityinsuranceyouneed,youwill

needtodetermineyourcurrentnetworth(assetsminusliabilities).Doyouexpectthisamounttoincreaseinthenearfuture?Becauseoftherelativelylowcostofthistypeofinsurance,youmightconsiderbuyingenoughcoveragetoprotectyournetworthforseveralyears.

Ifyouarethinkingaboutbuyingapersonalumbrellaliabilitypolicy,it'sbesttoplaceitwiththesameinsurancecompanythatwritesyourhomeownersandautocoverage.Notonlyareyoulikelytogetadiscountforhavingmultiplepolicieswiththesamecompany,butyouaremorelikelytoavoidgapsincoverageifonecompanyishandlingallyouroverlappinginsuranceneeds.Besides,mostcompaniestailortheirexcessliabilitycoverageprovisionsaroundtheirautoandhomeownerspolicies.

Personalumbrellaliabilitypoliciesvaryfromcompanytocompany.Tohelpyoucomparedifferentpoliciesandtooptimizethecoveragethatyoureceive,we'vedevelopedachartthatappearsattheendofthechapter.

ComprehensivePersonalLiabilityPolicies

Unlikepersonalumbrellaliabilitypolicieswhicharesecondary,orexcess,coverageacomprehensivepersonalliability(CPL)policyisaformofprimarycoverage.

Itusedtobethatpersonalliabilityexposuresarisingoutofyourhomeandtheactivitiesofyouandyourfamilymemberswerecoveredexclusivelyunderacomprehensivepersonalliabilitypolicy.However,ashomeownerspolicieshaveevolvedintomorecompletepackagesofcoverage,theyhavecometoincludeCPLcoverage.

Stand-aloneCPLcoverageisvirtuallyidenticaltotheliabilitycoverageprovidedbyahomeownerspolicyandtothecoverageprovidedbyaliabilitysupplementattachedtoadwellingpolicy(in

fact,thatsupplementwasintendedspecificallytoreplaceCPLinsuranceforms).Inshort,CPLcoveragecouldbeconsideredhomeownerscoveragewithoutthepropertyinsurance.

Generally,thedifferencebetweentheliabilityinsuranceprovidedunderahomeownerspolicyorasupplementtoadwellingpolicyandtheliabilityinsuranceprovidedunderaCPLpolicyconcernstheminimumlimitsavailable.Comprehensivepersonalliabilitypoliciescontinuetocarrythebasiclimitshomeownerspoliciesusedtohave.Theminimumlimitswrittenare:

personalliability$25,000peroccurrence(thishasbeenraisedto$100,000onhomeownerspoliciesandthedwellingliabilitysupplement);

medicalpayments$500perperson(thishasbeenraisedto$1,000onhomeownerspoliciesandthedwellingliabilitysupplement);and

damagetothepropertyofothers$250peroccurrence(thishasbeenraisedto$500onhomeownersformsandthedwellingliabilitysupplement).

So,onebenefitofastand-alonepolicyisthechancetopurchaselowerlimits,ifyouhaveverylittleinthewayofassetstoprotect.Ontheotherhand,aseparateCPLpolicyalsocanbewrittenwithmuchhigherlimits,forthosewhohavesignificantassetstoprotect.

So,ifthiscoverageisredundanttowhatyoucangetwithahomeownerspolicyoradwellingliabilityendorsement,whyareseparateCPLpoliciesstillavailable?

ThemostcommonuseforCPLpoliciesisasasupplementtoaFAIRplanhomeownerspolicy.FAIRplanpoliciestypicallyarewrittenforsubstandardriskshomeswithaverylowvalue,homesinneighborhoodsthatinsurancecompaniestendtoshyawayfrom,etc.TheseFAIRplanpoliciestypicallyofferverylimitedpropertycoverageandtheydonotofferliabilitycoverage.Andthat'swheretheCPLcomesin.

BecauseCPLpoliciesprovidehomeowners-styleliabilitycoverage,insurancecompaniessometimesdosetsomerestrictionsintermsofyourresidencethoughmanyoffercoveragetoalmostallconceivabledwellings.Anyonewholivesinanapartment,adwellinghavingnomorethanfourfamilyunits,acondominiumoramobilehomeusuallyiseligibleforaCPLpolicy.

CarandMotorcycleExcessLiabilityCoverage

Anotheroption,ifyouarelookingformoreliabilitycoverage,isan

AutomobileExcessLiabilityorMotorcycleExcessLiabilitypolicy.Theseworkmuchlikeapersonalumbrellaliabilitypolicy,onlytheyaretailoredtotakeoverexclusivelywhereanautoormotorcyclepolicyleavesoffand,ofcourse,theyonlycoverliabilityrelatedtoyourcarorbike.

Thesepoliciestypicallyarewrittenwitha$1millionlimit.Andsomeofthemalsoallowyoutouseyourcarorbikeforbusinessaswellaspersonalpurposes.

Althoughthesepoliciesareusuallyinexpensive,forthemoney,itishardtobeatapersonalumbrellaliabilitypolicy.Thebreadthofcoverageofferedisworthwhatmaybeonlya$100ayearinadditionalpremiums,comparedwithoneofthesenarrowerexcessliabilitycoverages.

Conclusion

Inthislitigiousera,itsometimesseemsthatnoonewantstotakeresponsibilityfortheiractions.Ifsomeonefallsandinjureshimself,hecan'tjustsay,''Aren'tIclumsy?Canyoupleasecallanambulanceforme?"Hecallshislawyer,too.

Therefore,mostpeopleprobablydon'thaveenoughpersonalliabilityinsurancetocoverthisandotherkindsofclaims.Fortunately,therearecoveragesoutthere,andthey'rereasonablyinexpensive(especiallywhencomparedwithlosingyourhouseandallyourotherassets).

Youcanraisetheliabilitylimitsonyourhomeownerspolicytoaddressslip-and-fallandotherexposures.Youalsocanraisetheliabilitylimitsonyourautoormotorcycleinsurancepolicyorevenpurchaseanexcessliabilitypolicyspecificallytoaddresstheseliabilities.

Butthebroadestpossibleliabilitycoverageisofferedbyapersonalliabilityumbrellapolicy.Itwillprovideexcessliabilitycoverageontopofyourhomeownersandautopolicies.Itwillprovidecoveragesthattheyexclude.Anditwillprovideothercoveragescompletelyapartfromhomeownersandautoliabilities,includingsomeboatownerliabilities.

Apersonalumbrellapolicyisalsoquiteaffordablefortheamountofcoverageoffered,soitmakessenseformanypeoplewithassetstoprotect.

KeyQuestions

Thefollowingquestionsshouldhelpyouestablishsomeparametersforbuyingumbrellainsurance.

1)AreyouaFAIRplanparticipantinsearchofliabilitycoverage?

Yes No

2)IfyouareinaFAIRplan,youmaybeabletobuyawrap-aroundliabilitypolicydesignedespeciallyforpeopleinyoursituation.Aretheseavailableinyourarea?Whosellsthem?

________________________________________________

3)Whatistheliabilitylimitonyourhomeownerspolicy?Doesitincludeanyrelevantexclusionsorexceptions?

_______________________________________________

4)Whatisyourtotalnetworth,whichistheamountofwealthyouwillneedtoprotect?

Homeequity_____________

Otherrealestate_____________

Stock/bondportfolio_____________

Annuities/trustfunds_____________

Deferredincome/pensionfunds_____________

Jewelry/preciousmetals_____________

Royalties/patents/intellectualproperty_____________

Collectibles _____________Cash _____________TOTAL _____________

Thefollowingsectionwillhelpyoucomparepersonalliabilitypoliciesamongcompanies.

ComparingPersonalUmbrellaLiabilityPoliciesCoverageOffered CompanyACompanyBCompanyCLibelandslander Yes No Yes No YesAutobodilyinjuryliability Yes No Yes No YesComprehensivepersonalliability Yes No Yes No YesBoatliability Yes No Yes No YesJetSkiliability Yes No Yes No YesProtectivedogliability Yes No Yes No YesCoverageappliesworldwide Yes No Yes No YesBoatrentalcoverage Yes No Yes No YesDefensecostspaidontopoflimitpurchased

Yes No Yes No Yes

Anylimitssetondefensecosts Yes No Yes No YesCoverageforrentalproperty* Yes No Yes No YesLimitsDesiredCostfor$1millionincoverage ____________________Costfor$2millionincoverage ____________________Costforotherlimitdesired($_______) ____________________UnderlyingCoveragesRequiredAutopolicybodilyinjury ____________________Homeownerspersonalliability ____________________*Noteanyrestrictions:_______________________________________________

_________________________________________________________________

HEALTHANDDISABILITYINSURANCE

Chapter11HealthInsuranceGoingwithouthealthinsuranceisrisky.Whatifyougetinjuredandrequiresurgery?Thecostofahospitalstaycanbeasmuchas$400aday.Orwhatifyouoryoursignificantotherbecomespregnant?Eventhroughaclinic,thepriceofprenatalcareanddeliverycanexceed$5,000today.

Insuranceisdesignedtohelpyouinthesesituationstoassumetheriskofpayingyourmedicalbillsforafee,ofcourse.

Ifyouhavetopayforyourownhealthinsurance,youknowitisn'tcheap.Butonemajormedicalexpensecanmakeoneortwooreven10years'worthofpremiumspayforthemselves.

Manypeoplegettheirhealthinsurancefromtheirjob.HealthinsurancefirstbecameanemployeebenefitintheUnitedStatesduringWorldWarII."Manycompaniesfoundthatofferinghealthcarecoveragewasaneffectivewaytoattractscarceworkerswithoutviolatingthewartimefreezeonsalaries,"saidKathleenSebelius,insurancecommissionerforthestateofKansas."Afterthewar,fullhealthcarecoveragesoonbecameanexpectedbenefitofbig-businessjobs."

Today,fullhealthcarecoverage,forthemostpart,remainsthedomainoflargebusinesses,withanestimated41millionAmericansstillgoingwithout.AccordingtotheWashingtonInsuranceCouncil,datafroma1991surveyof3,322firmsshowthatonly40percentof

employersofferhealthcoveragealthoughtheiremployeesaccountfor77percentoftheworkforceinthiscountry.

Manysmallemployerscannotaffordtoofferhealthinsurancetotheirworkers.Andplentyofmid-sizeandevenlargefirmscandosoonlyiftheemployeespaypartofthecost.

Still,ifyoualreadyhaveatleastsomehealthcoveragethroughyouremployer,you'reinprettygoodshapeevenifyouhavetopaypartoftheprice.Youalsomayhavetheoptionofpayingthosecostswithpre-taxdol-

lars,whichreducesyourtaxableincomefortheyearandshrinksthebiteUncleSamtakesoutofyourpaycheck.Sometimes,thetaxbenefitswindupmakingyourhealthinsurancevirtuallyfreeforyou,anyway.

RememberWhen?

Onceuponatime,peoplecouldgotoanydoctortheywanted.Iftheirgeneralpractitionerdecidedtheyneededtoseeaspecialist,theycouldseeanyspecialisttheypleased.Iftheyneededmedicine,theycouldgotoanypharmacyandgetexactlywhatthedoctorprescribed.

ForthevastmajorityofAmericans,thingshavechanged.Today,wehaveHMOs,PPOs,genericdrugs,listsofdoctorsinsurancecompaniessaywecanandcan'tsee,treatmentsweareallowedbutonlyaftertwoorthreedoctorsagreethey'renecessary.

Healthcareandhealthinsurancehavebeenchangedradicallyduringthelastcoupleofdecades.

Itallstartedwithskyrocketingmedicalcosts.AccordingtotheWashingtonInsuranceCouncil,in1969,percapitaexpendituresforhealthcarewere$268peryearinthiscountry.By1990,thefigurehadincreasedto$2,567.Duringthesame20-yearperiod,healthexpendituresgrewfrom5.3percentofthegrossnationalproduct(GNP)to12.2percent.

Bytheyear2000,theHealthCareFinancingAdministrationprojectstheannualpercapitaexpensewillbe$5,712andthenationalhealthexpenditurewillbe$1,616trillionayear,orapproximately16.4percentoftheGNP.

Healthinsurershavehadtopayformuchofthesecostsandthey'vehadtocontendwithever-increasingfeesfordoctors,labtests,prescriptiondrugsandhospitals.Thesegrowingcostsmeantinsurers

eitherneededtokeepincreasingtheirpremiums,ortheyneededtofindanotherway.Tosomedegree,theydidboth.

Theycertainlyhavepassedalongincreasingcoststotheircustomersforyears.Buttherecomesatimeineverybusiness'slifewhenitrealizesitcan'tjustpassalongitscostsanylonger.Ithastodosomethingelsetoremaincompetitive.Ithastocutthecoststhemselves.

Whathaveinsurancecompaniesdonetocutcosts?They'vesetupagreementswithdoctorsorhealthproviderorganizationsthatenabledthemtostandardizefeesforvariousservices.They'velimitedyourchoicestogenericdrugs,ifthey'reavailable.And,they'velimitedyoutoaselectgroupofdoctorsinyourarea,oronlytooneprimarycarephysician.Wanttoseesomebodyelse?You'llneedpermissionoryou'llhavetopaythebillsyourself.

Butyoudostillhavechoiceswhenitcomestohealthinsurance,whetheryouarebuyingyourownorgettingitthroughyouremployer.Andthat'swhatthischapterisabout.

PickYourPlan

Whenitcomestohealthinsurancethesedays,youhaveachoice:Doyouwanttojoinahealthmaintenanceorganization(HMO),apreferredproviderorganization(PPO)?Ordoyouwanttopaymoreandgetareimbursement-stylepolicy(MedicalExpenseplan)sothattheinsurancepaysyoubackforapercentageofyourcosts,afteryoumeetthedeductible?

AnHMOisaformofmanagedcareandconsistsofanetworkofdoctorsandhospitalsthatprovidecomprehensivehealthcareservicestotheirmembersforafixedperiodicpayment,usuallymonthly.Asaresult,theHMOisboththeinsurancecompanyandthehealthcareprovider.Becausepriceisanimportantfactor,aboutoneinthreeAmericansareenrolledinanHMOtoday,with15millionenrolleesinCaliforniaalone.

TheotherAmericansarecoveredbyamoretraditionalreimbursementplan,Medicare,ortheyhavenohealthinsuranceatall.

Ifyou'researchingforyourowncoverage,thereisatremendousvarietyofpoliciesavailableintoday'shealthinsurancemarket.Somecontainasinglecoverage(forexample,hospitalizationcoverageonly)oracombinationofthemajortypesofhealthinsurance.Evenifyou'rejustchoosingamongthetwoorthreeplansofferedbyyourinsurancecompanyoryouremployer,thischapterwillcoverwhatyouneedtoknowtochoosetheplanthat'srightforyouandyourfamily.

MedicalInsurance

ThemostcommonformofhealthinsuranceisMedicalExpense

insurance,designedtoinsureyouagainstsicknessandaccidentalbodilyinjury.MedicalExpensepoliciesareoftwotypes:BasicMedicalExpenseandMajorMedicalExpense.

BasicMedicalExpensepoliciescoveroneofthreeexpensesandinclude:hospital,physicianandsurgicalexpenses.Youcanpurchaseonlyone,oracombinationofexpensecoverages.Thehospitalexpensecoverageincludesroomandboard,includingintensivecare,operatingroomfees,labfeesandothernecessaryservicesandsupplies.Roomsarelimitedtosemi-privateand,telephoneandtelevisionchargesarenotcovered.

Surgicalexpensecoverageincludesanydoctor'sfeesrelatedtosurgeryandcoverageforvarioustypesofproceduresbasedonthecompany'ssurgical

schedule(themaximumamountpayableforparticularoperations).Whilephysiciansexpenseisforanytreatmentbyaphysiciannotrelatedtosurgery.

BasicMedicalExpensepoliciesareusuallywrittenwithdeductiblesrangingfrom$100to$500percalendaryear.Oncethedeductibleismet,theinsurerpaystheremainingcostsinfull,uptothepolicylimits.Incontrast,MajorMedicalExpenseinsuranceisaimedatcatastrophicmedicalexpenses.

Introducednationallyin1951byinsurancecompanies,todayvirtuallyeveryhealthinsurancecompanyoffersthispolicy.It'sintendedtocoverseriousillnessesandaccidentsthatendupcostingyouthousandsandthousandsofdollars.Asaresult,theycomewithveryhighdeductiblesbutalso,veryhighlimits.Sometimesupto$1million,whichcanmeanalotifyouneedabonemarrowtransplantorcancertreatmentsoveranextendedperiodoftime.Theygenerallyalsohaveaco-insuranceclause,meaningyoumustpayaportionofthecoveredexpenses,usually20percentandthentheinsurancecompanypaystheremaining80.

Besuretolookforanylimitations,however,sincemostmedicalexpensepolicieslimittheamounttheywillpayforsuchthingsasmentalillnessanddrugoralcoholdependency.

TherearetwotypesofMedicalExpenseplans(BasicandMajorMedical)andtwotypesofMajorMedicalExpenseplans(comprehensiveandexcess).TheBasicMedicalExpensepolicyoffersprimaryprotectionforsicknessandaccidentalinjurywhileMajorMedicalExpenseofferscatastrophiccoverage.OftheMajorMedicalExpensepolicies,oneofferscomprehensiveprotectionsothatbasiccoverageandextendedhealthcarebenefitsareintegrated.Theotherisasupplementandprovidesexcesscoverageoverthebasichospital/physician/surgicalexpenses.Itbasically"wraps-around"the

primarypolicyandprovidesadditionalexpenses.

Allmedicalexpensepoliciesarealmostalwayssubjecttoeitheradeductibleoraco-insurancepayment.Generally,youhavetopayacertainsmallamount(theco-payment)eachtimeyouseeadoctororhaveaprescriptionfilled,andtheinsurerpaystherestofthemoneydirectlytotheproviderifyouhaveassignedthebenefitstotheprovider.Ifyouhaven't"assigned"thebenefits,youwillhavetopaytheproviderdirectlyandtheinsurancecompanywillreimburseyoulater.

Ifyouchooseareimbursementinsuranceplan,youwillhavetopayforanymedicalservicesupfront,thenfilloutaclaimformandsendittotheinsurancecompany.Thecompanywillreimburseyouforapercentageofyourexpenses(often80percent)butonlyafteryouhavesatisfiedthedeductible.

PreferredProviderOrganizations

TheMedicalExpenseplancangiveyoucompletefreedomofchoicewhenitcomestodoctors,pharmaciesandhospitals.Oritcanattempttolimityoutoapreferredproviderorganization(PPO).Inthiscase,itwouldprovidealistof"preferred"doctorsandhospitals.Ifyougotoadoctororhospitalthatisnotonthelist,theinsurancecompanywillpenalizeyoubyreimbursingasmallerpercentageofyourmedicalexpenses.Ifyouseeapreferredprovider,youwillgetthefullreimbursementpercentage.

Ifyourregulardoctorandyourneighborhoodhospitalareonalistofpreferredproviders,itoftenisbeneficialtogowithaPPOprograminsteadofafullfreedomofchoiceplanbecauseyou'dbepayinglesstogowhereyouplannedtogoalready.

TheOtherChoice:AnHMO

Nearly38millionmembersenrolledinatotalof550HMOsin1991upfrom6millionin1976,accordingtotheGroupHealthAssociationofAmerica.Whywouldsomanypeoplejoin?Tosavemoneyontheirpremiums.

HMOswereformedtocontrolskyrocketingmedicalcostsandprovidepreventativehealthcarebeforemembersgotsick.(It'salotlessexpensivetopayforhypertensionmedicationthanahearttransplant,afterall.)

Theykeeptheircostsdownbygettinghospitals,doctorsandothermedicalpersonneltojointheHMO.TheseprovidersofferhealthcaretotheHMO'smembersinreturnforapre-paidmonthlycharge.So,youcangototheproviderasoftenasyouneedtoforthesamemonthlypremiumplusanadditionalsmallfee(orco-payment)per

officevisitorperprescription.MostothermedicalservicesarefullycoveredbyanHMO,suchashospitalstays.

However,inexchangeforlowerpremiums,yougiveupyourfreedomofchoice(unlessofcourse,yourdoctorispartoftheHMOandlistedasyourprimaryphysician).Ratherthanbeingpenalizedbygettinglessofareimbursement,asinaPPOplan,withanHMOyou'dhavetopaythewholebillyourself.(Clearly,thisisastrongincentivetoseeonlyproviderswithintheHMO.)Today,manyHMOshaveaddedoptionstotheirplanswhichallowyoutoseeadoctorofyourchoicewhoisoutofnetworkofcourse,this,too,willcostconsiderablymorethanaco-payment.

HMOsusuallyselltheirplanstobusinesses,whichofferthemtoemployees.Butthesedays,withtheincreaseinthenumberofindependentcontractors,itisbecomingeasiertojoinanHMOonyourown.

ChoosingtheRightPlan

Whatkindofplanisrightforyouoryourfamily?Onlyyouknowforsure.Youwillneedtochoosewhichstyleplantopurchase.And,ifyouoptforaMedicalExpenseplan,you'llalsohavetochooseadeductible.Aswithothertypesofinsurance,thehigheryourdeductible,theloweryourpremium.

Formostpeople,adeductibleinthe$100to$250rangeisthemostmanageable.Butcompareotherdeductibles,too.Ifyourfamilyhasbeenhealthyforanumberofyears,youmaywanttoswitchtoadeductibleof$500or$1,000.You'llnoticeasizablereductioninpremiums.(Justrememberthatyou'llhavetopaythebillsout-of-pocketuntilyousatisfythedeductible.)

Somepeopleevenchooseadeductibleinthethousandsofdollarsmakingtheirs,inessence,acatastrophicinsurancepolicy.Inthiscase,you'dabsorballtheeverydaycostsofmedicalcare,fromdoctorsvisitstoprescriptions.Butifyougotseriouslyill,you'dbecoveredafteryousatisfiedthedeductible.(MedicalSavingsAccountsorMSA's,aredesignedforthisveryreasonanddiscussedlaterinthechapter.)Ifyouarehealthy,thiscouldwindupsavingyoumoney.

Whencomparingcoverage,itisvitaltolookintoaplan'slimitationsandexclusionstodeterminewhichexpensesarenotcoveredandwhicharerestricted.Forinstance,manypolicieswillpayonlyfortreatmentthatisdeemed"medicallynecessary"torestoreyoutogoodhealth.Thesepoliciesoftenwillnotcoverroutinephysicalexaminationsorcosmeticprocedures.

You'llalsowanttoinvestigatewhattheinsurancecompanyconsidersusual,reasonableandcustomarycharges,ifatallpossible.That'sbecausethechargesacompanyconsidersnormalforaparticular

medicalprocedureinaspecificgeographicareaarethemaximumitwillpay.Ifthechargesarehigher(andtheyoftenare),you'llbestuckpayingthedifference.

Also,findoutiftheplansyouarelookingintoexcludecoverageforpre-existingconditions(moreontheminamoment).Unlessyouwanttopayforyourownmedicalexpenses,it'sbesttoavoidthesepoliciesifyoucan.Ifnot,trytofindonethatexcludescoverageforalimitedperiodoftimeonly.

Anotherwayyoucansavemoneyonyourpremiums,ifyoucanaffordtodoit,isbypayingthemannually.It'sworthlookingintohowmuchtheservicefeeisformonthlypaymentsandinquiringaboutadiscountforprepayment.

Evenifyoualreadyhavehealthinsurance,you'llwanttoreviewyourpolicyonceayeartobesureitstillmatchesyourneeds.Asthehealthcare

systemcontinuestochange,yourhealthinsuranceshouldchangewithit.

BuyingYourOwnCoverage

Ifyouremployerdoesnotprovidehealthcareinsuranceorifyou'reself-employedyoucanpurchaseinsuranceonyourown.Unfortunately,you'llwinduppayingmoreforyourowninsurancethananemployerorothergroupwouldsinceinsurance,likemostotherthings,ischeaperbythedozen.

Anotheroptionistoobtainhealthinsurancethroughagroup.Bybecomingamemberofatradeassociation,laborunion,collegealumniassociation,churchgroup,orothersimilarentity,you'llbeeligibleforanymemberbenefitsprovidedthatoftenincludehealthinsuranceatreducedcosts.

Ifyoudohavetoseekcoverageonyourown,you'llwanttoshoparoundforthebestcoverageatthebestprice.Youcancontactaninsurancecompanydirectly,oryoucangothroughanagent.Thiswillhelpyoufindthebestoveralldeal.Youalsowillwanttocheckwithyourstateinsurancedepartmenttoseeiftherehavebeenalotofcomplaintsabouttheinsurancecompaniesyou'reconsidering.

Youcanevencheckouttheinsurancecompanies'financialstabilityratings.A.M.BestCo.rateseachcompanyonaletterscalefromAtoF,inordertoprovideanoverallindicationofthecompany'sabilitytomeetitspolicyholderobligations.Theirratingsarebasedonfinancialstrength,thecompany'smarketprofileandoperatingperformance.Forinstance,A++andA+indicateSuperiorwhileFindicatesthecompanyisinliquidation.Theseratingscanbefoundatyourlocallibraryoron-line.

Thesedays,youshouldbeofferedachoiceofthevariousmedicalplanswe'vediscussed.Theseare,inorderofdecreasingcost:

aMedicalExpenseplan(fullfreedomofchoiceplan);

aPreferredProviderOrganization(PPO);or

aHealthMaintenanceOrganization(HMO).

IfyourdoctorisalreadyacontractingproviderwithaPPOorHMO,youmaybeabletosaveagoodbitofmoneybygoingwithoneofthemorerestrictiveplansandyou'dstillgettoseethedoctorofyourchoice.Inotherwords,readthepreferredproviderlist,ortheHMO'sproviderlist,beforeyoudecide.

ApplyingforInsurance

Togetanaccuratequoteforhealthinsurance,youwillhavetofilloutanapplication.It'sveryimportantthatyoudothiscompletelyandcorrectly.Ifyoulieontheapplication,thecompanycannotonlydenyyoucoveragefora

problemdowntheroad,itcanrescindthepolicyentirely.And,mostcompaniescangetyourmedicalinformationanywaythroughanon-profitassociationcalledtheMedicalInformationBureau(MIB).

TheMIBwasformedin1902byagroupdoctorswhowerealsomedicaldirectorsatseveral,largeinsurancecompanies.Becausetheircompanieshadlostsignificantdollarstodishonestapplicants,theysoughtameanstocentralizehealthrelatedinformationonindividualapplicantsandreducethepotentialforfraud,hencethebirthoftheMIB.

Today,theMIBmaintainsmedicalinformationonlyonapproximatelytwooutofevery10applicantsforhealth,lifeordisabilityinsurance.That'sbecauseonlythoseapplicantswithsignificantmedicalorlongevityconditionsarerequiredtobereportedtothembythe750orsomembercompanies.And,medicalconditionsarereportedbytheuseofaseriesofcodesatotalofabout210whichmeansthereisagoodchanceforerrors.

Beforeyouapplyforinsurance,itmightbeagoodideatocheckifthere'sareportonfileforyou,it'satnocharge.And,ifthereisoneandit'swrong,youcancorrectit.Justtelephonethemat(617)426-3660andaskforyourfreereport.

Theapplicationforhealthinsurancealsowillaskforyourageandhealthhistory.Mostinsurancecompanieswillaskyourdoctorforyourmedicalrecords,andtheymayrequireyoutoundergoaphysicalwithoneoftheirdoctorsorevengetadditionalbloodtests.(However,theycannotconductanHIVtest,exceptifyouarealsoapplyingforlifeordisabilityincomeinsuranceandthenithastobewithinformedconsent.)

Completingtheapplication,youwillhavetolettheinsurance

companyknowaboutpre-existingconditions.Thecompanywillwanttoknowwhatillnessesandhealthproblemsyouhavehadduringthelastcoupleofyears(possiblylonger).Mostinsurancecompanieswouldprefernottopayyoufortreatmentforapre-existingcondition,suchasanulceroragallstone.However,theyareusuallyrequiredbylaw,tocoverpre-existingconditionseventuallyusuallyaftersixmonthstoayear.

Aninsurancecompanyalsomayrestrictcertainbenefitsforasetperiodoftime.Forinstance,itmaynotcoverexpensesrelatedtoapregnancyuntilthecoveragehasbeenineffectforoneyear.Ifyou'realreadypregnant,thiswouldbetreatedasapre-existingcondition.So,ifyou'replanningonbecomingpregnant,you'llwanttogetyourhealthcoveragesortedoutasfarinadvanceaspossible.

Ifyou'vehadaseriouspre-existingcondition,suchascanceroraheartattack,aninsurancecompanymaynotwanttoissueyoucoverageatall.Orit

mayrequireyoutosignawaiver.Thisisarideroramendmenttoapolicythatrestrictsbenefitsbyexcludingcertainmedicalconditionsfromcoverage.(However,somestateshavebeguntoprohibitthispractice.)

Youragealsoisanimportantfactorinpricingandobtaininginsurance.Manyinsurancecompanieshaveage''bands,"whenitcomestocostsforcoverage.Forinstance,everyoneage21to25mayfallintoonepricerange,andeveryone26to30wouldcostabitmoretoinsureeachmonth.

Insurancecompaniesprefertowritepoliciesforyoung,healthypeopleandtheyprefertostayawayfromolder,lesshealthypeople.So,itpaystopickagoodplanwhenyou'rerelativelyyoungandstaywithit,ifyoucan.

Somecompaniesallowyoutochangeyourmindandgetyourmoneybackafteryoupurchasehealthinsurancebutonlyifthepolicyhasa"freelook"orreviewperiod,whichtypicallyrangesfrom10to30days.So,you'llwanttoreadyourpolicyassoonasyougetit.

Youmayevenwanttoaskyourpharmacistandyourdoctorhowdifferentplansarehandledbeforeyousignup.Theyshouldbemorethanhappytotellyouwhichcompaniesandwhichplansareeasytoworkwith,andwhichonesmakelifedifficultforthemandfortheirpatients.

ThereAreOtherOptions

Ifinsurancecompaniesconsideryouuninsurablebecauseofyourageorapre-existingconditionyouprobablyarequalifiedforastate-sponsoredhealthinsuranceprogram.

Theseprogramsshouldbeusedasalastresort,becausetheytypicallyofferonlylimitedbenefits,areexpensiveandusuallyincludea

waitingperiodbeforethebenefitskickinandyouarecovered.Butatleastthey'rethere,ifyouneedthem.Youcanfindoutabouttheseplansbycallingyourstateinsurancedepartment.

Ifpriceistheproblemwhenitcomestosecuringinsurance,youmayqualifyforMedicaid.Itprovidesmedicalassistancetolow-incomefamiliesandindividualsofallages.(Yourcounty'sSocialServicesDepartmentcanfillyouinontheeligibilityrequirements.)

Ifyouareanemployerwhocan'taffordtoofferyourworkerscoveragethroughnormalchannels,youalsomaybeabletogethelpfromyourstate.

Forinstance,inCalifornia,companieswiththreeto50full-timeemployeesareeligiblefortheHealthInsurancePlanofCalifornia(HIPC),astate-sponsoredpool.Itguaranteescoveragetoyourworkersinanyoneof20differenthealthplansofferedthroughinsurancecompaniesorHMOsatmorefavorablerates.

Mostsmallemployersalsocannotberefusedcoveragebecauseofthemedicalhistoryofoneormoreoftheiremployees.Thisisknownasaguaranteedissue.(Someindividualplansalsoareavailableonaguaranteed-issuebasis,althoughtheywillhavehigherpremiums.)

CriticismsofHMOs

HMOscanbequiterestrictive,andmanypeopledon'tlearnthedetailsoftheirplansuntiltheyhaveamedicalproblem.

Manycriticsquestionwhethermanagedcarehasbeenstretchingitsmethodofcostcurbingtoofar.Amongotherthings,managedcareiscriticizedfordepletingfundsforscientistsandmedicalschools,proposing"gag"rulestorestricttreatmentdiscussionsbetweendoctorsandpatients,andofferingfinancialincentivestoitsstaffforcurtailingmedicalcosts.

Inthemid-1990s,theAmericanMedicalAssociationcalledonallmanagedcareplanstocancel"gag"clausesintheircontractsorpolicieswithphysicians.Afewmonthslater,theAmericanAssociationofHealthPlans(AAHP),anationaltradegroupbasedinWashington,D.C.,thatrepresentsroughly1,000managedcareplans,announceditsadoptionofasimilarprogramtourgethestrengtheningofthepatient-physicianrelationship.

Theso-called"gag"rules,outlinedinaphysician'scontract,areawayformanagedcareorganizationstodiscouragediscussionbetweenphysiciansandpatientsregardingtreatmentoptionsthatmanagedcareorganizationsdonotwanttocover(usuallymoreexpensiveandnon-traditionalmethodsoftreatment).Therulesinitiallywereintendedtopreventthephysicianfromcriticizingthemanagedcareorganization.

Butgagordersdidn'tstopthecriticism,especiallyfromoutsidesources,likeconsumeradvocacygroups.Insomecases,managedcare

organizationshavebeencriticizedforofferingincentivessuchasbonuses,tophysicianstocurtailmedicalcosts.Thesefinancialincentiveswereusedtodeterminethetypeoftreatmentorteststhedoctorseitherrecommendedoravoided.Inothercases,managedcareorganizationsrequiredasecondopinionfromanotherphysicianbeforetheywoulddoleoutthemoneyforcoverage.

AccordingtoTimothyB.McCall,M.D.,"[Under]managedcare,doctors'incomesareoftendirectlyproportionatetohowlittletheydo.Bonusplansrewarddoctorswhoorderfewerexpensiveservices."Theresult,McCallsaid,is"doctorsinmanagedcaremaybemorelikelytoadviseagainstcostlyinterventionsthatmightbenefit[thepatient]."

Tohelpprotectyou,thepatient,lawmakersinanumberofstateshave

unveiledprovisionstoguaranteebroadprotectionsformanagedcareenrollees.Underthebipartisanlegislation,managedcareplanswouldberequiredtoprovidesafeguardstoenrolleesbyaddressingsuchissuesasclinicaldecisionmaking,accesstopersonnelandfacilities,choiceofprovider,grievanceproceduresandqualityofcarebasedonclinicaloutcomes.

And,publicsentimenthasputpressureonHMOstochangesomeoftheirpolicies.Forexample,manyHMOshavechangedtheirpoliciesregardingmastectomies.Believeitornot,afewmanaged-careprovidersactuallyhaddecidedthatamastectomyshouldbetreatedonanoutpatientbasisonly.

Inresponsetotremendouscriticism,theAAHP'sboardofdirectorsissuedastatementsaying,"Thedecisionaboutwhetheroutpatientorinpatientcarebestmeetstheneedsofawomanundergoingremovalofabreastshouldbemadebythewoman'sphysicianafterconsultationwiththepatient."

Thegroupalsostatedthathealthplansdonotandshouldnotrequireoutpatientcareforamastectomy,andthatphysiciansshouldmakemedicaldecisionsbasedonthe"bestavailablescientificinformation"andtheindividualneedsofeachpatient.

AnFHPInternationalCorp.spokesmancomparedtheso-called"drive-throughmastectomy"tothe"drive-throughdelivery"issuedealtwithin1995.SomeHMOshadplacedstrictlimitationsontheamountoftimeamothercouldstayinthehospitalaftergivingbirth.Thedrive-throughdeliverydebateresultedinafederallawmandatingthatnewmothershavetheoptiontostayinthehospitalfor48hoursafterdelivery.

Mostplansnowcoveratleastonenight'shospitalstayforpatients

undergoingmastectomies.

BeforeYouJoinanHMO

YouaregoingtowanttoaskafewquestionsbeforeyoujoinanHMO.Here'salistofthemostimportantquestionstoasktogetyoustarted.Mostofthesequestionsalsoapplytoatraditionalhealthplan.

Whatexactlydoestheplancover?Someservices,suchasmentalhealthtreatment,drugrehabilitationordentalcare,maynotbeincludedatall.Whileyoucan'tpossiblypredictallofyourhealthcareneeds,findoutifthetreatmentsyouthinkyou'llneedarecovered.Also,findoutiftreatmentsthatareconsideredexperimentalornon-traditional,arepermissibleunderyourplanand,ifyou'reinterested,ifalternativeorholistictreatmentsarecovered.

Whatwillitreallycost?Don'tjustlookatthemonthlypremiums.Considertheoverallcosts,includingco-paymentsanddeductibles.Someplansofferareasonablelimitonthetotalyouwillpayeachyear.Othersplacealifetimelimitonwhatthecompanywillpay,whichyoucanreachifyouhaveonemajorhealthproblem.

Doyouhaveachoiceofdoctors?Besureyouhavesomeflexibility.Alsobesureatleastafewlocalhospitalsandpharmaciesarecoveredundertheplan.

Isthereautilizationreview?Insomeplans,youcannotswitchdoctorsorseeaspecialistwithoutauthorization.Whathappensifyoudon'tlikethedoctoryouchoose?Thiscandelayordenycare.

Whodecideswhatisconsidered"medicallynecessary"?Isittheinsurancecompanyorthedoctorwhodecides?

Whataboutpre-existingconditions?Ifyouhaveapre-existingcondition,suchashighbloodpressure,youmaybeliableforallcostsrelatingtotheillness.Knowwhenandifyourinsurancepaysforillnessesyoumayhave.

Whatistherelationshipbetweenyourdoctorandthehealthcarecompany?Ifyourdoctorreceivesasetfeeperpatient(capitation)orreceivesabonusforminimizingcosts(incentives),yourhealthcarecouldgetshortchanged.Thephysicianmaybereluctanttoordertestsorreferralsunderthesesituations.Gagclausescanpreventdoctorsfromrevealingtheircompensationordiscussingtreatmentoptionsnotcoveredbytheplan.

Doestheplanyou'reconsideringhaveagrievanceprocedure?Whatifsomethinggoeswrong?Canyouappeal?Besuretotalkwithsomeonewhoisauthorizedtoansweryourquestions,liketheplanadministratorandkeepgoodrecords.WhoregulatesHMOsinyourstateandwhat'stheproceduretolodgeacomplaintifyouthinkyou're

beingtreatedunfairly?

TheChoicesIfYou'reaSenior

Ifyou'reoneof38millionAmericansover65orpermanentlydisabledyouqualifyforMedicareinsurance.Medicareisafederallyfunded,national

healthinsuranceprogramrunbytheHealthCareFinancingAdministration(HCFA)andadministeredbytheSocialSecurityAdministration(SSA)thatcovershospitalandmedicalexpenses.Anyone65yearsofageorolder,disabledorwithpermanentkidneyfailurequalifiestohavemanyoftheirmedicalbillspaidbythegovernment.TherearetwopartstoMedicare:PartAisHospitalExpenseandPartBisMedicalExpense.Enrollmentiseitherautomaticoryoumustapply.

Youareautomaticallyenrolledifyou'rereceivingbenefitsbeforeyoureach65fromeithertheRailroadRetirementBoardorSocialSecurityAdministration.YourMedicarecardwillbemailedtoyouapproximatelythreemonthsbeforeyourreachyour65thbirthday.Ifyou'redisabledandreceivingbenefitsfromeitherorganizationfor24months,yourcardwillbeautomaticallymailedaswell.

However,ifyou'renotreceivingretirementbenefits,youmustapplydirectlytoeithertheSocialSecurityAdministrationorRailroadRetirementBoard.Besuretodoitatleastthreemonthsbeforeyoureach65,toavoidanydelaysincoverage.Youonlyhavesevenmonthstoenroll,beginningthreemonthspriortoyour65thbirthday,otherwiseyou'llhavetowaituntilJanuary1thoughMarch31justtoenroll.Thenyourbenefitsdon'tkickinuntilJuly1.Sobesureyouknowyourdates.

Howmuchdoesitcost?SinceMedicareisfinancedinpartbypayrolldeductionspaidbyemployersandtheirworkers,theSocialSecurityAdministrationfundsaportion.TheothercomesfromtheSelf-EmploymentTaxpaidbyselfemployedpersons.Ifyouoryourspouseworkedforatleast10yearsinaMedicarecoveredjob(meaningyouwerehavingdeductionswithheldfromyourpaycheckforpayrollwithholdingtax)andyouareacitizenorpermanent

residentoftheUnitedStates,eligibleforMedicare,thereisnochargeforPartA(HospitalInsurance).Disabledindividuals,kidneydialysisandcertaintransplantpatientsarenotchargedeither.

Ifnoneofthesefityourparticularcircumstances,youmaypurchaseMedicarePartAifyouareatleast65yearsofageandmeetotherrestrictions.Theper-monthcostin1997(basedon30to40quartersofMedicare-qualifyingemployment)was$187.Ifyouworkedfewerthan30quartersduringyouradultlife,themonthlycostwas$311.

Thereis,however,afeeforMedicarePartB(MedicalExpenses)forallenrollees.In1997themonthlypremiumwas$43.80andautomaticallydeductedfromSocialSecuritypayments.Enrollmentisautomatic,unlessyoustateyoudon'twantit,whenyouareeligibleforpremium-freePartA.Ifyoudon'tqualifyforpremium-freePartAandare65orolder,generallyyoucanpurchaseit.

Medicareismadeupoftwoparts:PartAisHospitalInsuranceandPartB,MedicalExpenseinsurance.MedicarePartAcoverscostsassociatedwithinpatientcareinahospitalandskillednursingfacilitycareafterahospitalstay.Italsocovershomehealthcareandhospicecare.Itpaysforthecostofwholebloodorunitsofpackedcells,afterthefirstthreepintsduringacoveredstayinahospitalorskillednursingfacilityaswell.Inaddition,itpays80percentofdurablemedicalequipmentwhenapproved,suchaswheelchairsandwalkers.

ForthispartofMedicarecoverage,youwillhavetopayadeductibleof$760foreachbenefitperiod,beginningwiththefirstdayofadmissiontoahospitalorskillednursingfacilityandcontinuingfor60days.Ifyouarereleasedorhospitalizedformorethan60days,anewbenefitperiodbeginsandanewdeductibleapplies.Thegoodnewsis,thereisnolimitonthenumberofbenefitperiodsyoucanhave.ThefollowingchartillustrateswhatMedicarePartAcovers,paysandwhatyourportionis.

MEDICAREPARTA(HOSPITALEXPENSE)YOURCOST MEDICARE'S

COSTTIMEPERIOD

BENEFIT

$760 Everythingafter$760

Day1-60

Hospitalization,includingroomandboard(semi-private);

$190day Everythingafter$190aday

Day61-90

inpatientpsychiatriccare(ifrecievedinaMedicareparticipatingpsychiatrichospital,upto190daysperlifetimeonly);

$380aday Everythingafter$380aday

Day91-150

emergencycare;generalhospitalandnursingsupplies

Allcosts Nothing Over150days

andservices

Nothing 100%ofapproved

Day1-20

SkilledNursingCare,includingroomandboard

Upto$95aday Allbut$95a Day21- (semi-private);rehabilitativeandskilled

Upto$95aday Allbut$95aday

Day21-100

(semi-private);rehabilitativeandskillednursing

Allcosts Nothing Over100days

services;otherservicesandsuppliesapproved

20%ofapprovedamountfordurablemedicalgoodsandnocostforallapprovedservices

80%ofdurablemedicalgoodsand00%forallotherotherapprovedservices

Nolimit,aslongasyou'reeligibleforservices

HomeHealthcare,formedicallynecessaryhomehealthvisitsapprovedagencysuchasphysicaltherapyandspeechtherapy,onintermittantorpart-timebasis;durablemedicalequipment;homehealthaides

(Tablecontinuedfrompreviouspage)YOURCOST MEDICARE'S

COSTTIMEPERIOD

BENEFIT

Co-paymentfor5%forforpainmanagementdrugs,butnomorethan$5;ifRespitecareisneeded,$5perdaytoprovidetimeoffforcaregiver

Allcostsexceptco-insuranceforpainmanagementdrugsandin-patientrespitecare

Nolimitifdoctorcertifiesneed

HospiceCare,forterminallyillbeneficiariesinhomebyMedicareapprovedhospice.Physicianandnursingservices;durablemed.goods;Drugsforthemanagementofpain;socialservices;physical,occupationalandspeechtherapy

Forthefirstthreepints Allbutthefirstthreeinacalendaryear

Unlimitedifmed.necessaryduringbenefitperiod

Blood,whenfurnishedbyaskillednursingfacilityorhospitalduringacoveredstay

MedicarePartBisMedicalExpenseinsurancecoveringcostsassociatedwithdoctors'services,outpatientcare,laboratorytests,x-rays,mammogramsandpapsmears,andmedicalsupplies.You'llhavetopaythefirst$100,whichistheannualdeductible,thenMedicarewillpay80percentofallapprovedchargesforanyeligiblemedicalexpense.Theapprovedchargemayormaynotbeclosetotheactualfeechargedbyyourprovider,andyouareresponsibleforthedifference,aswellastheadditional20percentoftheapprovedcharge.(Fortunately,whendoctorsacceptaMedicareassignment,theyagreetochargethepatientnomorethanMedicare'sapprovedcharge.)Here'swhatPartBcovers:

MEDICAREPARTB(MEDICALEXPENSE)YOURCOST MEDICARE'SCOST TIME

PERIODBENEFIT

$100deductible,then20%ofapprovedcost;50%foroutpatient

80%ofapprovedchargesafter$100deductibleismet;50%

Unlimitedifmedicallynecessary

Medicalexpensessuchasdoctor'sfees;in-patient/outpatientmedical

50%foroutpatientmentalhealthand20%ofthefirst$900foreachphysicalandallchargesthereaftereachyear

deductibleismet;50%foroutpatientmentalhealthand$720ayearforeachindependentoccupationalandphysicaltherapy

necessaryexceptforindependentoccupationalandphysicaltherapy

patient/outpatientmedicalservicesaswellassurgicalserviceslaboratorytests;physical/occupationalandspeechtherapy;durablemedicalsupplies

Nothing 100%ofapprovedcharges

Laboratorytestsincludingbloodandurine

Afteryour$100,20%ofhospitalcharges

Approvedchargesforhospitalcosts

Unlimitedifmedciallynecesary

Outpatientservicesfordiagnosisandtreatmentofillnessorinjury

(Tablecontinuedfrompreviouspage)MEDICAREPARTB(MEDICALEXPENSE)

YOURCOST MEDICARE'SCOST

TIMEPERIOD BENEFIT

SameasMedicarePartA,onlyifyoudonotyoudonotcarryPartA

HomeHealthcare:sameasMedicareifyoudonotyoudonotcarryPartAandpaidonlyifyoudoPartAcarryPartA

After$100deductible,firstthreepintsplus20%foradditionalpints

80%ofapprovedamountbeginningwithfourthpint

ThegovernmentestimatesthatMedicarereallyonlypaysabouthalfofthecostsneededtocovertheelderlyandtherearelargegapsincoverage.Forinstance,Medicaredoesn'tcoverthecostofhearingaidsoreyeglasses,itemsvirtuallyessentialtoseniorstoday,nottomentionprescriptiondrugs.Asaconsequence,approximately89percentofallMedicarerecipientssupplementtheirhealthcarethroughwhatiscommonlyreferredtoasaMedicareSupplement.

Clearly,Medicareisnotgoingtopickupthetabforallofyourhealthcareneeds.Gapsincoverageandrestrictionsaboundwithinthissystem.So,insurancecompaniessteppedintofillthosegapsincoveragewithwhatarecalledMedicareSupplementpoliciesor"Medigap"insurance.

Toclarifybenefitsandstandardizethetypesofpoliciesoffered,CongresspassedalaweffectiveAugust1,1992,directingallinsurancecompaniestostandardizethepoliciestheyofferasMedicareSupplements.Asaresult,10standardplansweredevelopedbytheNationalAssociationofInsuranceCommissioners(NAIC)andaretheonlyplansthatmaybesoldasMedicareSupplementpolicies.

Andthebestpartis,noonecanbeturneddown,foranyreason,aslongasyou're65andapplywithinsixmonthsafteryoufirstenrollinMedicarePartB.Thepoliciesareguaranteedrenewable,meaningyouhavetherighttorenewthepolicywithnochangeinterms,aslongasyoupaythepremium.Theonlycatchistheinsurancecompanycanandoftendoes,increasethepremiumwhenclaimscostsexceedpremiumrevenue.

MedicareSupplementpolicieshaveletterdesignations,correspondingtothelevelofbenefitsprovided,beginningwiththebasicplanlabeled"A"andprogressivelyincreasinginbenefitstothemostcomprehensiveplanlabeled"J."AllstatesmustallowinsurerstosellPlanAandallMedigapinsurersmustmakePlanAavailableiftheyaretosellthemoreextensiveandexpensiveplans.However,allinsurersarenotrequiredtomakeall10plansavailable,theymayonlysellafewiftheychoseto,aslongasPlanAisoneofthem.

ThepoliciesaredesignedspecificallytoworkwithMedicare,toprovide

supplementalaccidentandsicknessinsuranceforhospital,medicalorsurgicalexpenses.Most,ifnotall,pickupMedicare'sco-insurancechargetoyouandmayevenpayyourdeductible.ManychargesnotcoveredbyMedicareareincludedinsomeoftheplans,suchasprescriptiondrugsforout-patients.Themorecomprehensiveplansalsocovertheco-paymentrequiredforhospitalandskillednursingfacilitystays.Theyalsocoverthe20percentofapprovedchargesyouwouldordinarilypayunderPartBofMedicare.However,coverageforprescriptiondrugcostsmaybesubjecttoanannuallimit.Thefollowingchartillustrateswhateachplancovers.It'sagoodideatoreviewitinconjunctionwiththeMedicarechartspreviouslyoutlined.

MEDICARESUPPLEMENTS(MEDIGAP)Plan A B C D E F G H I JBasicBenefits YesYesYesYesYes Yes Yes Yes Yes YesMedicarePartADeductible YesYesYesYes Yes Yes Yes Yes YesMedicarePartB YesNo No Yes No No No YesSkilledNursingCare YesNo No Yes No No No YesForeignTravelEmergency YesYesYes Yes Yes Yes Yes YesAt-HomeRecovery YesNo No Yes No Yes YesPreventiveCare Yes No No No No YesExcessCharges,MedicarePartB

Yesat80%

NoYesat

100%Prescription Yes Yes Yes

What'sIncluded?

BasicBenefits(PlanA)supplementMedicarebenefitsbyprovidingcoverageforyourhospitalizationco-insurancepaymentfromday61-90and91-150.Thismeansthatthe$190and$380perdayyouwouldberequiredtopayunderMedicare,willbe

paidforbythesupplement.Ifyourbenefitsendduringaperiodofhospitalization,thesupplementpaysforanadditional365daysat100percent.Inaddition,the20and50percentco-insurancepaymentunderMedicarePartBiscoveredafteryoupaytherequired$100deductible.ThefirstthreepintsofbloodorpackedredbloodcellsarecoveredaswellunderbothPartAandB.

PlanBincludestheBasicBenefitsandaddsoncoveragefortheMedicarePartAdeductibleof$760perbenefitperiod.Therefore,ifyouhadPlanB,youwouldhaveyourdeductiblemetandallco-insurancepayments.

PlanCincludeseverythinginPlanAandBandaddstheco-insuranceamountof$95adayforskillednursingcareyouwouldberequiredtopayunderMedicarePartAfordays21-100.Itpaysthe$100deductibleunderMedicarePartBand80percentofemergencycarewhileinaforeigncountryaftera$250deductible.Ifyoutraveloutofthecountry,youmaywanttoconsiderthis!

PlanDincludeseverythingprecedingitexcepttheMedicarePartBdeductibleandaddsoncoverageforcustodialcare(dressing,laundry,shopping,etc.).MedicarePartAHomeHealthCarecoveragedoesnotpayforcustodialcareandmanyseniorsneedassistancewithdailylifefunctions,especiallyafterrecoveringfromaseriousillnessorinjury.Thispaysupto$1600ayearforshort-termassistance.

PlanEdoesnotcovertheMedicarePartBdeductibleorAt-HomeRecoveryservicesbutdoesincludePreventiveCare.Thebenefitamountis$120peryearforroutinephysicalexams,screeningproceduressuchasbloodpressureandcholesterolaswellaspatienteducation.

PlanFdoesnotincludedPreventiveCareorAt-HomerecoverybutdoesaddonExcessChargesforMedicarePartBexpenses.Whatthis

meansisifyougotoadoctorthatdoesnotacceptMedicareassignments(meaningtheywillnothonortheMedicareapprovedcharges),youwouldbeobligatedtopaytheentirebill.Thisbenefitpaystheamountyou'llbebilledforateither100percentof80percent.If80percent,youwouldbeobligatedtopaytheremaining20percent.

PlanGexcludestheMedicarePartBdeductibleandPreventiveCareandpaystheExcessChargesatalevelof80percent,ratherthan100percentasinPlanF.

PlanHincludescoverageforprescriptionmedicationsat50percentwithanannuallimitof$1250peryear,aftera$250deductibleismet.ThisiscalledtheBasicBenefit.AnExtendedBenefitisavailableonlyinPlanJthatincreasestheannualamountto$3000.

PlanIexcludesMedicarePartBdeductibleandPreventiveCarebutincludesPrescriptionDrugsatthebasiclevelof$1250annually.

PlanJisthemostcomprehensiveandincludescoverageforallbenefitspreviouslylistedatthemaximumlevels.Itisalsothemostcostly,however.

Thekeyistoshopcarefullyifyou'reinthemarketforMedigapcoverage.Whilethebenefitswillbethesame,nomatterwhatcompanyyoupurchaseyourpolicythrough,thepriceswillvaryfromstatetostateandcompanytocompany.That'sbecausenotallstateshavethesamemedicalcostsand,insurancecompanieshavedifferentclaimsexperience.And,pricesareincreasing,whichhasforcedmanypeopleandcompaniesalike,tooptforamanagedcareapproachtocoveringseniors'healthcareissues.

SincePlanCisPlanC,nomatterwhichcompanyisofferingit,whenyoushoparoundforcoverage,you'llbelookingatprice,serviceandreliability.It'salsovitaltofindaninsurancecompanyyoufeelcomfortablewithandonethatisreputableandingoodshapefinancially.Yourstateinsurancedepartmentcanalertyoutoanyproblemcompanies.

MedicareHMO's

DuetotheincreasingcostsofMedicareSupplementpolicies,moreandmoreseniorsareswitchingtomanagedcare.Thefederalgovernmentestimatesapproximately70,000Medicarerecipientsamonthareswitchingtosomeformofmanagedcare.Currently,ofthe38millionseniorsanddisabledeligibleforMedicare,almost6millionareenrolledinaMedicareHMO.

MedicareHMO'sbasicallycombinethebenefitsofMedicareandMedigappoliciesallinone.Whatmakesthemsoattractive?

ThefederalgovernmentfundsmostoftherevenueforeachparticipatingHMO,whichmakesthecosttoyouonlythepremiumyouwouldnormallypayforMedicarePartB($43.80/monthfor1997),dependingontheHMO.(However,thatmaybechangingsoon,withrisingcostsandincreasedclaims,companiesarebeginningtochargepremiumsinadditiontothegovernment'sfunding.)And,itemssuchaseyeglassesandprescriptiondrugsarecoveredundermostHMO's.AslongasyouhaveMedicarePartB,continuetomakethepaymentsandliveinaserviceplan'sarea,youareeligibleforenrollmentwithouthealthscreening.

YoucanfindthenamesofHMOplansinyourareabycallingyourstate'sinsuranceoffice.Remember,however,thesamecriticismspreviouslydiscussedintermsofHMOsstillapply.

Pleasenote:OnceyouenrollinaMedicareHMOyoucanswitchback

toMedicareanytime.However,youmaynotswitchbacktoaMedicareSupplementpolicyyoupreviouslyhadwithoutthecompany'spermission.And,youcanbesuretheywillreviewyourhealthrecordifyoudoandpossiblyturnyoudown.That'swhysomeseniorshangontotheirMedicareSupplementpolicywhileenrolledinanHMO,justtomakesuretheyarehappywithit.ThisguaranteescontinuouscoverageunderthesupplementiftheychangetheirmindandgobacktotraditionalMedicareservice.

TheothermanagedcareoptionyouhaveisthroughaprogramcalledMedicareSelect.Basically,thisisanotherformofmedicaresupplementinsurancesponsoredbythefederalgovernment,thatmayormaynotbecontinued.In1998,MedicareSelectcameupforreviewand,bytheendof1998,theMedicaresystemstillwashavingtroublereplacingitasaMedicareoption.

CongressproposedMedicareSelectin1990asapilotprogramforthoseseniorswhowantedsomelevelofchoiceinwhereandwithwhomtheycouldsecurehealthservices.ServicedeliveryisintheformofaPreferredProviderOrganization(PPO)andprovidesstandardMedicaresupplementbenefits,dependingonwhichpolicyyoubuy.

IfyoubuyaMedicareSelectpolicy,youarebuyingoneofthestandardMedicareSupplementpolicies.YoucanpurchaseapolicythroughaninsurancecompanyorHMO,butbesuretoinquirewhichpolicyyouarebuyingandifitmeetsyourneeds.WhenyouenrollinaMedicareSelectpolicy(shouldsuchpoliciescontinuetobeavailable),youchooseaphysicianormedicalproviderfromalistprovidedbytheinsurancecompanyof''preferredproviders."Toreceivefullbenefitsyoumustgotothedoctorormedicalproviderselected.

Ifyouchoosetogoelsewhere,MedicareSelectpoliciesarenotrequiredtopayanybenefitsfornon-emergencyservices.Soitpaysto

gotoyourdoctorofchoice.And,ifyoudecideyoudon'tlikethepolicy,youcanalwaysreturntoanindividualMedicarepolicy.Youwill,however,havetoreapplyforaMedicareSupplement,justaswithHMOs.

Inshort,thereisaplantomeetyourneedsasyoumovethroughyour"goldenyears."Remembertoreviewthecost,checkthebenefitsandtheserviceissuesthatareimportanttoyou,beforeyoumakeachoice.And,don'tbeafraidtoaskquestions.It'syourhealth,youdeservethebest!

OtherCommonFormsofHealthInsurance

Inadditiontomedicalandhospitalizationcoverage,somepeopleopttopurchasedentalcoverage,visioncoverageandaseparateprescriptionplan.

Youcanobtaindentalinsurancethroughaninsurancecompany'sindividualorgroupplan(agroupplanmightbeofferedbyyouremployerorbyanassociationtowhichyoubelong),orthroughaprepaymentplanoradentalservicecorporation.Alloftheseplanswillreimburseyouforatleastpartofthemoneyyouspendondentalserviceandsupplies.

Thissortofcoverageusuallyincludespaymentforpreventivecare,suchasregularcheckups,X-raysandcleanings.Italsopaysforthethingsweallhate:fillings,toothextractions,inlays,bridgework,oralsurgeryandrootcanals.Thisinsurancealsowillhelpyououtwithexpensesfordenturesandorthodonture.You'llhavetoshelloutaprettyheftyco-payment,althoughthatco-paymentmaybesmallerforpreventiveservices.(Typically,insurancewillnothelppayforcosmeticworkonyourteeth.)

Visionplanstypicallyarediscountservices.Forasmallfeeabout$15to$20ayearyougetamembershipcardthatentitlesyoutodiscountsoneyeexams,glassesandcontacts.Thesediscounts(usuallyinthe50percentrangeforeyewear)oftenaregoodatawidevarietyofstores,includingmostofthemajorchains.Someoftheplansalsooffercontactlensesatadiscountbymail.Someevenprovideadiscountonnon-prescriptionsunglasses.

Ifyoupurchaseglassesorcontactlensesonaregularbasis(forexample,ifyouweardisposablelenses),theseplanscanbequitecost-effective.

Prescriptionplansaremuchlikevisionplans.Theyalsogetyouadiscountonprescriptionsifyouvisitaparticipatingpharmacy.Again,theytypicallyincludemostmajorchains.Discountsrangefrom5percentto50percentonmostdrugs.Discountsmaybehigherifyoupurchaseyourprescriptiondrugsthroughamail-orderprogram.

Mostpeoplewhohavehealthinsurancedonotneedaprescriptionplanunlesstheyhaveanextremelyhighdeductibleonamajormedicalplanandpurchaseprescriptiondrugsonaregularbasis.

Inadditiontoallthetypesofcoveragediscussedsofar,someinsuranceagentsorinsurancecompaniesmaytrytosellyousupplementalinsurancepolicies.Thesearedesignedtopayinadditiontoyourregularmedicalcoverage.

Theypaylimitedbenefits,suchasadailydollaramountifyouarehospitalized(theseareknownashospitalincomepolicies)orexpensesincurredtotreataspecified"dreaddisease,"suchascancerorastroke.

Bewareofthesepolicies.Thecoverageoftenwillduplicatewhatyouarepayingforinyourcomprehensivemedicalplan.Besureyouunderstandthelimitationsandexclusionsandwhetherornotyouhaveanyrealneedforthiscoveragebeforeyoubuy.

CafeteriaPlans

Congressfirstauthorizedcafeteriaplansin1978,aspartoftheInternalRevenueCode(Section125).(Cafeteriaplansarealsoknownas"flexible-spendingaccounts"and"Section125plans.")Acompanycansetupacafeteriaplanforitsemployees.Thisallowstheemployeestopayforafullmenuofmedicallyorientedexpenseswithpre-taxdollars.Thisnotonlyreducestaxableincomeforemployees,whichcanmakethebenefitsvirtuallyfreeitalsoreducestaxablepayrollfortheemployer.

Youcanusethemoneyfromacafeteriaplantopayforanynumberofdeductiblemedicalitems.Thiscanincludehealthinsurancepremiums,unreimbursedmedicalexpenses(includingco-paymentsfordoctorvisitsorprescriptiondrugs),dependentcareexpenses,alternativemedicaltreatments(includingacupunctureandchiropractic),treatmentofalcoholism,programstoloseweightorquitsmoking,visioncare(eyedoctorvisits,glasses,contacts,etc.),birthcontrolpills(whichsomehealthplansdonotordinarilycover),sterilization,specialschoolingandcareforpeoplewithdisabilities(fromwheelchairsandcrutchestoartificiallimbsandBraillebooks),dentalfeesanddentures,orthodontia,psychiatriccare,electrolysisandhearingaids.

Ifyouremployeroffersacafeteriaplan,youchoosetheamountyouwouldliketohavewithheldfromeachpaycheck.Ifyoutypicallyspend$200amonthonchildcareandanother$50onprescriptionco-payments,forexample,youmightelecttohave$250amonth

withheldfromyourpaycheck.Ifyoualsohaveannualexpensesforglasses,co-paymentsforcheckups,dentalvisitsandsoon,youcanhaveanadditionalamountdeductedeachmonthtocoverthesecosts,aswell.

Thismoneyisplacedintoanescrowaccount.Wheneveryouhaveamedicalcostthatisnotcoveredbyyourinsurance,yousubmitaclaimtothecompanythatmanagesyouremployer'scafeteriaplan,andthatfirmdebitsyouraccountandsendsyouacheck.

Acafeteriaplancanbeaverygoodwaytosavemoneyonhealthcarecosts.However,thekeyistoavoidhavingtoomuchmoneydeductedfromyourpaychecks.Whatevermoneyyouputintoacafeteriaplaneachyearmustbeusedforhealthcarecosts.Ifthereismoneyleftover,itcannotberolledoverintotheaccountforthefollowingyearorreturnedtoyou.Asfarasyou'reconcerned,it'sgoneforever.

Thechartbelowillustrateswhyyoumightwanttopayformedicalexpensesyoualreadyhavewithpre-taxdollars.

TheBenefitsofUsingaCafeteriaPlanWithoutaCafeteriaPlanGrossSalary $1,600.00

Federal&StateTaxesSocialSecurity(FICA)LessMedicalPremiumLessMedicalExpensesLessDependentCare

$221.82$122.40$110.60$60.00$200.00

SpendableIncome $885.18

WithaCafeteriaPlanGrossSalary $1,600.00

Federal&StateTaxesSocialSecurity(FICA)LessMedicalPremiumLessMedicalExpensesLessDependentCare

$135.43$94.05$110.60$60.00$200.00

SpendableIncome $999.92

Source:CynthiaPogueBaker,CPA

IfYouLeaveYourJob

Ifyouhavehealthinsurancethroughyouremployerandyouleavethejob,oddsareyoucankeepthiscoverageforatime.UndertheConsolidatedOmnibusBudgetReconciliationAct,orCOBRA,whichispartofafederallawenactedin1986,youhavetherighttokeepyourcoverageatgroupratesifyouloseyourgrouphealthinsurancebecauseofareductioninyourhoursofemploymentorbecauseyouleaveorloseyourjobunlessyouarefiredforgrossmisconduct.You

alsohavetherighttocontinuecoverageforyourspouseandanydependents.

COBRAonlyapplies,however,toemployerswith20ormoreemployees,50percentofthetimeduringtheprecedingperiod.

Howlongyoucankeepthiscoveragedependsonyourparticular"qualifyingevent"thatis,dying,beingfired,quitting.Ifyouwerefired(foranythingotherthangrossmisconduct,inwhichcase,youdon'tqualifyatall),

you,yourspouseanddependentchildrenareentitledto18monthsofcontinuouscoverage.Anyotherqualifyingevententitlesyoutoupto36monthsofcoverage,ifyoudecidetopayforit.

WhenyourCOBRAcoverageisgoingtorunout(assumingyouhaven'ttakenanotherjobintheinterimthatprovidesgrouphealthinsurance),youcanapplytotheinsurancecompanyforconversionfromCOBRAtoanindividualpolicybutyoumustdosowithin31daysofterminationofCOBRA.Thecompanyisnotobligatedtoprovideyouwithanindividualpolicy,however,iftheyonlysellgroupinsurance.

Yourformeremployerwillnotkeeppayingforyourhealthinsurance.You'llhavetostartpickingupthetab.Thecompanycanchargeyou102percentofwhatthecoverageunderthegroupplanactuallycosts(theextra2percentistocoveradministrativecosts).Butrestassuredthatthisamountisalmostalwayslessthanwhatyouwouldpayifyoupurchasedyourownindividualcoverageanditisoftensubstantiallyless.

Bylaw,youremployerisrequiredtoletyouknowaboutCOBRAandwhatstepsyoumusttaketoretainyourhealthinsurancecoverage.Youremployeralsowillbreakdownthecostsforvariouscoveragesyoumayhave,soyoucanchoosetocontinuealloronlysomeofthemforinstance,youmaydecidetokeepyourHMOcoveragebutgiveupyourvisionanddentalplan.

TheHealthInsurancePortabilityandAccountabilityActof1996alsomadeafewchangestotheprovisionsofCOBRA,whichbecameeffectiveJanuary1,1997.Now,newbornandnewlyadoptedchildrenofpeoplewhohaveCOBRAcoverageautomaticallyqualifyforthecoverage,aslongasyouenrollthemwithin30daysoftheadoptionorbirth.Inaddition,adisabledCOBRAbeneficiaryiseligiblefor11

additionalmonthsofcoverageifheorshewasdeterminedtohavebeendisabledunderSocialSecurityatthetimeofthequalifyingeventoratanytimeduringthefirst60daysofcontinuation.Thisistrue,aslongasthedisabledindividualnotifiestheplanadministratorofhisorherdisabilitystatuswithin60daysofthedeterminationandwithinthefirst18monthsofcontinuation.

IfyourCOBRAcoverageisabouttoexpireandyouanticipategettinganotherjobthatprovideshealthinsurancesoon,youmaywanttoconsideratemporaryinsurancepolicy.Thissortofcoverageisfairlylimited,butitwillprotectyoufromanycatastrophicmedicalexpenses.Itusuallywillhaveadeductible,thenwillreimburseyouforapercentageofyourcosts.Someplanswillreimburseyouonapercentagebasisuptoasetamount(sometimes$5,000),thenpay100percentofyourcostsabovethatthreshold.

Atemporarymedicalpolicywillpaytypicalhospitalizationcostsbutonlyforproceduresthataremedicallynecessary,atratesthatareusualandcustomaryaswellasrecoverycosts,includingtimeinanursinghomeorin-homevisitsfromaregisterednurse.Itoftenwillnotpayforanyconditionyouhadduringthe24monthspriortothestartdateofthepolicy,orforanyself-inflictedinjuriesoranythingthatmightbecoveredbyworkers'compensationinsurance(thatis,job-relatedinjuriesorillnesses).

Alsoexcludedarecoverageforinjuriesincurredinawar(youshouldbecoveredbythemilitary,ifyou'reservingorbytheVeteransAdministration),dentaltreatment,routinephysicalsandimmunizations,routinepediatriccareofanewbornchild,normalpregnancyorchildbirth,sterilization(orthereversalofsterilization),mentalillness,alcoholismordrugabuse,prescriptiondrugsandmedicationsthatyougetwhenyouarenotconfinedtoahospital,treatmentoutsidetheUnitedStatesandthelistgoeson.

Inaddition,ifyoupurchase120days'worthoftemporarymedicalcoverageandgetajobin30days,thetemporaryinsurancecannotbecancelled.(Ordinarily,ifyouhadsomeothersortofmedicalinsurance,youcouldgetarefundlessadministrativeexpensesfortheunusedportion.

However,bearinmindthatthereisprobablyaprobationperiodwithyournewemployer,duringwhichyouarenoteligibleforthecompany'smedicalplan.So,atemporarypolicytoprotectyouincaseofamedicalcatastropheduringthatperiodmaybeworththemoney.

MedicalSavingsAccounts

Anewoption,whenitcomestohealthinsurance,isthetax-freemedicalsavingsaccount(MSA).Itcombinesalong-termsavings

accountandahigh-deductiblehealthinsurancepolicy.

AsofJanuary1,1997,theseaccountscouldbeofferedtoalimitednumberofindividualsthatareself-employedoremployedatfirmswith50orfeweremployees.TheaccountsarepartofapilotprogramthatwasputinmotionbytheKennedy-Kassebaumbill,passedinAugust1996.Thepilotprogramallowsnomorethan750,000policiestobedistributedandisdesignedtoofferconsumersmorechoicesinthehealthinsurancemarket.Policiesarebeingsoldonafirst-come,first-servebasistothosewhoqualify.

HowdoMSAswork?They'relikeacombinationofacafeteriacontributionplanandanindividualretirementaccount(IRA).Asinacafeteriaplan,youcontributepre-taxdollarstotheaccount.Thatmoneycanbeusedtopayavarietyofmedicalexpenses.ThisisthepremiumfortheMSA.

WhenyoustartanMSA,youalsoswitchtoahigh-deductiblehealthinsurancepolicy.(Bothareusuallyofferedintandembythesameinsurancecompany.)Theannualdeductibleforasinglepersonmustbebetween$1,500and$2,250;forfamilies,itmustbebetween$3,000and$4,500.

Individualsthencancontributeupto65percentofthedeductibleintotheMSAeachyear,andfamiliescancontributeupto75percent.Thecontributionsarenotsubjecttofederalincometaxesandareusedtomeetthedeductible,untiltheinsurancecoveragebeginstokickin,ofcourse.

MSAsalsoallowyoutousethatmoneyforabroaderrangeofservicesthanarecoveredbymosthealthplans.ThefundsinanMSAcancoversmall,everydayexpenses,aswellasdentalcare,eyeglasses,psychotherapyandhomehealthcare.MSAsalsocanbeusedtowardpaymentofpremiumsforlong-termcareinsuranceorCOBRAcoverageuponleavingajob.

PremiumsforMSAswilldiffer,dependingonsuchfactorsasyourage,thetypeofplanandyourplaceofresidence.

MoneythatyouputintoanMSAgrowstax-free,likeanIRAora401(k)retirementplan.Andunlikeacafeteriaplan,MSAfundscanaccumulateovertime.Iftheannualpremiumisnotexhaustedattheendoftheyear,thisamountwillrolloverintothenextyear.Whenyouturn59½,themoneyintheaccountbecomesyourpropertyandisnolongerrestrictedtouseforhealthcare.Priortothattime,themoneycanbewithdrawnfornon-health-relatedexpenses,butyouwillhavetopayordinaryincometaxonwhatevermoneyyouwithdraw,plusa10percentto15percentpenalty.

ThisiswhyMSApoliciesarebeingmarketedasinvestmenttoolssince

theleftovermoneycanberolledoveryearafteryearandcollectinterest.

Conclusion

AccordingtotheCensusBureau,thenumberofpeoplewithouthealthinsuranceintheUnitedStatesincreasedfrom33.4millionin1989to34.7millionin1990.ThecurrentfigureaccordingtotheWhiteHouse,isintheneighborhoodof41.5millionpeople.

Manyofthesepeopleworkfull-time,butarenotofferedbenefitsbytheiremployersandcannotaffordthehighcostofhealthinsuranceontheirown.

Theexplanationsofcoverageofferedinthischaptershouldhelpkeepyououtofthisever-growinggroupofuninsuredAmericansandhelpyougetthebestcoveragetosuityourneeds.

KeyQuestions

1)Doesyouremployerofferyouhealthinsurance? YesNo

2)DoyouhaveachoicebetweenanHMOandareimbursement-stylepolicy?

3)IsyourregularphysicianaproviderfortheHMOyou'reconsidering?

4)Ifyouchooseamedicalexpensepolicy,howmuchofadeductibleareyouconsidering?(It'sworthwhiletocomparepremiumsforapolicywithseveraldifferentdeductibles.)_________________________________________________

5)Wouldyouconsiderpurchasingcatastrophiccoveragebyincreasingyourdeductiblesubstantially?

6)Doyoubelongtoagroupthatoffersdiscountsonhealthinsurance(e.g.,atradeassociation,analumniassociation,achurch)?

7)Haveyouaskedyourdoctororpharmacisttorecommendahealthinsuranceplan?

Whatdidheorsherecommend?_____________________

8)Ifyouhavebeenunabletoobtaininsuranceonyourown,doyouqualifyforastate-sponsoredhealthinsurancepool?

9)DoyouqualifyforMedicaid? YesNo

10)DoyouqualifyforMedicare? YesNo

11)HaveyouconsideredaMedigappolicy? Yes No

12)Doyouneeddentalinsurance? Yes No

13)Doyouneedavisionplan? Yes No

14)Doyouneedaprescriptionplan? Yes No

15)Doesyouremployerofferacafeteriaplan? Yes No

16)Howmuchmoneywouldyouwanttohavewithheldfromyourpaycheckforacafeteriaplan?(Addupyourregularmonthlymedical-relatedexpenses,andalsoincludeanallotmentforannualcosts,suchasco-paymentsfordoctors'visitsandglasses.)

HealthinsurancepremiumsAveragemonthlyco-payments

Dentalpremiums/feesAlternatetherapies,etc.

Psychologicalcounseling,etc.Child-andelder-careexpenses

VisioncareexpensesMedicalequipment

Otherhealth-relatedexpensesMonthlytotal

____________________________________________________________________________________________________________________________________________

17)Ifyou'reabouttoleaveyourjob,haveyouinvestigatedCOBRAcoverage?

Yes No

18)Ifyoudonothavegrouphealthinsurancethroughyourjob,haveyouconsideredamedicalsavingsaccount?

Yes No

Chapter12Long-TermCareInsuranceLong-termcareinsurancewillpayyourexpensesifyouneedtoenteranursinghome.Italsoprovidescoverageifyouneedsomeonetocometoyourhomeandhelpyouwiththetasksofeverydayliving,suchasbathing,dressingandeating.

Long-termcare(LTC)insuranceisarelativelynewidea.In1980,onlyaboutadozeninsurancecompaniesofferedthiskindofcoverage.ButLTCinsuranceisgaininginpopularity,andfast.Today,hundredsofinsurancecompaniesofferthiscoverage,andmillionsofAmericanshavepurchasedpolicies.Whyisthemarketgrowingsoquickly?Thereareanumberofreasons,including:

theagingofourpopulation;

longerlifeexpectancy;

increasinghealthcarecosts;and

thefactthatgovernmentprogramsoftendonotprovidethekindofcoverageneededordesired.

YoucangetLTCcoverageonanindividualpolicyorthroughanemployer-sponsoredgroupprogram.OryoucanaddanLTCridertoyourlifeinsurancepolicy.

LosingYourIndependence

Bytheyear2000,therewillbemorethan35millionpeopleintheUnitedStateswhoareoverage65.Andthatfigureisexpectedtonearlydoublebytheyear2030.Inaddition,bytheyear2000,lifeexpectancyforbothmalesand

femalesisexpectedtoexceed80yearsofageby2030,itmostlikelywillapproach90yearsofage.And,bytheyear2025,thenumberofpeopleoverage80isexpectedtodouble,whiletheagegroupover90isexpectedtomorethantriple.

Aspeoplelivelonger,theyareexposedtohealth-relatedrisksforlongerperiodsoftime.Theyalsoaremorelikelytorequirehelpwiththeactivitiesofdailyliving(ADLs).

ExamplesofADLsinclude:

walking;

movingintoandoutofabed,chairorwheelchair;

dressing;

goingtothebathroom;

bathing;and

feeding.

Ifyouarenolongerabletoperformsomeoralloftheseactivitiesofdailyliving,you'llneedwhatisknownascustodialcare.Youalsocangetthissortofcareathome,ifsomeonecomesintohelpyou.Youcanmoveinwithfriendsorfamilytogetthissortofcare.Oryoucanmoveintoanursinghome.Today,about80percentofroutineseniorcareisprovidedbyfriendsandrelatives.Butwhatifyouliveinacommunityofotherseniors?Duetotheirownphysicalproblems,friendsandneighborsmaybeunabletoassistwithcustodialcare.

Dependingonrelativesforcustodialcaremaynotbepractical,either.Today'sfamilytendstobedispersedandverymobile.Manytimes,parentsliveintheSunBeltandtheirchildrenarescatteredaroundthecountryoreventheworld.Thus,whenyouneedassistancewithbathing,eating,transportation,medicaltreatmentandtaking

medication,yourfamilymembersmaynotbecloseenoughtolendahand.

Eveniftheyarelocal,yourchildrenmaynothavethefinancialresourcestoassistyouwhenyougetoninage.Theymayhavetoworkfull-timetomakeendsmeet.Stayinghometotakecareofaparentsimplymaynotbeafinancialoption.

Orperhapsyou'reveryindependentandyoudon'twanttorelyonhelpfromfriendsandfamily.Perhapsyou'drathertakecareofyourselfevenifthatmeanspayingsomeonetocometoyourhomeandfeedanddressyou.

Ifyouhavetoenteranursinghometogetthecustodialcareyouneed,moneywillbeabigconcern.Nursinghomecarecancostfrom$35,000to$65,000ayearandpricescontinuetoincrease.

Unfortunately,ifyouarenow65,yourriskofhavingtospendatleastsometimeinanursinghomeisbetween35percentand49percent.Whilemostnursinghomestaysaverage90daysorless,atage65,yourriskofspendingmorethanayearinanursinghomeisabout22percent.

(Long-termcareisnotjustaproblemoftheelderly,either.Whiletheoddsthatyouwillneedlong-termcareatayoungerageareslim,achronicillnessorsevereaccidentcanresultincatastrophicexpensesforcare.)

Howwillyoupayforalong-termstayinanursinghomeorforsomeonetocometoyourhomeandhelpyouwiththeactivitiesofdailyliving?Therearen'tawholelotofchoices.Youcan:

usepersonalassetstopayforassistance;

dependonrelativesandfriendsforhelpandsupport;

dependongovernmentprograms;or

purchaseLTCinsurancetokickinwhenyouneedit.

UsingPersonalAssets

Mostpeoplewhohavebeenindependentalltheirliveswouldprefertoremainindependentlaterinlife,too.They'dratherpaytheirownwaywhenthetimecomestogetcustodialcare.

Unfortunately,mostretireesdonothavelargeamountsofsavings,cashorotherassets.ApproximatelyoneinsixretiredpeoplelivesatorbelowthepovertylevelintheUnitedStates.

Unlessyouarequitewealthy,itwon'ttakelongtorunthroughalifetimeofassetsifyoumustmoveintoanursinghome.You'llsoonspendyournesteggandyourchildren'sinheritance.Youmayhavetosellyourhome,yourcarandanyinvestmentsyouhadhopedtopassalongtoyourheirs.

Afteryou'verunthroughmostofyourassets,youwillqualifyforassistancethroughMedicaid,astate-fundedand-operatedprogramthatreceivessomefederalsubsidiesandprovideshealthinsuranceforthefinanciallyneedy.TheHealthCareFinanceAdministrationreportsthatabouthalfofallMedicaidspendinggoestopeoplewhohadfinancialresourceswhentheyenteredanursinghome,butreachedthepovertylevelwhiletheywerethere.

Usingupalifetimeofaccumulatedassetsisafrighteningscenariofora

singleseniorcitizen.Butwhatifyourspouseisstilllivingathomeandyoumustmoveintoanursinghome?Willyouhavetosellthehousetocoveryournursinghomecosts?Wherewillyourspouselive?

Atonetime,Medicaidrulesdidrequireyoutoliquidatevirtuallyallofyourassetsincludingcash,investments(suchasstocksandbonds),bankaccounts,realestateandevensomeformsofcash-valuelifeinsurancetoqualifyforcoverage.Fortunately,thefederalgovernmentmodifiedtherequirementsin1993toallowsurvivingspousesanddisabledchildrentoretainmoreofthefamily'sassets.

Now,ifyouaremarriedandyouenteranursinghomewhileyourspouseremainsinyourhouse,theat-homespouseispermittedtokeep:

onehome;

onecar;

thegreaterofone-halfofthecouple'sassetsor$75,740;and

upto$1,919inmonthlyincome.

Theseamountsareindexedannuallyforinflationandaresignificantlylowerforunmarriedseniors.However,onceneitherspouseislivinginorlikelytoreturntothehomeandthehouseissold,Medicaidmaydemandreimbursementforexpensesassociatedwithpriornursinghomeservices.

Anentire''Medicaidplanning"specialtyhasemergedintheestateplanningfieldtohelppeopleavoidrunningthroughtheirlifesavingsbeforequalifyingforMedicaid.SomepeopleareeventemptedtogiveawayassetssothattheycanqualifyforMedicaidandstillpasssomethingalongtotheirheirs.However,thegovernmentfrownsonthis:Federalprovisionsenactedin1996setcriminalpenaltiesfor

transferringassetsforthesolepurposeofqualifyingforMedicaidpenaltiesthatincludefinesofupto$25,000andimprisonmentforuptofiveyears.

WhatAboutMedicare?

Aswementionedinthepreviouschapter,Medicarealsomaypayforsomenursinghomecosts.However,custodialcareisnotacoveredexpenseinaccordancewithMedicareprovisions.MedicarewillpayonlyforskillednursingcareandthenonlyifyouareaninpatientinaMedicare-certifiedskillednursingfacility.ManynursinghomesarenotcertifiedbyMedicare,becausetheyprovidemorecustodialcarethanskilledcare.

SinceMedicarewillpayonlyforrehabilitativeservices,italsorequirespriorhospitalizationbeforeadmissiontotheskillednursingfacility.Forexample,sayyou'rehospitalizedformajorsurgery.Followingthehospitalstay,thedoctorordersyoutoaskillednursingfacilityfornecessaryphysicalor

rehabilitativetherapy.Medicarewouldnormallyprovidesomebenefitsforthissituation.

However,ifadoctorsuggestedthataseniorcitizenbeplacedinanursinghomeforroutinecustodialcare,Medicarewouldnotprovidebenefits.

WhenMedicaredoespay,itfullycoversthefirst20daysofconfinementinaskillednursingfacilityifyouarereceivingskillednursingcare.

Afterthefirst20days,youwillberequiredtomakeco-paymentsforskilledcare.Theamountoftheseco-paymentschangeseachyearandisapplicabletothenext80daysofconfinement.Typically,thisco-paymentfeaturewillresultinaMedicarepaymentofapproximately10percentoftheexpenseprovidedthecareisskilledcare.

After100daysofconfinement,Medicarepaysnothing.

Nationwide,Medicarepaysforlessthan3percentoftotalnursinghomeexpenseseachyear.

ItisalsoimportanttonotethatMedicaresupplementalinsurancepoliciesdonotprovidecoverageforcustodialcare.BothMedicareandMedicaresupplementinsurancearedesignedtocoveronlyacutemedicalcare.

AreThereOtherOptions?

Whatifyouarenotwealthy,youdon'twanttodependonfriendsorfamilytotakecareofyou,andyoudon'twanttospenddownyourassetssoMedicaidwillcoverthecostsofanursinghome?Thereisanotheroption:purchasinglong-termcareinsurance.

Inasense,owningLTCinsuranceenablesyoutomaintainyourindependence,evenwhenyouneedhelpwiththeactivitiesofdailyliving.Long-termcareinsurancewillpayyouabenefittocoverthecostsofanursinghomeorthecostsofin-homecare.LTCinsurancealsoenablesyoutoselectanursinghomethatsuitsyourneedsanddesiresratherthanjustyourbudget.

Ofcourse,thegovernmenthasnointention(anddoesnothavetheresources)topayforthelong-termcareofpeoplewhocanafforditthemselves.

WhoShouldBuyLTCInsurance?

Formanypeople,purchasingLTCinsuranceismoreappealingthanthealternatives.ButnoteveryonewhoisapproachingretirementageisacandidateforLTCinsurance.Probablythemostimportantreasonforpurchasing

LTCinsuranceisprotectionofassetssoyoudon'thavetoliquidateeverythingyouhavetoqualifyforMedicaid.However,apersonwithoutsubstantialassetsmaynotbeacandidateforLTCinsurance.

Forexample,let'ssayJoeandIreneBrownareboth67yearsold.TheironlysourceofincomeisSocialSecurityandasmallpension($200monthly).Theyrentanapartmentinaseniorcitizencomplex,haveaverysmallamountoflifeinsurance(enoughforburial)andusuallymaintainasavingsaccountbalanceofnomorethan$1,000.Theyhavenootherassets,otherthanpersonalpossessionsandanautomobile.

AreMr.andMrs.BrownprospectsforLTCinsurance?Probablynot.Firstofall,it'sdoubtfulthattheycouldaffordthepremiums,basedontheirrelativelysmallretirementincome.Secondly,theyhavenoassetsofanyconsequencetoprotect.Theydonotownahome,havealargesavingsaccountorhaveotherinvestments.However,theyprobablyareeligibleforMedicaidbenefits,shouldtheybeforcedintoanursinghome.

Let'sconsideranotherexample:Jim,age64,willretireinayear.Whenhedoes,heandhiswifewillhaveamonthlyincomeof$3,000fromSocialSecurityandJim'spension,aswellashiswife'spension.TheyplanonsellingtheirhomeandbuyinganotherhomeinFlorida.InadditiontotheirFloridahome,Jimandhiswifehavea$5,000savingsaccount,CertificatesofDepositvaluedat$30,000andsomestockinvestmentswithacurrentmarketvalueof$50,000.

Jimandhiswifecertainlyhaveassetstosafeguardfromtheimpactofnursinghomeexpenses.Ifthereisarealpossibilitythattheirassetswouldbeexhaustedorreducedtoanunacceptablelevel,thenthepurchaseofLTCinsurancemaybeaviablealternative.

WhenitcomestothedecisiontopurchaseLTCinsurance,theactualprobabilityofconfinementinanursinghomedoesn'thavetobehigh,butthepotentiallossofbeinguninsuredmustbeseverei.e.,thelossofpersonalassets.

Howsevereaparticularlosswillseemisarelativething.Forinstance,awealthyindividualmaynotviewthelossof$50,000to$100,000assevere.

Example:RalphwillberetiringsoonandpermanentlyrelocatingtoHawaiiwithhiswife,Lenore.Histotalretirementincomewillbe$10,000permonth.Heissellinghisbusinessandasummerhome.Histotalassets,includingstockholdings,willtotalnearly$3million.

WouldRalphbeseriouslyaffectedbyalossof$100,000duetoexpensesincurredastheresultofnursinghomeconfinement?Probablynot.

Inthiscase,Ralphdoesn'treallyneedLTCinsurance.Heis,inessence,self-insured.

Thequestion"whoshouldpurchaseLTCinsurance?"canbeansweredrathersimply:Anyonewhostandstoloseanunacceptableamountofpersonalassetsduetoaconfinementinanursinghome.

Howmuchdoeslong-termcareactuallycost?LTCexpensescanbedefinedastheexcessdailycostoflong-termcareovertheaveragedailycostofnon-long-termcare.

Example:George,age74,andhisfamilyareconsideringthepossibilityofadmittinghimtoanursinghome.Itisestimatedthathisfoodandrentexpensescurrentlyaverage$50aday.Anursinghomecharges$70perdayforroomandboard.So,theactualLTCexpenseis$20perday.Accordingly,George'spersonalassetswouldbedepletedattherateof$20perday.

HowlongwillGeorgebewillingtoreducehispersonalassetstomeetthecostsofthenursinghome?Ofcourse,theanswerwilldependonthevalueoftheseassets.IfGeorgehashundredsofthousandsofdollars,thenadepletionof$20perdaymaybeinconsequential.Ontheotherhand,ifGeorgeonlyhashundredsofdollars,a$20-per-dayreductioninassetsissignificant.

Thesmallertheamountofpersonalassetsatrisk,thelesslikelyyouwillneed(orbeabletoafford)LTCinsurance.

Asaruleofthumb,ifyouhavepersonalassetsof$25,000orless,youprobablyarenotaprospectforLTCinsurance.YoumayalreadybeattheassetlevelrequiredforMedicaidpayments.

Ifyouhavepersonalassetsrangingfromabout$25,000to$150,000,youarethemostlikelycandidateforLTCinsurance.

Ifyouhaveassetsinexcessof$150,000,youprobablycancoverthecostsofanursinghomeonyourown.

Thecriticalquestionisnot,"CanIaffordtobuyLTCinsurance?"It's"CanIaffordnottopurchaseLTCinsurance?"

WhatDoesLTCInsuranceCover?

Long-termcareinsuranceprovidesfourprincipaltypesofbenefits:

skillednursingcare;

intermediatecare;

custodialcare;and

homehealthcare.

Skillednursingcareiscareprovidedunderthedirectsupervisionofalicensedphysician.Thecareisprovidedona24-hourbasisandisadministeredbyregisterednursesand/orphysicians.

Forexample,Sarah,age77,hashadserioussurgery.Sarahiswellenoughtobedischargedfromthehospital,butsheneedsskillednursingcareforaperiodoftimeduetothesurgery.Sheisadmittedtoanursinghome.

Intermediatecareisnursingcareforindividualswhodonotrequirethedegreeofcarethatahospitalorskillednursingfacilityprovides,butdorequiresomemedicalcareunderthedirectionofmedicalpersonnel.Intermediatecareisadministeredunderthesupervisionofaregisterednurse,butalsomaybeadministeredbyalicensedpracticalnurseorphysicaltherapist.

Example:Sarahslowlyrecoversfromtheeffectsofhersurgeryandisnowabletotakecareofherselftoasmalldegree.However,sheisstillinneedoffrequentmedicalcare.Sarah'scaremaybedowngradedtointermediatecare.

Custodialcareisprimarilyforthepurposeofmeetingessentialdailylivingrequirements.Thistypeofcaremaybeadministeredbyvolunteerworkers,licensedpracticalnursesandtherapists.

Example:DuetotheseriousnessofSarah'ssurgeryandherage,sheisneverabletofullyrecoverandneedsdailyhelpwithsuchthingsaswalking,bathing,dressingandfeedingherself.Althoughrecoveredfromhersurgery,shemaybeinneedofcontinuedcustodialcare.

Generally,LTCpoliciesprovidebenefitsforeachoftheselevelsofcare.Thepolicymayrequirethatthecarebeprovidedbyastate-or

Medicare-approvednursingfacility.

Homehealthcareisintermediateand/orcustodialcareprovidedinahomesetting.ThehomehealthcarebenefitprovidedbyLTCpoliciesisusually50percentto85percentoftheregularskillednursingcarebenefit.Somepoliciesnowallowyoutoselectwhethertoreceiveinstitutionalorhomecare.Toqualifyforhomehealthcarebenefits,youusuallyneedtobecertifiedbyaphysicianasunabletoperformtwoormoreoftheactivitiesofdailyliving.

Homehealthcarebenefitsincludevisitstothepatient'shomebyaregisterednurse,theservicesofpracticalnurses,physicaltherapists,etc.MoreliberalLTCinsurancepoliciesmayevenpayforhomecareprovidedbyfamilymembers.However,thisisspecificallyexcludedfromcoverageonotherpolicies.

Inrecentyears,therehasbeenashiftinLTCinsuranceclaims.Moreandmore,LTCinsurancepolicyholdersarefilingforhomehealthcareandadultdaycarebenefitsratherthanskillednursingbenefits.

BasicLTCBenefitsLevelofCare

TypeofCare AdministeredBy

Skilled Administrationofmedication,changingsurgicaldressings,therapy,generalrehabilitativeandcustodialcare

Doctors,RNs,practicalnursesandtherapists

IntermediateTherapy,generalrehabilitativeandcustodialcare RNs,practicalnursesandtherapists

Custodial Assistanceinwalking,bathing,dressing,eatingandgeneraldailylivingrequirements

RNs,practicalnursesandtherapists

Home Intermediateand/orsomecustodialcareworkersandtherapists

RNs,practicalnurses,social

AdultdaycarealmostalwaysisprovidedasanoptionalbenefitonanLTCpolicy.Anadultdaycarefacilityprovidesastructuredenvironment,wheretheadultreceivesmedicalcareandparticipatesinavarietyofhealth,socialandrelatedsupportactivitiesforafewhourseachday.Suchcareincludestransportationtoandfromthefacility,aswellasmeals.

Hospicecaremaybeastandardoroptionalbenefit.Ahospiceisanorganizationwhoseprimarypurposeistoprovidecomfortandanacceptableenvironmentfortheterminallyill.Coverageforhospicecarewillincludehomevisitsbysocialworkers,aswellasregisterednurses.Italsoincludesin-patientservicesinahospice.Typically,ahospicewillkeepaterminallyillpatientcomfortableinhisorherlastdays,butitdoesnotprovidelife-savingorlife-prolongingtreatment.

Often,aspartofthehospicebenefit,respitecaremaybeprovidedforfamilymemberswhoareresponsibleforthecareoftheterminallyillpatient.Respitecareprovidesabreakintheday-to-dayroutineandcare

oftheterminallyill.Forinstance,apatientmaybeadmittedtothehospicetogivethefamily"atemporaryrest"forashortperiodoftime.Followingtherespite,thepatientreturnstothehomeandthecareofthefamily.

QualifyingforBenefits

EarlyLTCpoliciesnormallyrequiredaperiodofpriorhospitalizationbeforeyouwouldbeeligibleforbenefits.Thisprior-hospitalizationrequirementalsoisreferredtoasagatekeepermechanism.

Manyofthesepoliciesrequiredatleastathree-daystayinahospitalduetosicknessoranaccidentbeforeyouwouldbeeligibleforLTCbenefits.Inaddition,admissiontothelong-termcarefacilityhadtooccurwithinaspecifiedperiodoftimefollowingdischargefromthehospital(forexample,within30days).So,ifyouwerehospitalizedasaresultofsicknessoranaccidentforatleastthreedaysandwereadmittedtoanursinghomewithin30daysofdischarge,youwereeligibleforLTCbenefits.

NewerLTCpoliciesnolongerrequirepriorhospitalizationasaconditionforreceiptofbenefits.Infact,manystateshavepassedlawsthatprohibitLTCpoliciesfromhavingthistypeofgatekeepermechanism.

SomeofthenewerLTCpoliciesbaseeligibilityforadmissiontoanursinghomeontheinabilitytoperformsomeoftheactivitiesofdailyliving.Thesecontractsdonotrequirepriorhospitalization,nordotheyrequirethatyoubeadmittedtoanursingfacilityasaresultofsicknessorinjury.Forexample,ifyouareunabletotakecareofyourpersonalhygieneorunabletowalkor"getaround,"youwouldbeeligibleforadmissiontoanursinghomeandpaymentofpolicybenefits.

Federallegislationenactedin1996theKennedy-KassebaumActwhichexpandsthetaxadvantagesforpurchasersofLTCinsurance,alsoraisesthethresholdsfordisability(forexample,byeliminating"walking"fromthelistofqualifyingADLs).Lawsinyourstatemay

supersedethislegislation,however.Aninsuranceagentorsalespersonwillbeabletoexplainwhatwillorwillnottriggerbenefitsunderaparticularpolicyandyourstateinsurancedepartmentcanletyouknowifyourstaterequiresinsurancecompaniestoprovidecoverageifyoubecomeunabletowalk.

HowanLTCPolicyPays

ThemajorityofLTCpoliciesareindemnitycontracts.Thismeansthatadailybenefit,suchas$100perday,wouldbepaidforeachdayofcare.

However,someLTCpoliciesarebasedonareimbursement(orexpense-incurred)format.Aswithmanyhealthinsuranceplans,theinsurancecompanywillreimburseyouforapercentagesuchas80percentofactualexpensesincurredduetoastayinanursinghome.

Somepoliciesofferadailybenefitfornursinghomecoverage,buta

reimbursementbenefitforhomehealthcoverage.Stillothersofferamaximumlifetimebenefitamount,fromwhichincurredexpensesarededucted.

You'llneedtodeterminehowaparticularpolicywillpaywhenyouarecomparisonshopping.Youalsomaywanttolookintohowmuchnursinghomecarewillcostinyourarea,soyoucanmakeawisechoicebetweenanindemnityorareimbursement-stylepolicy.

WhenaPolicyPays

LTCpoliciesdonothaveamonetarydeductible,liketheoneyouwouldfindonanautoorhomeownerspolicy.Instead,theyhaveaneliminationperiod(EP),whichis,essentially,atimedeductible.Onceaneventoccursthatwouldtriggerbenefits,youwillhavetowaitacertainlengthoftimetheeliminationperiodbeforeyouactuallystartreceivingthosebenefits.

MostinsurancecompanieswillofferEPsof15,30,60or90days.Somemayofferpolicieswithwaitingperiodsoflessthan15daysorlongerthan90days.AndsomeevenofferEPsthatapplyonlyonceperlifetime.

WhenshoppingforLTCinsurance,youwillneedtodeterminehowlongyoucanwaitbeforeyoubegintoreceivebenefits.Notsurprisingly,thelongeryouhavetowait,thesmallerthepremiumyouwillhavetopay.TheEffectoftheEliminationPeriodonPremiums

$$$$$$$$$

Premium $$$$$

15 30 60 90 180EliminationPeriod(indays)

Itisalsoimportanttonotethatalllong-termcarepolicieswillcontainsomeexclusionsand/orlimitations.Thesetypicallydescribethekindsofclaimsforwhichtheinsurancecompanywillnotpay.Commonexclusionsinclude:

lossesduetowarandactofwar;

lossesduetointentionallyself-inflictedinjuries;

careforstaysingovernmentfacilities,suchasaveteran'shospital;

lossesthatarecoveredbyworkers'compensationorsimilarstatutorybenefits;and

lossesduetomental,psychoneuroticorpersonalitydisorders,whenthereisnophysicalororganicdiseaseinvolved.

Mentalorpersonalitydisordersresultingfromanaccident,Alzheimer'sdiseaseorotherorganicdiseasesarecovered.

HowLongWillthePolicyPay?

AnotherkeyconsiderationwhenshoppingforLTCinsuranceishowlongthepolicywillcontinuetopayyoubenefits.Thisisthebenefitperiod(BP).AnLTCpolicywillnotsimplypayyoubenefitsforlife.Youhavetochoosethelengthofthebenefitperiodandpaypremiumsaccordingly.

Mostinsurancecompanieswillofferbenefitperiodsofonetofiveyears,andsomeofferlifetimebenefitsbuttheseareexpensivepolicies.

SomepoliciesmaycontainbothaBPperstayandalifetimemaximumbenefitperiod.Forinstance,apolicymayofferathree-yearbenefitperiodpernursinghomestay,butamaximumlifetimebenefitperiodoffiveyears.So,ifSamwereconfinedtoanursinghomeonthreedifferentoccasionsforperiodsofsixmonths,oneyearandtwoyears,hewouldreceivethebenefitshewasentitledtoforeachstay,sinceeachofthesestayswasnolongerthanthreeyears.Inaddition,hewouldhaveusedupthree-and-one-halfyearsofhisfive-yearmaximumlifetimebenefit,leavinghimwithone-and-a-halfyearsofadditionalcoverage.

Asyoumightexpect,thelongeryouwillreceivebenefits,thehigherthepremium.TheEffectoftheBenefitPeriodonPremiums

$$$$$$$$$

Premium $$$$$

$1 2 3 4 5BenefitPeriod(inyears)

CommonPolicyProvisions

Differentinsurancecompaniesusedifferentformsfortheirlong-termcarepoliciesunlikehomeownersinsurance,whichiswrittenonstandard

forms.So,long-termcarepoliciesdifferfromcompanytocompany.However,thereareafewcommonpolicyprovisions.

Forexample,mostindividuallong-termcarepoliciesareguaranteedrenewable.Thismeanstheinsurancecompanyguaranteestorenewthepolicyattheendofitstermbutitdoesnotguaranteeatwhichpremiumthepolicywillberenewed.Theinsurancecompanycannotcancelthepolicy,butitdoesreservetherighttoincreasepremiumsinaccordancewiththepolicyprovisions.

Ifthepremiumsaretobeincreased,theywillbechangedonthepolicyanniversary,andtheincreasedpremiumwillbeforanentireclassofinsureds,notjustasingleindividual.Forexample,allpolicyholdersinagivenstatewillhavetheirpremiumsincreasedontheirrespectivepolicyanniversaries.

AsmallnumberofindividualLTCpoliciesareoptionallyrenewable.Theinsurancecompanyhastheoptiontorenew,cancelorincreasethepremiumsbyclass.Mostcompaniesmarketguaranteed-renewablecontractsandrefrainfromissuingoptionallyrenewableones.Eventually,therealsomaybenon-cancellableLTCcontractsissuedmeaningbothrenewabilityandthepremiumareguaranteedforthelifeofthepolicy.

LTCpoliciesalsoprovidefora30-dayfreelook.Ifyouarenotsatisfiedwithyourpolicywhenitarrives,youhave30daysduringwhichyoucanreturnittotheinsurancecompanyforafullrefundofanypremiumpaid.

SomeLTCpoliciesalsoprovideaguaranteed-purchaseoption,whichallowsyoutobuyhigheramountsofcoverageatspecificintervals.Forinstance,theprovisionmayread:Thepolicyholdermayincreasecoverageby25percentoftheunderwrittenamounteverytwoyears

untilprotectionisdoubled.

Newerpoliciesofferprescriptiondrugbenefits,nursinghomebedreservations,anaccidentaldeathbenefit,benefitsfordurablemedicalequipmentandbenefitsforhomemodification.Othersareofferingmanagedcare-typebenefits,wherecareisprovidedthroughapreferredprovidernetwork.

Becausetheyaresonew,long-termcarepoliciesarestillevolving.Theyarebeingrevisedandrefinedtobetterreflectpeople'sLTCneeds.

CareCoordinationBenefits

SomeLTCpoliciesincludecarecoordinationbenefits(CCB),whichprovidepaymentsfortheservicesofaprofessionalcarecoordinator.Thecare

coordinatorassessesyourconditionandthesupportavailablefromfamilymembers,formulatesaplanofcareandthenassistsintheimplementationofthatplan.Thisisavaluablebenefit,asitrelievesyouandyourfamilymembersfromhavingtocoordinateandmonitorthecareyou'rereceiving,whichissometimesthemostdifficultandtime-consumingpartoflong-termcare.

Thecarecoordinatorcouldrecommendaplanunderwhichtheindividualisconfinedtoanursinghomeindefinitely.Conversely,thecoordinatorcouldrecommendaplanthatcombineshomehealthcare,familycareandsomeskilledcare,dependingonyourneeds.

Thepurposeistobetterutilizetheservicesandbenefitsprovidedbythevarioustypesofcoveredfacilitiesinanefforttobeofbetterservicetothepatientand,atthesametime,conserveexpenses.

MostLTCplansthatofferthisbenefittypicallywillpaythefeeofthecarecoordinatorinfullorprovideabenefitequaltosomefactorofthedailynursinghomebenefit,suchas10timesor20timesthedailybenefit.

InflationProtection

Adequatelevelsofcoveragepurchasedtodaymaygraduallyerodeovertimeduetoinflation.Theinsuranceindustryhasbeenexploringthisissueasitrelatestopolicybenefits,aswellaspremiums.

Typically,inflationprotectionappearsinanLTCpolicyinoneoftwoways:asbuilt-ininflationprotectionorasinflationprotectionbyoption.

AlthoughinflationprotectionusuallyisofferedasanoptionalbenefitandaddssubstantiallytothecostoftheLTCpolicyitisaworthwhileexpense.Thecostofcareisonlygoingtoincreasein

futureyears.Protectionagainstinflationisanimportantconsiderationfortheseniorcitizen.Inaddition,manystatesnowhavelawsthatrequireinflationprotectionasastandardprovisioninLTCpolicies.

Built-ininflationprotectionprovidesbenefitincreasesforboththedailybenefitandthelifetimemaximumbenefit.Inflationincreasesareguaranteedandoccurautomatically,withoutoptionandwithoutregardtoactualincreasesinthecostofliving.Typically,thebenefitincreaseequalsastatedannualpercentage.Thispercentageiseitherbasedonasimpleinterestrateoracompoundedrate.

Forinstance,inflationprotectionoftenwillprovideanincreaseof5percentoftheamountofthedailybenefiteachyear.Thus,ifyoupurchasedapolicywitha$100dailybenefitfiveyearsago,youwouldrealizeabenefit25

percentgreatertoday.Followingareexamplesofthesimpleinterestrateandcompoundedrateconcepts.5PercentSimple

Theannualbenefitincreaseis5percentoftheoriginalbenefitamountforthefirst10policyyears.Theultimatebenefitthenbecomes150percentoftheoriginalbenefit.Iftheinflationaryperiodis20years,thentheultimatebenefitbecomes200percentoftheinitialpolicybenefit.Thus,aninitial$50dailybenefitwillbecomea$75dailybenefitafter10years,anda$100benefitafter20years.

$50x5%=$2.50$2.50x10years=anadditional$25$50x5%=$2.50$2.50x20years=anadditional$50

5PercentCompounded

Theannualbenefitincreaseis5percentofthepreviousyear'sbenefit.Theultimatebenefitbecomes163percentoftheinitialbenefitafter10yearsand265percentafter20years.Thus,aninitial$50dailybenefitwillbecome$81.50after10years,and$132.50after20years.

$50x163%=$81.50$50x265%=$132.50

InflationoptionsareanotherwaytoprotectthepurchasingpoweroftheLTCdollar.Withthisapproach,youarecontractuallyguaranteedtherighttopurchaseadditionalbenefitamountsinordertokeeppacewithinflation.

Forinstance,sayyouare65andyourpolicyhasaninitial$80dailybenefit.Youaregiventherighttobuyanadditionalannualbenefitequalto5percent(simpleorcompounded)oftheinitialbenefitamount.Theoptiondatesareeverythreeyearsfromtheageof68to80.Theoptionamountisequalto5percentforeachofthethree-yearintervals(or15percent).Thefollowingchartillustratestheeffectthiswouldhaveon

yourbenefit.InitialDailyBenefit:$80

5%Simple 5%CompoundedAge OptionAmount Total

BenefitOptionAmount Total

Benefit68 $12 $92 $13 $9371 $12 $104 $14 $10774 $12 $116 $17 $12477 $12 $128 $20 $14480 $12 $140 $22 $166

Thisoptionapproachcouldbeexpensivebothforyouandfortheinsurancecompany.Becausetheoptionmethodguaranteesyoutherighttopurchaseadditionalamountsofinsuranceregardlessofyourhealth,fromthe

perspectiveoftheinsurancecompany,the''expense"becomesamatterofsubstandardriskspurchasinginsurancebenefitsatstandardrates.Thismeans,theolderyouare,themorelikelyyouaretohavemedicalproblems,whichaffectyourinsurability.Ifyoubecomelessinsurablebutareguaranteedmoreinsurance,theinsurancecompanyfacesgreateroddsofpayingyoumoremoney.(Insurancecompaniescallthisadverseselectionagainsttheinsurer.)

Fromtheconsumer'sperspective,policiesthatprovideinflationprotectionwillresultinincreasedpremiums.Ifyou'reretiredandlivingonafixedincome,you'llbefacedwithincreasingcosts,sinceLTCpoliciesdonotguaranteethepremium.Thisfactcoupledwithpotentialadditionalcostsfortheinflationprotectionmayonlyaddtoyourburden.TheImpactofInflationProtection

ThischartillustratesthedifferenceinpremiumsthatcanbeexpectedforanLTCpolicywitha$100-per-daynursinghomebenefit,a90-dayeliminationperiodandafour-yearbenefitperiod.ColumnAshowspremiumsfornoinflationprotection,andColumnBshowspremiumsforapolicywith5percentcompound-for-lifeinflationprotection.

ColumnA ColumnBAge60 $325 $700Age70 $950 $1,750Age75 $1,550 $2,400

WhatwemayseeinthefutureareLTCpoliciesthatpayreasonableandcustomaryLTCexpenses,similartothewaymanyhospitalizationpoliciescalculatebenefits.

Suchaninsuranceproductwouldautomaticallykeeppacewith

inflation,butitalsoprobablywouldneedtohaveahigherinitialpremiumthanmostcurrentLTCpolicies.

NonforfeitureProvisions

EarlyLTCpoliciesmadenoprovisionfornonforfeiture.

Inotherwords,ifyoustoppedpayingpremiumsandallowedthepolicytolapse(ordiedwithouteverhavingusedtheLTCbenefit),youoryourheirsreceivednothinginreturnforallthosemonthsoryearsduringwhichyoupaidpremiums.

Consumeradvocatesandstateinsurancedepartmentstookaction,andnownonforfeitureprovisionsareofferedaspartofmostindividuallong-termcarepoliciesandgrouppolicies(wheretheemployeeispayingthepremium).

Thepurposeofnonforfeitureprovisionsistoprovideyouwithamechanismwherebyallpolicyvaluesorbenefitswon'tbeforfeited,shouldyouelecttostoppayingpremiumsontheLTCpolicy.

Mostcommonly,whenapolicylapses,youareofferedeitherareturnofpremiumspaidorashortenedbenefitperiod.Ifyouchoosethelatter,thebenefitperiodwillbeadjustedsothatitisequaltothetypeofpolicyyouwouldhavepurchased,basedonthetotalpremiumsalreadypaid.Inotherwords,ifyouwerepayingforapolicywithafive-yearbenefitperiodbutstoppedpayingpremiumsafterseveralyears,theinsurancecompanymightadjustthepolicytoprovideathree-yearbenefitperiod.Inaddition,manypoliciesprovidethatuponthedeathofthepolicyholder,thereisareturnofpremiumspaid,lessanyclaimsthathavebeenpaidout.

Insurancecompaniesofferseveraldifferentstandardnonforfeitureoptions.It'swisetoknowwhicharerelevantforthepolicyyou'reconsidering,incaseyouareunabletocontinuepayingpremiumsatsomepoint.ThenonforfeitureoptionsthatwouldapplytoLTCinsuranceinclude:

CashSurrenderValue.Thisisaguaranteedsumpaidtoyouuponsurrenderorlapseofthepolicy.Thissumgenerallyisequaltosomeportionorpercentageoftheinsurancecompany'spolicyreserveatthetimepremiumpaymentscease.

ReducedPaidUp.Thisisalesserorreducedamountofdailybenefitpayableforthemaximumlengthofthepolicy'sbenefitperiodwithnofurtherpremiumpaymentsrequired.

ExtendedTerm.Thisprovidesanextensionofinsurancecoverageforthefullamountofthepolicybenefitswithoutanyfurtherpremiumpayments,foralimitedperiodoftimeonly.

ReturnofPremium.Thisprovidesalump-sumcashpaymentequaltosomepercentage(60percent,80percent,etc.)ofthetotalpremiumspaid,paidtoyouwhenyousurrenderthepolicyoritlapses.Normally,anyclaimspreviouslypaidtoyouwouldbedeductedfromtheamountreturned.

Thereducedpaidupandextendedtermoptionsarepaidfromthepolicy'scashvalue.Thesearefairlystandardandareverysimilartothenonforfeitureoptionsfoundinpermanentlifeinsurancepolicies.

Forexample,Larryhaspaid$15,000inpremiumsforhisLTCpolicyandhashadoneclaimtotaling$5,000.Thepolicycontainsa70percentreturn

ofpremiumnonforfeitureprovision.IfLarryweretoterminatehispolicy,hewouldbeentitledto70percentofthepremiumpaid(70%x$15,000=$10,500),lesstheclaim($10,500less$5,000=$5,500).

AvariationonthisoptionisareturnofpremiumintheformofbankedLTCclaims.Insteadofthereturnofpremiumbeingpaidinalumpsum,thevaluewouldbebankedandpaidoutasfutureLTCclaimsuntilthebankedamountwasexhausted.

Withoutnonforfeitureprovisions,ifyourpolicylapsesoryousurrenderit,yougetnothing.Allvalueandallpremiumspaidarelost.Thisisamajordisadvantageifyouneverhaveaclaimandterminatethepolicy.Contractswithnonforfeitureprovisionsprovidethatallisnotlostanimportantpointtoconsiderwhenshoppingforapolicy.

Typically,youcanreinstateahealthinsurancepolicywithinashorttimeifithaslapsedfornon-paymentofpremium.ThelengthoftimethatyouhavetoreinstateapolicyoftenisexpandedandenhancedwithLTCpolicies.

SomeinsurersspecifythatyoucanreinstateanLTCpolicyuptosixmonths,ninemonthsoreven12monthsafterithaslapsedifthereasonforthelapsewasacognitiveimpairment.Often,aseniorcitizensimplyforgetstopaythepremium,thinksithasalreadybeenpaidordoesn'tunderstandthepurposeofthepremiumnotice.

Toqualifyforreinstatementafterthestandardreinstatementperiod,you(oryourrepresentative)wouldhavetosubmitaphysician'sreporttotheinsurancecompanyasproofofacognitiveimpairment.Cognitiveimpairmentmeansadeficiencyintheabilitytothink,perceive,reasonorremember,whichresultsintheinabilityofindividualstotakecareofthemselveswithouttheassistanceor

supervisionofanotherperson.

Pre-ExistingConditions

Mostpoliciesalsowillcontainasix-monthpre-existingconditionprovision,whichmeansthepolicywillnotpayanybenefitsforapre-existingconditionduringthefirstsixmonthsthatthepolicyisinforce.(Statelawsusuallypreventinsurancecompaniesfromhavingapre-existingconditionlimitationthatisgreaterthansixmonths.)Moreliberalpoliciesmaystatethatallpre-existingconditionsarecoveredasoftheeffectivedateofthepolicy,iftheconditionisstatedontheapplication.

Apre-existingconditionusuallyisdefinedasanyinjuryorillnessforwhichmedicaltreatmentoradvicewasreceivedorrecommendedwithinacertainperiodoftimepriortotheeffectivedateofcoverage.

Forexample,MikesawhisdoctorJune1forabackproblem.OnSeptember1,heappliesforLTCcoverage.Mikemustansweryestoanyquestionontheapplicationregardingpre-existingconditions.IfMike'spolicycontainsasix-monthpre-existingconditionprovision,anynursinghomestayduetohisbadbackwillnotbecoveredforthefirstsixmonthsofthepolicy.

WhatifMikedoesn'tseehisdoctorabouthisbadback,buthedoescallhimandthedoctorprescribessomemedicationoverthephone?DoesMikehaveapre-existingcondition?Yes,becausehehasreceivedadvice(andmedication)fromthedoctorregardingthecondition.

OtherProvisionstoConsider

Thewaiverofpremiumprovisionisfairlystandard.MostLTCpoliciesprovidethatafteryouareconfinedtoanursinghomeandreceivingbenefitsforatleast90consecutivedays,thepolicypremiumwillbewaivedforthedurationoftheconfinement,aslongasbenefitscontinuetobepaid.

TherecurringprovisionfoundinLTCpoliciesissimilartorelapseinsurance.Underthisprovision,ifyouarereleasedfromanursinghomeandarereadmittedwithin180daysduetothesameorarelatedcondition,thesecondadmission(therelapse)willbeconsideredacontinuationofthepreviousnursinghomestay.However,ifmorethan180dayshaselapsedsinceyouwerereleasedfromthefacility,you'llhavetowaitoutaneweliminationperiod(EP)but,onthepositiveside,youalsostartanewbenefitperiod.

Forexample,MaryBeth,age72,hasanLTCpolicywitha30-dayEPandathree-yearbenefitperiod.Herdailybenefitis$100.MaryBethisadmittedtoanursinghometorecuperatefromhipsurgery.Sheisinthefacilityforatotaloffourmonths,atwhichpointsheisreleased.

However,threemonthslater,sheundergoessurgeryagainonthesamehipandreturnstothenursinghometorecuperate.

MaryBeth'ssecondadmissioniswithin180daysofherdischargefromthefirststay,anditisforthesamecondition:hipsurgery.Undertherecurringprovision,thesecondadmissionisnothingmorethanacontinuationofherfirstclaim.Duringherfirststay,shesatisfiedthe30-dayEPandreceiveddailybenefits.Therefore,nonewEPisrequired,andshewillcontinuetoreceive$100perdayforthebalanceofthebenefitperiod,ifnecessary.

HowMuchInsuranceDoIWant?

You'llneedtoconsidertheamountofpersonalassetsyouhavetodetermineifyouneedLTCinsuranceand,ifso,howmuchyouneed.

Ifyouhaveaverylimitedamountofassets,youprobablyarealreadyattheMedicaidlevelandmaynotneedLTCinsurance.

Ifyou'reverywealthy,youprobablydon'tneedLTCinsurance,either,becauseyoucanaffordtopayyourownwayor,essentially,self-insure.

Ifyou'resomewherebetweenthesetwoextremeswithpersonalassetsrangingfromabout$25,000to$250,000youarethemostlikelycandidateforlong-termcareinsurance.Consumeradvocatessuggestthatyoushouldnotspendmorethanfiveto10percentofyourincomeonsuchcoverage.

Generally,theamountofassetsyouhavealsowilldeterminethetypeofcoverageyouchoose.Asageneralrule,themostcomprehensivepolicywillbeselectedbypeoplewhohaveassetsof$100,000to$150,000ormore.

Amorecomprehensivepolicyischaracterizedbyhigherdailybenefits($100to$200perday),relativelyshorteliminationperiods,plusoneormoreoptionalbenefits.Allofthesebenefitswillresultinahigherpremium.

Ifyouhavesubstantialassets,youcertainlycanaffordtopayahigherpremium.Butyoualsomaychoosetoself-insureorpurchasealimited-benefitpolicy.Ifyoupurchasealimited-benefitpolicy,youpaylessforpremiums,andyouhavecoverageonlywhenyoureallyneeditwhichwouldbetheequivalentofpurchasingahigh-deductible,catastrophichealthinsurancepolicy.Thismaybeawisechoiceifyouhaveenoughliquidassetstocoverthecostofasix-monthnursinghomestay,forexample,butprefernottohavetosellyourhomeifyouneedtobeconfinedtoanursinghomeforalongertimeperiod.

Iffundsaretight,youhaveotheroptions.Forexample,Margaret,age

66,haslimitedassetsandasmallretirementincome.ShewouldliketopurchaseanLTCpolicywitha$100-per-daybenefit,a10-dayeliminationperiodandafive-yearbenefitperiod.However,shecannotaffordthepremium.Whatcanshedotoreduceherpremiumcosts?

1)Shecanreducethedailybenefittoalesseramountforexample,$50.

2)Shecanincreasetheeliminationperiodto60days,90daysorlonger.

3)Shecanreducethebenefitperiodtotwoorthreeyears.

Thesearetheprimaryfactorsthatyoucancontrol,whenitcomestothepriceofLTCinsurance.

Theotherprimaryfactorwhichyoucannotcontrolisyourage.Whileyouaremostlikelytoneedlong-termcareinlateryears,itisinyourbestinteresttoconsiderpurchasingLTCinsurancewhenyouare50to60.Thisisbecauseyouaremoreeasilyinsurableatthisageandyourpremiumswillbemuchlower.

Mostinsurancecompaniesofferpoliciesbeginningatage50,thoughafewofferthemtopeopleasyoungasage40.Aslossexperienceandunderwritingdataareaccumulated,thisminimumagemaybereducedtoamuchlowerentryleveland,consequently,lowerpremiums.

However,todate,noinsurancecompanyoffersanon-cancellablecontractmeaningoneinwhichbothrenewabilityandthepremiumareguaranteed.Manypoliciesareguaranteedrenewable,butthepremiumisnotguaranteed.So,evenifMargarethadpurchasedanLTCpolicyatamuchyoungerage,shestillmightfindithardtopaythepremiumwhenshereachedage66.

ComparisonShopping

FormanyoldercitizensinneedofLTCinsurance,howcomprehensiveorhowcostlyapolicyismaynotbeasimportantaswhichbenefitsandprovisionsarecontainedinthecontract.

WhenpurchasingLTCinsurance,it'svitaltopaycloseattentiontothetypeofpolicybenefitsprovided,theamountofcoverageavailableforeachlevelofcare,thebasicpolicyprovisions,andthepolicyexclusionsandlimitations.

Thefourbasictypesofbenefitsprovidedbyindividualpoliciesincludeskillednursingcare,intermediatecare,custodialcareandhomehealthcare.Homehealthcaremayappearasanoptionalpolicybenefit.Allbenefitsareprovidedafteryouhavesatisfiedthepolicy'seliminationperiod.AftertheEPissatisfied,benefitswillbepaidfor

themaximumbenefitperiodoruntilyouhavereceivedthemaximumlifetimebenefitofthepolicy.

Twocommonformsofoptionalpolicybenefitsincludeinflationprotectionandadultdaycare.Aswementionedearlier,inflationprotectiontypicallyadds5percenteachyeartotheamountofthedailybenefit.Adultdaycareisdesignedtoprovideneededcustodialandsocialactivitiesforfunctionallyimpairedadultsawayfromtheirhomeenvironment.

PaymentOptions

TheusualmethodofpayingforLTCinsuranceisalifetime,annualormonthlypremium.Butsomeinsurersoffera10-yearor20-yearpaid-upop-

tion.Therearealsosingle-paypoliciesavailabletoretireeswhowanttorolloveralump-sumretirementamountintoanLTCinsurancepolicy.

TaxConsiderations

ThefederalHealthInsurancePortability&AccountabilityActof1996establishedthatthepremiumspaidforindividualLTCinsurancearetaxdeductibleasamedicalexpensetotheextentthatyourtotalunreimbursedmedicalexpensesexceed7.5percentofyouradjustedgrossincome.

This"advantage"soundsbetterthanitreallyis.ManypurchasersofLTCinsuranceareage65orolder.Sinceonlyabouthalfoftheindividualsoverage65payincometaxandevenfeweritemizetheirdeductions,thetaxbenefitisoflimitedapplication.Forapersonwhohasasubstantialincome,the7.5percentfigurecanrenderthisdeductibilitymeaningless.Also,thetaxdeductionissubjecttoage-relatedlimits,rangingfrom$200peryearfortaxpayersunderage40upto$2,500peryearfortaxpayersage71andolder(theselimitsaresubjecttoannualindexing).

LTCbenefitsareconsideredreimbursementsformedicalexpensesalreadyincurred,andarethereforereceivedtax-freeuptoaper-daymaximumof$175perday(tobeadjustedforinflationafter1997).

Whengrouplong-termcareinsurancepremiumsarepaidbytheemployer,thepremiumsaretax-deductiblefortheemployerandbenefitsarereceivedtax-freeuptospecifiedlimits.

ConsumerProtections

Partiallybecauseofthevulnerabilityoftheseniormarketandpartiallybecauseofthecomplexityofthelong-termcareinsuranceproduct,

LTCisamongthemostheavilyregulatedareasoftheinsuranceindustry.

Seriousproblemsarisingoutofthefirstlong-termcareinsurancepoliciesinvitedregulatoryscrutinyandresultedinaflurryofstatelawsandregulations.Consumeradvocacygroupslobbiedfortighterandtightercontrolsoncompanyunderwritingpractices,policyprovisionsandagentactivities.

MoststateshavepassedlawsthatprohibitcertainpracticeswithregardtoLTCinsurance.Hereisasummaryofcommonconsumerprotections:

Applications.ApplicationsforLTCinsurance(exceptguaranteedissue)mustcontainclear,simplequestionsdesignedtoascertaintheapplicant'shealth.Eachquestionmustcontainonlyoneinquiry,anditmustrequireonlyayesornoanswer(exceptfornamesofphysiciansandprescribedmedica-

tions).Manytimes,statesrequiretheapplicationtoincludethewarning:"Caution:Ifyouranswersonthisapplicationaremisstatedoruntrue,theinsurermayhavetherighttodenybenefitsorrescindyourcoverage."

Iftheinsurancecompanydoesnotcompletemedicalunderwritingandresolveallreasonablequestionsontheapplicationbeforeissuingthepolicy,thecompanymayonlyrescindthepolicyordenyaclaimonclearevidenceoffraudormaterialmisrepresentation.What'smore,thefraudmustpertaintotheconditionforwhichbenefitsaresought,involveachronicconditionorinvolvedatesoftreatmentbeforethedateofapplication,anditmustbematerialtotheacceptanceforcoverage.

Thepolicyalsowillhaveacontestabilityperiodusuallytwoyears.Duringthistime,theinsurancecompanyhastherighttorescindthepolicyformaterialmisrepresentationsontheapplication.Afterthattime,eveniftheinsurancecompanyfindsoutthatyouliedontheapplication,itcannotrescindthepolicy.

Cancellation.LTCpoliciesmaynotbecancelled,nonrenewedorotherwiseterminatedongroundsofageordeteriorationofmentalorphysicalhealth.

Benefits.MoststateshavepassedlegislationestablishingstandarddefinitionsforLTCterminologyandsettingminimumbenefitstandardsforeligibility,levelsofcareandpolicyprovisions.Inmostcases,policiesmaynotprovidecoverageforskillednursingcareonly,orprovidemorecoverageforskilledcareinafacilitythanforlowerlevelsofcare.Plus,noLTCinsurancebenefitsmaybereducedbecauseofout-of-pocketexpendituresmadebyyouormadeonyourbehalf.

Exclusions.LTCpoliciesmayonlyexcludecoverageforthe

following:

1)pre-existingconditions(andonlyforsixmonths);

2)mentalornervousdisorders(butnotAlzheimer'sorseniledementia);

3)alcoholismordrugaddiction;

4)waroractofwar;

5)participationinafelony,riotorinsurrection;

6)serviceinthearmedforces;

7)suicide,attemptedsuicideorself-inflictedinjury;

8)treatmentinagovernmentfacilityprovidedatnochargetotheinsured;and

9)territoriallimitations.

Terminationofbenefits.IftheinsurancecompanyterminatesyourLTCinsurancepolicy,itmustcontinuepayinganybenefitsthatwereunderwayatthetimethecoveragewasterminatedwithoutinterruption.However,theextensionofbenefitsmaybelimitedtothedurationofthebenefitperiod,ifany,ortopaymentofamaximumbenefit,anditmaybesubjecttoanypolicywaitingperiodsandallotherpolicyprovisions.

Disclosure.Limitationsonpre-existingconditionsmustbesetforthinaseparateparagraphonthefirstpageofthepolicyandclearlylabeled.Anylimitationsorconditionsforeligibilityalsomustbesetforthasaseparateparagraphandlabeled"LimitationsorConditionsonEligibilityforBenefits."

IndividualLTCpoliciesmustcontainarenewabilityprovisiononthefirstpageofthepolicy,whichstatesthetermsofrenewability:durationofthetermofcoverageanddurationofthetermforwhichitmayberenewed.

OutlineofCoverage.OnemustbedeliveredatthetimeofLTCpolicyapplication.Theoutlinemustincludeadescriptionoftheprincipalbenefitsandcoverageprovidedbythepolicy;astatementoftheprincipalexclusions,reductionsandlimitationsofthepolicy;itsrenewalprovisions,includinganyreservationofarighttochangepremiums;andadescriptionofthepolicyholder'scontinuation,conversionandreplacementrights.Ifbenefitsarepaidundera"usualandcustomary"or"reasonableandcustomary"basis,thosetermsmustbedefinedandexplainedintheoutline.

Certificates.Acertificateissuedunderagrouplong-termcarepolicymustincludeadescriptionoftheprincipalbenefitsandcoverage

provided,astatementoftheexclusions,reductionsandlimitations,andastatementthatthegroupmasterpolicydeterminesgoverningcontractualprovisions.

LTCandlifeinsurance.WhenanindividuallifeinsurancepolicyprovidesLTCbenefits,itmustbeaccompaniedbyapolicysummarythatincludesanexplanationofhowtheLTCbenefitsinteractwithothercomponentsofthepolicy;anexplanationoftheamountofbenefitsavailable,thelengthoftimebenefitswillbepaidandtheguaranteedlifetimebenefits(ifany)foreachcoveredperson;anyexclusions,reductionsorlimitationsonLTCcoverage,ifapplicable;disclosureoftheeffectsofexercisingotherrightsunderthepolicy,ofguaranteesrelatedtoLTCcosts,andcurrentandprojectedlifetimebenefits.

OtherConsumerProtections

Ridersorendorsementsthatreduceoreliminatebenefitsusuallyrequirethesignedacceptanceofthepolicyholder(unlessotherwiserequestedbythepolicyholder).Youalsomustagreeinwritingtoridersorendorsementsthatincreasebenefitsandincreasethepremium,unlessthechangeisrequiredbylaw.

ManystatesprovideprotectionagainstunintentionallapseofLTCinsurance,duetoacoveredcognitiveimpairment.Applicantsusuallyareaskedtodesignateanadditionalpersonwhowillreceivenoticeofanyimpendinglapseorterminationofcoverageduetononpaymentofpremium.Also,thepoliciesmustincludeaprovisionallowingsuchpersontoreinstateterminatedcoveragewithinfivemonths,aslongasthepersonsubmitsproofofcognitiveimpairmentandpayspast-duepremiums.

Insurancecompaniesalsomustmake"everyreasonableeffort"todiscoverwhetheryoualreadyhaveaccidentandsicknessorLTCinsurance,andthetypesandamountsofsuchinsurance.

InrecommendingthepurchaseorreplacementofanLTCpolicy,anagentmustmakereasonableeffortstodeterminetheappropriatenessoftherecommendedpurchaseorreplacement.Manystateshaveincorporatedlanguagetothiseffectintotheirinsurancelaws.

Lawsprohibitinsurancecompanies,brokersandagentsfrompersuadinganyonetoreplaceanLTCinsurancepolicyunnecessarily,especiallywhenthereplacementcausesadecreaseinbenefitsandanincreaseinpremiums.Tothisend,LTCinsuranceapplicationformsmustincludeaquestionaboutwhethertheproposedinsuranceisintendedtoreplaceanyotherLTCinsurancepresentlyinforce.Upondeterminingthatasalewillinvolvereplacement,theinsurancecompanyisrequiredtofurnishtheapplicantwithaNoticeRegarding

Replacement.

IfagroupLTCpolicyisreplacedbyanothergroupLTCpolicy,thereplacinginsurancecompanymust:

providebenefitsidenticalorsubstantiallyequivalenttotheterminatingcoverage;

calculatepremiumsbasedonthepolicyholder'sageatthetimeofissueoftheoriginalcoverage(however,ifthereplacementcoverageoffersneworincreasedbenefits,thepremiumforthosebenefitsmaybecalculatedbasedonthepolicyholder'sageatthetimeofreplacement);

offercoveragetoallpersonscoveredunderthereplacedpolicy;

notexcludecoverageforpre-existingconditionsthatwouldhavebeencoveredundertheterminatingcoverage;

notrequirenewwaitingperiods,eliminationperiods,probationaryperiodsorsimilarpreconditions;

notvarythebenefitsorpremiumsbasedonthepolicyholder'shealth,disabilitystatus,claimsexperienceoruseofLTCservices.

IfexistingcoverageisconvertedtoorreplacedbyanewformofLTCinsurancewiththesamecompany,theinsurancecompanymaynotestablishanynewwaitingperiodsexceptforanincreaseinbenefitsvoluntarilyselectedbythepolicyholder.

ApplyingforLTCInsurance

Whenaninsurancecompanyisconsideringyourapplicationforlong-termcareinsurance,itwilllookatmanyofthesamefactorsitconsiderswhenreviewingahealthinsuranceapplication.Theprocessofconsideringthesefactorsisreferredtoasunderwriting.Generally,healthinsuranceunderwritingisconcernedwiththefollowing:

theprobabilityofasickness;

high-riskavocationsoroccupations;

healthhistoryandcurrentphysicalcondition;and

certainmoralorethicalconsiderations.

LTCunderwritingisconcernedwiththesamefactors,buttheemphasismaybedifferent.Forexample,ifyouapplyformajormedicalinsuranceandindicateamildheartcondition,theunderwriterhastobeconcernedaboutthepossibilityofhavingtopayforopen-heartsurgery.

IfyouareapplyingforLTCinsurance,thisheartconditiontakesona

differentsignificance.Sincethepolicywillnotpayforsurgeryorhospitalstays,theunderwriternowmustviewthepotentialheartproblemintermsofhowlikelyitistoresultinaprolongedconfinementinanursinghome.Accordingly,theheartconditioncouldcausetheunderwritertodeclinetheindividualforamajormedicalpolicy,buttheunderwritermightacceptthesamepersonforLTCinsurance.

Theunderwritermustfollowtheunderwritingguidelinesestablishedbytheinsurancecompany.Forexample,somecompanieshaveestablishedminimumandmaximumissueagesforlong-termcareinsurance.Andsomecom-

paniesdonotissueLTCpoliciestosubstandardrisks.

Probablythemostimportantcogintheunderwritingmachineryistheagent.Theagentisnormallytheonlypersonwhoeverseesyoupersonally.Theagentisresponsibleforcompletingtheapplicationforinsuranceasaccuratelyandthoroughlyaspossible.Thismayincludeaskingmoredetailedquestionsthantheonesontheapplication.

Aninsurancecompanyalsomayuseaninspectionreporttodeterminewhetherornottoissueyouapolicy.Thepurposeofsuchareportisgenerallytoverifyinformationcontainedontheapplicationortoobtainadditionalinformationaboutaspecificconditionorpossibleproblemthatmayhavesurfacedontheapplication.InaccordancewiththeFairCreditReportingAct,ifaninvestigativereportistobecompletedaspartoftheunderwritingprocess,youmustbenotified.

Medicalinformationisextremelyimportanttotheunderwriter,too.Muchofthisinformationwillbefoundontheapplication.Additionalmedicalinformationmaybeobtaineddirectlyfromyourdoctor,throughtheuseofanAttendingPhysician'sStatementandrequestformedicalrecords.Occasionally,applicantsforLTCinsurancearerequiredtotakeaparamedicalexam.Thisisusuallyrequiredforapplicantsage80andover.

Finally,aface-to-faceinterviewmaybeconductedtoestablishcognitiveabilities.ItisincreasinglycommonforinsurancecompaniestoaskapplicantsforLTCinsurancetosubmittoanevaluationofcognitivereasoningabilities,sincetheseproblemsusuallydonotshowupinroutinemedicalhistoryfiles.Sometimes,acognitiveassessmentisrequiredonlyforapplicantsaboveage75or80.

ClassifyingYouasaRisk

Oncealloftheunderwritinginformationisgathered,theunderwriter

willclassifyyouasapreferred,standardorsubstandardrisk.Ifyouareastandardrisk,youwillpaythestandardrateorpremiumforthepolicy.Preferredrisksareentitledtopremiumdiscounts,whilesubstandardrisksmaybedeclined,ortheymayhavetopayanextrapremiumforthepolicyorhaveapolicyissuedwitharideromittingsomeelementofthecoverage.

Todeterminetheriskclassification,theunderwriterisconcernedwiththefollowingfactors:

pastmedicalhistoryandcurrentphysicalcondition;

ageandsexoftheapplicant;

occupation(ifstillworking)andavocations;

morals;and

pre-existingconditions.

WhatIfYou'reaSubstandardRisk?

Ifyouareconsideredasubstandardrisk,theinsurancecompanymaychargeyouanadditionalpremiumtocovertheadditionalrisk.Orthecompanycouldaddexclusionriders,reducethebenefitamount,increasetheeliminationperiodorreducethebenefitperiod.

AddingridersthatexcludeaparticularconditionfromcoverageisnotacommontechniqueforLTCpoliciesreducingthebenefitamountsis.

Forexample,MarieappliesforanLTCpolicywithadailybenefitamountof$150,followinga30-dayeliminationperiod.Benefitsarepayableforuptofiveyears.Marieindicatesontheapplicationthatshehasseveralmedicalproblemshighbloodpressure,arthritis,borderlinediabetesandhardeningofthearteries.

Marie'smedicalhistorypresentsunderwritingproblems.Therefore,theinsurancecompanymaychoosetolimitthedailybenefitforthisimpairedrisk.Forexample,theunderwritermayapprovethepolicyissue,butonlyfor$50perdayinbenefits.Inessence,thepolicyisreducedfromatotalbenefitof$273,750(fiveyearsx$150perday)to$91,250(fiveyearsx$50perday).

Ortheinsurancecompanymaychoosetoincreasetheeliminationperiodfrom30daysto90or100days.IncreasingtheEPwillhavetheeffectofeliminatingsomeofthesmallerclaims.

Ortheunderwritercouldapprovethepolicywithashorterbenefitperiodtoreducethedollaramountofthepotentiallosstotheinsurancecompany.ReducingthebenefitperiodfromfiveyearstooneyearwouldresultinMariereceivingamaximumbenefitof$150

x365days,or$54,750.

Ortheunderwritercouldemployallofthesedevices.Forexample,theinsurancecompanycouldissueapolicywithareducedbenefitamount(forexample,$50perday),plusareducedbenefitperiodofthreeyearsandanincreasedeliminationperiodof90days.Ifthisweredone,Mariewouldbeissuedapolicywithapotentialmaximumbenefitof$54,750,payableaftera90-dayEP.

Anothertoolinsurancecompaniesusetoreduceclaimspaidistheso-calledgatekeepermechanism.Onesuchdeviceisapolicyprovisionwhichstipulatesthatanyconfinementtoanursinghomemustbeprecededbyahospitalstaytypically,atleastathree-daypriorhospitalizationduetoacci-

dentorsickness.Further,theprovisionwillstatethatadmissiontoanursinghomemustoccurwithin30daysofdischargefromthehospital.Thisprovisionshouldreducethenumberofpotentialclaims,plusadmissiontoanursinghomeforpurelycustodialcarenormallywouldnotbecovered.

Anotherpolicyprovisionthatmayservetoreducepotentialclaimsistheuseofaprobationaryperiod.Aprobationaryperiodisawaitingperiodforsicknessbenefits.Thepolicymaystatethatnobenefitswillbepaiduntilthepolicyhasbeeninforceforthreemonths,sixmonths,etc.

LTCAttachedtoLifeInsurance

Inrecentyears,someinsurancecompanieshavebeguntoofferlong-termcarecoverageintheformofariderattachedtoanewissueoflifeinsuranceorpossiblysomeotherpolicyform,suchasadisabilityincomepolicy.Withthismarketingapproach,therearetwosalesthelifesaleandtheLTCsalewhichshouldbebeneficialtotheinsurancecompany,theinsuredandtheagent.

LTCriderbenefitsareverysimilartothosefoundinanLTCpolicy.Thebenefitstructureincludesthefollowing:

eliminationperiodsintherangeof10to100days;

benefitperiodsofthreetofiveyearsorlonger;

benefitsmaybetriggeredbyimpairedactivitiesofdailyliving;and

levelsofcareincludeskilled,intermediate,custodialandhomehealthcare.

Inaddition,certainoptionalbenefitsmaybeprovided,suchasadultdaycare,costoflivingprotection,hospicecare,etc.

Onedifferencewiththis''LTCpackage"isthemethodofdetermining

LTCbenefits.Thebenefitsmaybeexpressedasaspecificdailyamount$50,$100or$150perday,forexample.Theyalsomaybeexpressedasafactorofthefaceamountofthelifeinsurancepolicy.Forinstance,2percentofthefaceamountofthepolicymaybepaidmonthlyasanLTCbenefit,uptoaspecifiedmaximum.

Forexample,Johnhasa$100,000universallifepolicywithanLTCriderthatprovidesamonthlyLTCbenefitof2percentofthefaceamount,uptoamaximumof$50,000.IfJohnwereadmittedtoanLTCfacility,hisbenefitwouldbe2%x$100,000=$2,000permonth.Johnwouldbelimitedtoa

25-monthbenefitperiod,sincewithin25months,themaximumLTCbenefitof$50,000wouldbeexhausted.

TherearebasicallytwoapproachestotheLTCriderconcept.Thefirstofthesemaybereferredtoasageneralizedorindependentapproach.Underthisapproach,theLTCriderisindependentfromthelifepolicy,inthatLTCbenefitspaidtotheinsuredwillnotaffectthelifepolicy'sfaceamountorcashvalue.

Forexample,Samhasa$100,000lifepolicywithanindependentLTCriderandcollects$20,000inLTCbenefits.The$100,000faceamount,aswellasthepolicy'scashvalue,willnotbereducedbytheamountoftheLTCbenefitspaid.

TheintegratedapproachlinkstheLTCbenefitspaidtothelifepolicy'sfaceamountand/orcashvalue.Theresultisareductioninthesevalues.

Example:Samhasthe$100,000lifepolicywithanintegratedLTCriderandcollects$20,000inLTCbenefits.ThefaceamountofSam'slifepolicyisreducedbythebenefitspaid,resultinginareduceddeathbenefitof$80,000.

Criticsofthisapproacharguethatthereductioninthepolicy'sdeathbenefitisadisadvantagetotheinsured.Valuablelifeinsurancebenefitsarebeinglostorreducedatatimewhentheymaybeneededmost.Inaddition,evenifyouwantedtopurchaseadditionallifeinsurancetooffsetthisreduction,there'saverygoodchancethatyouwillbeuninsurable,havingspentsometimeinanursinghome.

ThiscombinationoflifeinsuranceandLTCbenefitsismarketedasaLivingBenefitorLivingNeedsrider.ThisapproachdrawsonthelifeinsurancebenefitstogenerateLTCbenefits.Thus,theLTCriderisattachedtothelifepolicy"atnocharge."It'slikeborrowingfromthelifeinsurancetopayLTCbenefits.

Generally,theLivingNeedsRiderprovidesfundsforLTCexpensesorforexpensesincurredwithaterminalillness.Underthisrider,youmaybeadvancedlifeinsurancedollarstocovertheseexpenses.Thereareusuallytwooptionsassociatedwiththisrider.

ThefirstistheLTCOption,whichtypicallyprovidesupto70percentto80percentofthepolicy'sdeathbenefittooffsetnursinghomeexpenses.ThesecondistheTerminalIllnessOption,whichcanprovide90percentto95percentofthedeathbenefitasapre-deathbenefittobeusedtooffsetmedicalexpenses.

Theconditionsunderwhichthesebenefitsarepaidaredeterminedbythepolicyandtheinsurancecompany.Theridermaylinkbenefitstoactivi-

tiesofdailyliving,oritmayrequireaminimumpriorhospitalizationduetoanaccidentorsickness.

Typically,therideralsowillcontainaneliminationperiod.Thebenefitperiodislinkedtothedollaramount,asopposedtoatimeelement.Benefitswillceasewhenyouhaveusedupallofthemoneyavailable(thepercentageofthepolicy'sfaceamount).Inmostotherrespects,theLivingNeedsRiderfunctionsinmuchthesamewayasabasicLTCpolicy.

LTCandAnnuities

LTCcoverageisnotonlybeingcombinedwithlifeinsurancepolicies,itisbeingcombinedwithannuitiesanddisabilityincomeinsurance.

Anannuity,whichisdesignedtobearetirementvehicle,maybeissuedwithanLTCriderinmuchthesamewaythattheLTCridermaybeattachedtoalifeinsurancepolicy.Withthisarrangement,theannuityprovidesnecessaryfundstohelpwithLTCexpenses.ItmightbesaidthattheannuityandtheLTCpolicyarecousins,inthatannuitiesprovideretirementincomeandLTCneedsnormallyoccurafterretirement.

Whenandifneeded,annuityfundswillbepaidtocoverLTCexpenses.This,ofcourse,willhavetheeffectofreducingtheamountofmoneyintheannuityand,consequently,themonthlyretirementincomemaybereduced,aswell.

LTCandDisabilityIncomeInsurance

AnotherprogressiveuseofanLTCriderisincombinationwithadisabilityincomepolicy.Disabilityincomeinsuranceisdesignedtoprotectaperson'smostimportantassettheabilitytoearnanincome.However,yourdisabilityincomeneedsnormallyendatage65oratretirement,sinceyounolongerhaveearnedincome.

Howdoesthiscombinationwork?Here'sanexample:Jack,age45,purchasesadisabilityincomepolicytoprotecthisabilitytoearnanincome.HeaddsaGuaranteedInsurabilityOption(GIO),wherebyhewillbeeligibletopurchaseunitsofLTCcoverage($10to$50)atcertainoptiondatesfromage55to70,withouttheneedtoproveinsurability.Atage65,Jackretiresand"surrenders"hisdisabilityincomepolicyforanLTCcontract.

Thisappearstobeanidealmixofproducts,asthedisabilityincomeinsuranceneedterminatesatretirementand,generally,theneedforlong-termcarecoveragebegins.

Intheyearsanddecadestocome,itwouldappearthatthetypesofLTCpoliciesofferedwillonlybelimitedbytheimaginationofthoseresponsible

forproductdesigntomeettheLTCneedsoftheseniorcitizen.

Conclusion

Thechanceofanexpensivestayinanursinghomeisaveryrealriskfortheseniorcitizen.Duetoincreasinglifeexpectancy,theaveragelengthofanursinghomestaywillgraduallyincrease,aswilltheaverageexpense.

Thebasicproblemishowtopayfornursinghomecare.Medicareactuallyoffersveryfewbenefitsforcareinanursingfacility,especiallyforcustodialcare.Medicaidwillcovernursinghomeexpensesonlyforthefinanciallyneedy.

Anotheralternativeistorelyonfriendsandrelativesfornecessarycare.Oryoucanpayfornursinghomecostsfrompresentfinancialassets.Dependingonthelengthandcostofsuchastay,thebillcouldbeconsiderableandyoumayexhaustavailablefinancialresources.WhilethiswouldmakeyoueligibleforMedicaid,it'scoldcomfortforpeoplewhohadplannedtoleavesomethingtotheirheirs.

ThenaturalsolutiontotheproblemisLTCinsurance.Thistypeofpolicycanprotectyourassets.Italsogivesyouflexibilityandfreedomofchoiceintheselectionofanursinghome.Anditallowsyoutomaintainadegreeofindependence.

KeyQuestions

ThefollowingisachecklistofLTCpolicyfeaturesthatyoushouldconsider.You'llwanttomakecopiesofthischecklistandfillintheappropriateanswerswhenyoucomparepoliciesfromdifferentinsurancecompanies.TYPEOFPOLICYBENEFITSDoesthepolicyprovidebenefitsforthefollowing,andhowlongwillbenefitsbeprovided?Skillednursingcare Yes No Length:

__________________Intermediatecare Yes No Length:

__________________Custodialcare Yes No Length:

__________________Homehealthcare Yes No Length:

__________________Doesthepolicyhaveamaximumbenefitamountexpressedindollarsortime? YesNoIfso,whatisthemaximumbenefit?________________________________Doesthepolicycontainnonforfeitureprovisions?

Doesthepolicycontainanyofthefollowingoptionalpolicybenefits?Adultdaycare Yes NoHospicecare Yes NoInflationprotection Yes NoHomehealthcare Yes NoAMOUNTOFBENEFITSArepolicybenefitspaidonareimbursementbasis?

Ifso,whatisthepercentage?__________%Howlongwillbenefitsbeprovided?_________________________

Howlongwillbenefitsbeprovided?_________________________Arepolicybenefitspaidonanindemnitybasis?YesNoIfso,whatisthedailybenefitforeachlevelofcare?_______________________________________________________Howlongwillbenefitsbeprovided?_______________________________Doesthepolicyhaveamaximumlifetimebenefit?

Ifso,howmuchisit?_________________

POLICYPROVISIONSHowlongistheeliminationperiod?_________________________Howlongisthebenefitperiodforeachlevelofcare?_______________________________________________________Doesthepolicyrequirepriorhospitalization? YesIfso,forhowlong?_______________________________Doesthepolicybasebenefitsontheabilitytoperformtheactivitiesofdailyliving?

Ifso,howmanyactivitiesmustyoubeunabletoperformtotriggercoverage?______________________________________________________

______________________________________________________Istheabilitytowalkoneoftheactivitiesthattriggerscoverage? YesNoDoesthepolicyprovidepurelycustodialcare? YesNoIsthereawaiverofpremiumprovision? YesNoPOLICYEXCLUSIONSORLIMITATIONSDoesthepolicycoverAlzheimer'sdisease? YesNoDoesthepolicycoverpre-existingconditions? YesNoIfso,afterhowlong?___________________________________Whatarethepolicy'sotherexclusions?Mentalornervousdisorders YesNoAlcoholismordrugaddiction YesNoWaroractofwar YesNoParticipationinafelony,riotorinsurrection YesNoServiceinthearmedforces YesNoSuicide,attemptedsuicideorself-inflictedinjury YesNoTreatmentinagovernmentfacilityprovidedatnochargetoyou YesNoTerritoriallimitations YesNo

Chapter13DisabilityIncomeInsurancePeoplewillinsuretheirhome,theircars,theirthings,butthey'lloftenforgettoinsuretheassetthatpaysforallofthesetheirabilitytoearnmoney.

Ifyouhaveafamily,youprobablyhavelifeinsurancetoprotectthemincaseyoudie.Butwhatifyoudon'tdie?Whatifyousufferastroketomorrowandcannolongerwork?Whatifyouarediagnosedwithadebilitatingillness?

Ifyoudied,yourlifeinsurancewouldpayoff.YourfamilyalsowouldgetSocialSecuritysurvivor'sbenefits,andtheymightbeabletosellanyassetsyouhave.

Butifyouliveandyoucannolongerearnaliving,whatwillhappen?Willyoubeabletopayyourbills?Willyourfamilysuffer?Youmayliveformanyyearstotallydisabledand,therefore,unabletogenerateanincometopayforthehighermedicalandlivingexpensescausedbythedisability.

Didyouknowthat,intheUnitedStates,themostcommoncauseofmortgageforeclosuresisthedisabilityoftheborrower?

TheOddsofBecomingDisabled

Ifyou'relikemostpeople,youthinkitwon'thappentoyou.Butitcould.Infact,apersonismorelikelytobecomedisabledthantodieatalmostanyage.

Thechartonthefollowingpage,showsthattheriskofbecomingdisabledduringpeakearningyearsissubstantialespeciallyforpeopleage50andyounger.Andasyougetolder,thedurationoftheaverage

disabilityincreasesasdothechancesthatyouwillnevertotallyrecover.

Bythetimeyou're50,ifyou'vegotadisabilitythathaslastedmorethan90days,oddsareitwilltakeyoumorethansixyearstorecover.Formostpeople,whoworkforaliving,thiskindofdowntimeiscatastrophic.

TheProbabilityofDisability

ComparedtoDeathatSpecificAges

Numberper1,000

DisabledNumberper1,000Dying

ProbabilityofDisabilityComparedto

32 6.87 1.74 4to137 7.75 2.27 3.5to142 9.46 3.39 2.8to147 12.00 5.00 2.4to152 15.78 7.36 2to1

Source:Commissioner'sIndividualDisabilityTableandCommissioner'sStandardOrdinaryMortalityTable

HowMuchCanIReallyEarn?

Doyoureallyneedtoworryaboutprotectingyourincome?Considerhowmuchyoucouldearnbetweennowandage65,ifyouaretheagelistedintheleftmostcolumnbelow:

PotentialEarningstoAge65

MonthlyIncomeAge $2,000 $4,000 $6,000 $8,00025 $960,000 $1,920,000 $2,880,000 $3,840,00030 840,000 1,680,000 2,520,000 3,360,00035 720,000 1,440,000 2,160,000 2,880,00040 600,000 1,200,000 1,800,000 2,400,00045 480,000 960,000 1,440,000 1,920,00050 360,000 720,000 1,080,000 1,440,000

Yourabilitytoearnanincomecouldgeneratemorethan$1millioninanaveragelifetime.Andthechartabovedoesn'tincludethingslikepayraisesorcostoflivingincreases.

WhatHappensIfYouBecomeDisabled?

Disabilityincomeinsuranceisaformofhealthinsurancethatprovidesaweeklyormonthlyincomebenefittoreplaceaportionofthesalaryorwageslostwhenyou'reunabletoworkbecauseofaninjuryorillness.

Ifyoudon'thavedisabilityincomeinsurance,youhavetorelyonotherresourcestohelpoffsettheeffectsofadisability.Whatsortsofotherresources?

CashSavings

Investments

BusinessAssets

GovernmentPrograms

Borrowing

Howlongwillyoursavingslast?Andhowliquidareyourinvestmentsorbusinessassets?Ifyouhaveanartcollectionoracarcollection,itmighttakemonthsoryearstofindtherightbuyerattherightpriceandthesamegoesforabusiness.Whatareyougoingtoliveoninthemeantime?

Andwhoisgoingtoloanyouenoughmoneytocoveryourcostsduringanextendeddisability?Certainlynotabank,sinceyouhavenowayofrepayingtheloanifyouaren'tearningaliving.(Ontheotherhand,ifyoucanrelyonarichrelativewholovesyoudearly,youmaynotneeddisabilityincomeinsurance.)

Whataboutprogramsthroughwork?Ifyou'reanemployee,theremaybesomework-relatedbenefitsavailablefromagroupdisabilityplan,asalarycontinuationplan,employeestockplan,workers'compensation,etc.

Butgroupdisabilitybenefitsareofshortdurationayearorlessandcoveronlyapercentageoflostincome.Thesefixedandcappedbenefitplansalsotendtodiscriminateagainsthigher-paidemployees.

Forexample,agroupplanmightprovidebenefitsequalto60percentofyourpay,uptoamaximumbenefitof$2,000permonth($24,000

annually).Thismayprovetobeanadequatebenefitifyouearn$40,000orlessperyear.Butforpeopleearningmore,thedisabilitybenefitisstilllimitedto$24,000peryear.Ifyouearn$60,000annually,thenyourdisabilitybenefitwouldcoveronly40percentofyourordinarypay.

Animportantpointaboutgroupbenefitsorwork-relatedplansisthatyoumerely"rent"thiscoverage.Benefitsareavailableontheconditionthatyoucontinuetobeanemployee.Ifyouterminateemployment,yourdisabilitybenefitsalsoareterminated.Ifadisabilitystrikesbetweenjobs,nowork-relatedbenefitsareprovided.

Workers'CompandSocialSecurity

Workers'compensationprovidesanothersourceofdisabilityincomebenefitsbutonlyifyouraccidentorsicknessisjob-related.Fallingoutofbed

inthemorningandbreakingyourarmdoesnotconstituteaworkers'compclaim.Slippingonawetflooratthejobsiteandbreakingyourarmalsoisaworkers'compclaim.

Theintentoftheworkers'compsystemistomaketheemployerliableforoccupationaldisabilitieswithoutyouhavingtoprovethatthecompanywasatfault.Youremployereitherwillcoversuchclaimsoutofcompanyfundsorelect(asalmostalldo)tocoverthisriskbymeansofworkers'compinsurance.

Thelawsandthebenefitsprovidedvarysomewhatfromstatetostate.Butbenefitsareusuallylowabout$300aweekatmost.

YoualsomightthinkyoucancountonSocialSecuritydisabilityincomebenefits.Butit'snoteasytogetSocialSecuritybenefitsandthey'reprettypunywhentheydocome.TobeeligiblefordisabilitybenefitsunderSocialSecurity,youhavetobeboth"fullyinsured"and"disabilityinsured."FullyinsuredstatusmeansthatyouhavepaidSocialSecuritytaxesfor40calendarquarters(10years).DisabilityinsuredmeansthatyouhavepaidSocialSecuritytaxesinatleast20outof40calendarquarters(5outof10years)priortofilingadisabilityclaim.

Inaddition,youmustbeunderage65,thedisabilitymustbeexpectedtolastforatleast12monthsorendindeath,andthedisabilitymustsatisfythedefinitionoftotaldisabilityinaccordancewiththeSocialSecuritylaw.

Totaldisabilityisdefinedastheinabilitytoengageinanysubstantialgainfulactivitybyreasonofamedicallydeterminedphysicalormentaldisabilityrelativetoaperson'seducationandpriorworkexperience.

Thismeansthatyoumustbeunabletoperformyourpreviousjoboranyothersubstantialworkthatexistsinthenationaleconomyrelative

toyourage,educationandpriorworkexperience.

Inaddition,thereisafive-monthwaitingperiodbeforeanybenefitscanbepaid.Inreality,duetothewaitingperiodandthetimeittakestoprocessaninitialclaim,youprobablywon'treceiveyourfirstSocialSecurityclaimcheckuntilaboutayearaftertheonsetofthedisabilityifyou'reoneoftheveryfewwhoqualifiestocollectbenefitsinthefirstplace.

WhatAboutOtherCoverage?

Ifyouweren'tinjuredonthejob,somestates(includingCalifornia,Hawaii,NewJersey,NewYorkandRhodeIsland)providestatebenefitsfor

non-occupationaldisabilities.Theamountofthebenefitswillvary.Generally,thestateplanwillprovide50percentto60percentofyourwagesforalimitedperiodoftimesuchassixto12months.

YetanotherformofcoveragethatcouldkickinisAccidentalDeathandDismemberment(AD&D)coverage,whichfrequentlyisprovidedaspartofanindividualorgrouplifeinsurancecontract.AD&Dcoveragepaysa''principalsum"(basically,thepolicy'sfaceamount)foraccidentaldeathinaccordancewiththepolicy'sprovisionsanddefinitionofaccidentaldeath.Thissameamountispaidifyouloseuseofbotharmsorbothlegs,orifyoulosevisionintwoeyesduetoanaccident.Thisamountusuallyisidentifiedasthecapitalsumifthepolicyispayinganaccidentaldismembermentbenefit.

Whatifyourbackgivesout?Thenwhat?

Youcouldqualifyforcoverageunderyourlong-termcare(LTC)insuranceifyouhaveit.Itwillpayforthecareofpersonswithchronicdiseasesordisabilities,andmayincludeawiderangeofhealthandsocialservicesprovidedunderthesupervisionofmedicalprofessionals.

Youalsomighthaveanotherinsurancepolicythatwouldhelpoutintheeventofadisability.Forinstance,accidentonlyinsuranceprovidescoverageforinjuryfromanaccidentbutitexcludescoverageforsickness.Benefitsmaybepaidforalloranyofthefollowing:death,disability,dismemberment,orhospitalandmedicalexpenses.Thisisnotakindofinsurancethatmostpeopleneed.Butsome,whotraveloften,willeitherbuyitthemselvesorgetitasawork-relatedbenefit.

Whataboutlifeinsurance?Unfortunately,itisn'tmuchhelpintheeventofadisability.Thelifeinsurancebenefits(otherthanatypically

smallpolicycashvalue)aren'tavailable.Pensionbenefitsusuallyaren'tavailableeither.

Whataboutcreditinsurance?Thispolicyisissuedonlyifyouareindebttoacreditor.Thecoverageislimitedtothetotalamountofyourindebtednessbutsomeinsurancecompaniesevenbalkatpayingthat.Ifyou'regiventhechoiceofpurchasingcreditinsurance,forthemostpart,you'rebetteroffspendingthepremiummoneyondisabilityincomeinsurance.

DisabilityIncomeInsuranceIstheSolution

Itisclearthatmostpeoplecannotrelyonanyoftheotherkindsofinsurancethattheymayhaveortheirsavingsorcollectionstohelpthemthroughaprolongeddisability.Fortunately,thereisaformofinsurancedesignedtodojustthat.It'saptlycalleddisabilityincomeinsurance.

Disabilityincomeinsurance(alsoreferredtoasloss-of-timeinsurance)paysyouaweeklyormonthlybenefitfordisabilitiesduetoanaccidentor

sickness.Theprimarypurposeofthiscoverageistoreplacethelossofpersonalincomeduetoadisability.

Disabilityincomepoliciesareissuedonanindividualbasisoronagroupbasis,throughanemployer-sponsoredplan,laborunionorassociation.Benefitspaidareinaccordancewiththepolicy'sprovisionsand,toadegree,yourlossofincome.

FiguringOutHowMuchYouNeed

Disabilityincomeinsurancecanenableyoutopayamortgageandothernecessaryexpenseswhenatotaldisabilityduetoanaccidentorsicknesscutsoffyourincome.Butexactlyhowmuchofthisinsurancedoyouneed?

Tofigurethisout,youwillneedtogathersomeinformation.Thisincludes:whatyoumakeandwhatyouhavetoprotect.

Usually,it'sbesttouseaworksheetwhenconductinganeedsanalysis.(Seepage292foraworksheet.)Thishelpsyouconsiderproblems,needs,andobjectivesconsistently.Italsohelpsyouavoidthemainproblemthatplaguesneedsanalysis:overlookingsomething.

Whatyoumakeisfairlysimpletocalculate.It'stheamountofearnedincomeyouexpecttohaveduringaspecificperiodoftime.Inmostcases,insurancecompaniescalculatethisnumberbyaskingwhatyoumakeinsalaryandotherearnedincome.AgoodinsurancecompanywillaskforsomekindofproofofincomelikeanIRSW-2formorothertaxdocument.

Don'tattempttofudgethesenumbers.Ifyoudo,theinsurancecompanywillnothavetopayyouanythingintheeventofaclaim.You'dbeamazedhowmanypeopleblatantlylieontheirapplications,andthenhaultheirinsurancecompaniesintocourtwhentheywon'tpay.Justincasethisdoesn'tsoundsobad,it'sworthnotingthatthe

insurancecompanywinswhenyoulie.Andyouwindupwithlawyers'billsontopofeverythingelse.

Todetermineyourdisabilityincomeinsuranceneeds,youalsoneedtocalculatehowmuchyouneedtoprotect.Amongthemostcommonoftheseissuesareeducationalobjectivesfordependentchildren,otherfamilyneeds,businessobjectivesandretirementgoals.

Ingreaterdetail,thesearethefactorsthatwillimpactyourdisabilityneedsmostdirectly:

FixedObligations.Suchexpensesasmortgageorrent,carpayments,utilities,food,installmentpurchases,insurancepremiums,etc.,mustbeitemized.

VariableExpenses.Thesearetheunexpected,non-fixedex

pensesthatoccurfrommonth-to-month,suchascarrepairs,medicalexpenses,prescriptions,homerepairs,etc.Trytoestimatetheseunexpectedmonthlyexpensestothebestofyourability.

AddedExpenses.Inaddition,thereareaddedexpensesduetoaperson'sdisabilityadditionalmedication,doctors'bills,prostheticappliances(suchasbraces),therentalofahospitalbedorawheelchair,hospitalbillsthatarenotfullycoveredbyhospitalizationinsurance,etc.

YourResources

Onceyouknowhowmuchyoumakeandhowmuchyouneedtoprotect,thenextquestionis:Whereisthemoneygoingtocomefromtopaythesevariousobligations?

It'stimetoexamineyourothersourcesofmoney.Thismayinclude:

PersonalAssets.Startwiththemostliquidasset,yourpersonalsavings.Doyouhaveanysavings?Ifso,howmuchandhowadequateisitforpurposesofpayingexpenses?Furthermore,willyoubewillingtousepersonalsavingstopayexpensesassociatedwithadisability?

Work-RelatedBenefits.Whattypeofdisabilitybenefitsdoyouhavefromyouremployer?Isthereaformalsickpayorsalarycontinuationplan?Doyouhaveanyaccumulatedsickdays?

GovernmentBenefits.AreyoueligiblefordisabilitybenefitsfromSocialSecurity?(Becausesomanyclaimantsaredenied,don'texpecttoreceiveanySocialSecuritydisabilitybenefits.Besides,evenifyoudoqualify,ittakesnearlyayeartoreceivethefirstcheck.)Whataboutstatedisabilitybenefits?

Non-EarnedIncome.Ifyouownanapartmentbuilding,therentswill

keepcomingin,evenifyou'redisabled(althoughyoumighthaveincreasedexpenses,ifyouhavetohiresomeonetotakecareofthingsyouordinarilydoyourself).Otherformsofnon-earnedincomeincludeinterestincome,dividends,otherrentalincome,deferredcompensationandresidualcommissions,royaltiesorothermiscellaneousincome,andgroupdisabilityincomeinsurance.

ChartingYourNeeds

Mostinsurancecompaniesusefairlystandardworksheetstodetermineamonthlyexpenseestimatethatrelatestodisabilitycoverageneeds.

Theworksheetbelowwillhelpyouaddupyourexpenses,suchasmortgageorrent,utilities,food,autoortransportationexpenses,tuitionoreducationexpenses,clothing,outstandingconsumerloansorinstallmentpurchases,insurancepremiums,medicalordentalcarecosts,taxesandmiscellaneousexpenses.

Thenitwillhelpyoulookatyourothersourcesoffundsintheeventofadisability,andconsideryourpotentialneeds,shouldyoubecomedisabled.Ifthefinalincomefigureisnegative,checkyournumberswithaneyetowardmakingsurethatyourexpensesareallcoveredandthatthenon-earnedincomeisabsolutelyreliable.Ifyourfinalnumberisstillnegative,youdon'tneedtoworryaboutdisabilityinsuranceyoushouldbethinkingaboutretiring.

Formostpeople,thefinalincomefigurewillbepositiveandprobablydisturbinglylarge.Andremember,thisisonlyamonthlynumber.

DisabilityIncomeNeedsAssessmentWorksheetPART1EnteryourmonthlyexpensesrelatedtoeachoftheseitemsandaddthemforSubtotal1.Ifpossible,averagewhatyouspentduringeachofthelastsixthmonths.

MortgageorrentUtilitiesPhoneFoodAutoexpenses/transportationTuition/educationexpensesClothing

______________________________________________________________________________________________________

LoansandinstallmentpurchasesInsurancepremiums(car,home,etc.)Medical/dentalcarecostsMiscellaneousexpensesTaxes

____________________________________________________________________

Subtotal1 _________________

PART2Enteryourmonthlyincomeprovidedbyeachofthefollowingsourcesof"non-earnedincome."Fortheinsuranceitems,checkeachpolicy'smaximumbenefit.Fortheotheritems,averageyourcostsoverthelastsixmonths,ifyoucan.AddthemtocomeupwithSubtotal2.(Continuedonnextpage)

(Continuedfrompreviouspage)GroupdisabilityinsurancebenefitsOtherinsurancebenefitsInterestincomeDividendsRentalincomeDeferredcompensation,residuals,royalties,etc.

____________________________________________________________________________________________________________

Subtotal2 __________________PART3SubtractSubtotal2fromSubtotal1.Thiswillprovideyouwiththemonthlyincomefigurethatyouneedtoinsureagainstdisability.Subtotal1 __________________minus

Subtotal2 __________________equals

Totalmonthlyincometobeinsured __________________

Inordertoestimatethelikelytotallossfromadisability,refertothedisabilitydurationchartbelow.

TheAverageDurationofaDisabilitythatLastsforMoreThan90Days

AgeatOnset Duration30 4.7years35 5.1years40 5.5years45 5.8years50 6.2years55 6.6years

Source:JournaloftheAmericanSocietyofCertifiedLifeUnderwriters

Thenmultiplythetotalmonthlyincomeyouneedtoinsurebytheaveragedurationofadisabilitythatlastsatleast90days.

Totalmonthlyincometobeinsuredmultipliedby

__________________

Averagedurationofadisabilitythatlastsatleast90daysequals __________________

Averagelong-termdisabilityloss

__________________

Thekeytostayingingoodfinancialshape,evenwhileyouaredisabled,iscoveringthatmonthlyfigure.Nowyouknowthethreenumbersyouneedtotellyourinsurancecompanyoragentwhenyou'reshoppingfordisabilitycoverage:thetotalmonthlyincometobeinsured,yourcurrentmonthlyearnedincomeandtheaveragelong-termdisabilityloss.Thesenumbersprovidearangewithinwhichyourincomecoverage(whetherit'sdisabilityinsurance,SocialSecurityorsimplecashsavings)shouldfall.

AnalyzingCoverage

Onceyourneedsanalysisiscompleted,you'rereadytostartcomparingdisabilityincomepolicies.Onceagain,thisprocessusuallyworksbetterifyouuseaformalmethodofreview.Let'sstartbyexplainingthevariables,thataffectdisabilityincomeinsurance.Thefollowingaretheitemsyoucanchangetoraiseorloweryourpremiumandtosuityourneeds.

Thelengthoftheeliminationperiod(EP).Thisisthewaitingperiodbetweenwhenyoumakeanincomeinsuranceclaimandwhenthecoveragebegins.EPsworkmuchlikedeductiblesinautoorhomeownersinsurancethelargertheyare,thecheaperthecoverage.Ifyouhaveasubstantialamountofsavingsthatyouarewillingtospendtosupportyourselfandyourfamilyintheeventofadisabilityorifyouhaveashort-termdisabilityplanthroughworkyoucanaffordtoselectalongereliminationperiod.

Thelengthofthebenefitperiod(BP).Thisistheamountoftimethattheincomeinsurancewillpaybenefits.Itmaypayforayear,twoyears,fiveyearsorevenfortherestofyourlife.Thelongerthebenefitperiod,thebiggertherisktheinsurancecompanytakessothehigheryourpremiumwillbe.

Theamountofthemonthlybenefit.Thismaybethemostimportant

factorofall.Thebiggerthebenefit,themorecostlythepolicy.

Theinclusionofoptionalbenefits.Theseusuallyarebasedonyourindividualneedsandfinancialgoalsthesubjectivefactorsthataredifficulttoquantify.

Finally,thereisoneotherconsiderationthatprofoundlyaffectsyourratesandtheamountofcoverageaninsurancecompanywillprovide:youroccupationalclassification.We'llcoverthisinmoredetaillaterinthischapter.

ChoosinganEliminationPeriod

Mostofthesevariablescanbeadjustedtoprovideforanincreaseordecreaseinthepremium,andshouldbeconsideredifthepriceofthepolicyisacriticalfactor.Forinstance,theeliminationperiodissimilartoadeductiblebutit'satimedeductible,insteadofadollardeductible.ThelongertheEP,thesmallerthepremium.TheshortertheEP,thehigherthepremium.Thus,aplanwitha30-dayEPwillhaveaconsiderablyhigherpremiumthanaplanwitha90-or180-dayEP.

Anillustrationofthistrade-offcanbeseeninthefollowingchart:ThePremiumandtheEliminationPeriod

Male,Age45,$1,000MonthlyBenefitPayabletoAge65

EliminationPeriod AnnualPremium30Days $69060Days $55090Days $495

Usually,aplanwitha60-dayEPwillcostapproximately20percentlessthanaplanwitha30-dayEP.Mostinsurancecompanieswilloffereliminationperiodsrangingfrom30daystoaslongastwoyears.EventhoughasavingsinpremiumcanberealizedwiththelongerEP,itmaynotbeinyourbestinterest.

Forexample,ifyouchoosea90-dayeliminationperiod,youwillnotbegintoaccrueabenefituntilthe91stdayofadisability.However,theinsurancecompanywon'tissueaclaimcheckuntiltheendofthemonth.Therefore,you'llwaitroughly120daysfourmonthsfromtheonsetofthedisabilityuntilyoureceiveanybenefit.

Whendeterminingwhicheliminationperiodtoelect,youmustanswer

thequestion,"HowlongcanIgowithoutanyincomefrommydisabilityincomeplan?"Theanswertothisquestionwilldependonthesizeofyourmonthlyincomeinsuranceneedandtheamountofcashsavingsorthesizeoftheliquidassetsyouhaveinreserve.

Everysituationisdifferent,butyouprobablywillendupchoosingamong30-,60-or90-dayeliminationperiods.ApolicywithnoEPisusuallyveryexpensive.Apolicywithmorethana90-dayEPusuallydoesn'tbeginpayingbenefitssoonenough.

It'susuallyamistaketoassumesomeonewhohasahigherincomecanlivewithalongerEP.Ifyoumakemoremoney,youoftenhavebiggerex-

penseswhichputsyouroughlyinthesameplaceassomeonemakinglessmoney.Acorporateexecutiveearning$250,000maynothaveanymoreliquiditythanaworkerearning$25,000peryear.

ThebestwaytobesureyoucanlivewithalongerEPistomakesureyouhaveshort-termdisabilityinsurancetocoveryouduringthewait.Thisshort-termcoverageiswhat'sprovidedbymostwork-relatedplans.

SelectingaBenefitPeriod

Onceyou'vefiguredoutwhatkindofeliminationperiodyoucantolerate,youneedtochoosethelengthoftimethatbenefitswillbepaid.Themostcommonbenefitperiodsareone,two,orfiveyearsandtoage65.Insomecases,alifetimeaccidentand/orsicknessoptionmaybeincludedinthepolicy,whichextendsthebenefitperiodforyourlifetime.

Liketheeliminationperiod,thebenefitperiodisareflectionofthepremiumyoupay.Thelongerthebenefitperiod,thehigherthecostofthepolicy.Shortbenefitperiodsresultinlowerpremiums,especiallywhentheyarecoupledwithlongeliminationperiods.

Thefollowingchartillustratesthisconcept.ThePremiumandtheBenefitPeriod

Male,Age45,$1,000MonthlyBenefitPayabletoAge65

BenefitPeriod AnnualPremium1Year $2552Years $3305Years $510

ToAge65 $690Lifetime $830

Ifyoudeterminethata30-dayeliminationperiodisadequate,thenitwouldbereasonabletoconsideratwo-orfive-yearbenefitperiod.Ontheotherhand,whenevaluatingtheriskofapermanentdisabilitythepotentiallossofincomeduringato-age-65benefitperiodiscontrolling.

Althoughinsuranceexpertsnormallydiscussdisabilityincomebenefitsintermsofmonthlyamounts,theylookatthebiggerpicturewhendeterminingthebenefitperiod.Thepotentiallossofincomeduetoapermanentandtotaldisabilitycanliterallybeinthemillionsofdollars.

Forexample,a40-year-oldearning$50,000peryearwhobecomestotallydisabledstandstolosemorethan$1.2millionbeforeage65ifthedisabilitybecomespermanent.

And,aswe'veseen,theolderyouareattheonsetofadisability,themorelikelyitisthatyouwillnotrecoverfully.Thispossibilitysuggeststhatyoushouldgetthelongestbenefitperiodpossible.However,alongerbenefitperiodleadstoalargerpremium.

Followingananalysisofallofthefactsandyourneeds,thedecidingfactormaywellbethecostofthepolicy.Inthiscase,askyourself:Shouldyouuseyourresourcestopayforashortereliminationperiodorusethepremiumstocoveralongerbenefitperiod?

SelectingtheBenefitAmount

Thenextfactortoconsideristheamountofthemonthlybenefit.Whileitwouldbenicetomakemoremoneyifyouweredisabledthanifyouwereworking,thisisnotanoption.Theinsurancecompanydoesnotwanttoencourageyoutostayhome.

Theinsurancecompanyuseswhatareknownasissueandparticipationlimitstodeterminethemaximumamountofmonthlybenefitsthatmaybeissued.(Anystatelawsonthesubjectalsowouldcomeintoplay.)Typically,thislimitwillbeapredeterminedpercentagesuchas70percentor75percentofyourearnedincome(beforetaxes).

Anotherfactorthatdeterminestheamountofthebenefitistheexistenceofanyotherdisabilityincomecoverageinforce.Ontheapplicationforinsurance,youmustindicatethenameoftheinsurancecompanyandparticularsregardingtheadditionalcoverage.Anyothercoveragewillcausetheamountrequestedtobelimited.

Forexample,assumethatCompanyAwillissuedisabilitycoverageupto70percentofaperson'sgrossearnedincome.Inaddition,itwillparticipatewithotherinsurancecompanies'coverageuptothis70percentmaximum.

Diane,apharmacist,earns$3,000permonth.Shemaypurchasedisabilityincomeupto70percentofherearnedincomeor$2,100permonth.However,sheindicatesonherapplicationthatshehasothercoveragewithCompanyXintheamountof$1,000permonth.ThemaximumcoveragethatCompanyAwillissueisanadditional$1,100permonth.CompanyAisparticipatingwithCompanyX,andtotalbenefitsarelimitedtoCompanyA'sissueandparticipationlimitsof70percentofearnedincome.

Athirdfactorthatcanlimitapolicy'sbenefitamountisyournon-earnedincome.Typically,ifapersonhasnon-earnedincomeamountingto$15,000ormoreeachyear,theinsurerwillwanttoreducethebenefitamount.

Ahighnetworthalsocanreduceyourneedfordisabilityinsurance

andtheinsurancecompany'sdesiretoprovideitforyou.Ifyou'reamulti-millionaire,you'rebasicallyself-insuredandprobablydon'tneeddisabilityincomeinsurance.Yourpersonaland/orbusinessassetsshouldprovideplentyofprotection.Theinsurancecompanyisawareofthis:Itmaydeclinecoverageforapersonwithahighnetworthoroffersomesmalltokenbenefit.

Inshort,whenaninsurancecompany'sissueandparticipationlimitsare70percentofgrossearnedincome,thisamountprobablywillbeveryclosetoyournetincomeortake-homepayaftertaxes.Inthisway,thelossismaderelativelywholeagain.Ifyouweretogetmorethantheequivalentofyourtake-homepay,theinsuranceoffersyouadisincentivetoreturntoworkandencouragesyoutocommitfraud.

OptionalPolicyBenefits

Whenyou'reconsideringanincomeinsurancepackage,thefinalingredientistheinclusionofanyoptionalpolicybenefits.Anddisabilityincomepoliciesprovideasmorgasbordofoptions.

Theonesthatappealtomostpeopleinclude:

FutureIncreaseOption.Thisisimportantifyou'reunder40yearsofage.Itprotectsfutureinsurabilitybyprovidingtheguaranteedrighttopurchaseadditionalamountsofdisabilityincomeinsuranceinfutureyears.(Theassumptionisthatyouwillgetraisesovertime.)Normally,theriderisnotavailablepastage40,althoughsomeinsurersmayofferituptoage50.

CostofLivingRider.Toprotectthepurchasingpowerofdisabilityincomebenefits,manyapplicantsaddtheCostofLivingRidertotheirbasepolicy.Thissimplystatesthat,asapredeterminedcostoflivingstandardincreases,thebenefitsprovidedbythepolicywillincreasebyacorrespondingamount.

LifetimeBenefitsOption.Althoughitisarelativelyexpensiveoption,LifetimeAccidentandSicknesshasparticularappealtoapersonwhoislikelytoexperiencedramaticincreasesinearningsovertheyears.

Example:Ayoungphysicianinthefirstyearortwoofpracticemaynotbeearningasubstantialamountofincome,butmostcertainlywilloverhisorherprofessionalcareer.Acareerendingindisabilitywouldhaveadrasticeffectonsuchapersonbysubstantiallyreducingpotentiallifetimeearnings.Extendingthebenefitperiodforlifewillhelpreducetheeffectofsuchaloss.

Theseandotheroptionalbenefitsaredescribedinmoredetailbelow.

Theadditionalpremiumchargedformostoftheoptionalbenefitsdescribedhereisrelativelylow.Dependingontheoption,theadditionalcostwouldrangefrom$30to$100annually.

FutureIncreaseOption

ThisoptionalsomaybereferredtoastheGuaranteedInsurabilityOptionorGuaranteedPurchaseOption,sinceitenablesyoutopurchaseadditionaldisabilityincomeprotectionregardlessofyourinsurabilityatspecifiedfuturedates.

Thisbenefitcomeswithseverallimitations:

Thepremiumchargedforthefuturecoveragewillbebasedonyourageatthetimeofpurchasenotyouragewhenthepolicywasoriginallyissued.

Youwillbeabletopurchaseonlyaspecified,predeterminedamountofadditionaldisabilitycoverageateachoptiondate(manyinsurancecompanieslimittheamountofadditionalcoverageavailabletohalftheoriginalamount.)

Yourearnedincomemustwarrantadditionalcoverage.

Thereareaspecificnumberofoptiondatesonwhichyoumaypurchaseadditionalcoverage.Usually,theseoptiondateswillbeeverytwoorthreeyearsfromages25to40or,sometimes,toage50.Thesedatesmaybearbitrarilyselectedbyyourinsurancecompany,ortheymaycoincidewithyourbirthday,marriageorbirthsofchildren.

Forexample,George,age24,earns$3,000permonthandcurrentlyhasadisabilityincomepolicythatprovidesamonthlybenefitof$2,000.Hiscompany'sissueandparticipationlimitsare70percentof

monthlyearnings.Hispolicycontainsafutureincreaseoption,whichallowsGeorgetopurchaseanadditionalbenefitof$300permonthonhis25th,28th,31st,34th,37thand40thbirthdaysplusuponmarriageandthebirthofchildren.

Georgedoesn'tseeanyincreaseinhissalarybythetimeheturns25,sohe'sunabletoexercisethe$300optionamount($2,300inbenefitswouldexceed70percentofhismonthlysalary).

However,whenheturns28,Georgeismaking$3,500amonth.Hecanexercisethe$300increase($2,300islessthan70percentofhismonthlysalary).Ayearlater,Georgegetsanotherraiseandgetsmarried.Withhis

salaryat$4,000amonth,hecanexercisehisoptionagainandincreasethemonthlybenefitto$2,600.

CostofLivingBenefit

Thepurchasingpoweroffixeddisabilitybenefitsmaybeerodedduetoinflationandincreasesinthecostofliving.Toprotectagainstthesetrends,mostinsurancecompanieswillofferanoptionalcostoflivingbenefit.

Underthisoption,yourmonthlydisabilitybenefitautomaticallywillbeincreasedasneeded,onceyouareonclaim.Typically,thisincreasewilloccurafteryouareonclaimfor12monthsandeach12-monthperiodthereafteraslongasyouremainonclaim.

Onceyou'reoffclaim,thetotaldisabilitybenefitrevertsbacktotheoriginalamount.

Manyinsurancecompanieswillpermitapersontobuybacktheadditionalmonthlybenefitwhencomingoffclaim.Thismeansyouravailabledisabilitybenefitwillbeincreasedtoincludethecostoflivingadjustmentsandthepremiumchargedwillbeincreasedtoreflectthebiggerbenefit.

Forexample,Lucyhasadisabilityincomepolicywitha$1,000monthlybenefitandacostoflivingbenefit.She'stotallydisabledforfiveyearsandgetsa5percentcostoflivingincreaseeachyear.Duringhertimeonclaim,shegetsa$200permonthincreaseinherdisabilitybenefit.Eventually,sherecoversfromherdisabilityandcanreturntowork.Whenshedoes,shecanpayaslightlyhigherdisabilitypremiumandkeeptheextra$200amonthinforce.

Ifyoubuybackacostoflivingincrease,theadditionalpremiumwillbebasedonyourageatthetimeofthebuyback.

LifetimeBenefitsOption

Thisoptionextendsyourbenefitperiodfromage65toyourlifetime.Thisextensionmayapplytoaccidentonlybenefitsortoaccidentandsicknessbenefits.

Normally,itmeansthatifthetotaldisabilityisduetoanaccidentanditoccurspriortoage65,benefitswillbepaidfortherestofyourlife,providedyouremaintotallydisabled.

Mostcompanieswillplacesometimelimitationsforthelifetimesicknessbenefit.Thatis,thedisablingsicknessmustbeginpriortoaspecifiedage,suchas50or55.Apolicyprovidinglifetimesicknessbenefitsmightstate,iftotaldisability,duetosickness,beginsatage55orearlier,totaldis-

abilitybenefitswillbepaidforthelifetimeoftheinsured.Iftotaldisabilitybeginsatage:

56totalbenefitsarepaidtoage65,then90percentofthebenefitwillbepaidforthelifetimeoftheinsured;

57totalbenefitsarepaidtoage65;then80percentofthebenefitforthelifetimeoftheinsured;

58totalbenefitsarepaidtoage65;then70percentofthebenefitforthelifetimeoftheinsured;andsoon.

Theprogressionofbenefitswouldcontinueinthismanneruntilage65.Ifthetotaldisabilitybeganatage65(typically,thepolicyisnotrenewedpastage65),thenthepaymentoftotaldisabilitybenefitswouldbelimitedtooneortwoyears.

RehabilitationBenefits

Rehabilitationbenefitsisanoptionalcoveragethatcanbepurchasedwithadisabilityincomepolicyandanoptionalbenefitthatcanbeclaimedundermostworkers'compsystems.Asaresultofadisability,youmaynotbeabletoreturntotheworkyouweredoingbefore,butyoumaybeabletoworkanotherjob.However,movingtoanewjoborcareermaynecessitatesomevocationaltraining.

Ifyouelecttoparticipateinvocationalrehabilitation,totaldisabilitybenefitswillcontinueaslongasyouareactivelyparticipatinginthetrainingprogramandremaintotallydisabled.

Someinsurersmayprovidealumpsumpaymentforvocationaltraining.Whetheralumpsumoramonthlypayment,thisbenefitenablesyoutotakepositivestepstowardreturningtowork.Thus,thisoptionbenefitsbothyouandtheinsurancecompany.

SocialSecurityRiders

TheSocialSecurityAdministrationdefinestotaldisabilityastheinabilitytoperformanysubstantialgainfulwork.Inaddition,thedisabilitymustbeexpectedtolastatleast12monthsorendindeath.Clearly,thisisaveryconservativedefinitionoftotaldisability.

Asaresult,theSocialSecurityAdministrationdeniesabouttwo-thirdsofthedisabilityclaimsfiledeachyear.Forthatreason,manypeoplebuyspecialdisabilitycoveragethatwilltakeeffectwheneverSocialSecuritywon't.

ThiscoveragemaybecalledaSocialSecurityRiderorsimplyanAdditionalMonthlyBenefit(AMB)Rider.Regardlessofthename,thepurposeisthesametoprovideadditionaldisabilityincomebenefitsduringthefirstyearofaclaim,whileyouarewaitingforSocialSecuritytobegin.

Theseridersalsoareusedtocomplementotherdisabilityincomesources,suchasshort-termgroupdisabilitybenefitsprovidedthroughanemployer.

Therearetwodifferentmethodsbywhicharidermayprovidebenefits:

AllorNothingRider.Underthisconcept,youwillbepaidabenefitifSocialSecuritypaysnothing.Conversely,ifSocialSecurityprovidesanybenefit,thentheriderpaysnothing.

OffsetRider.Thebenefitprovidedbytheriderwillbereduced,oroffset,bytheamountofanybenefitprovidedbySocialSecurity.

TheAdditionalMonthlyBenefitrideralsocanbeusedtocomplementgroupdisabilitycoverage.Forexample,Jackhasashort-termgroupdisabilitybenefitthroughwork.Thisprovideshimwithabenefitof$1,000permonthforaperiodofoneyear,afterwhichnobenefitisprovided.

Jackneedsandcanqualifyforadisabilityincomebenefitof$1,500permonth,payabletoage65.Tocoordinatehisindividualplanwiththegroupplan,Jackshouldpurchasea$1,500totaldisabilitybenefitpayabletoage65withaone-yearEP.Thiswilltakeoverwhenhisgroupcoveragestops.Healsoshouldbuya$500AdditionalMonthlyBenefitRiderwitha30-dayEPandabenefitperiodofoneyear.Thiswillsupplementhisgrouppolicy.

HospitalConfinementRider

Ordinarily,youhavetowaituntiltheeliminationperiodhasbeensatisfiedtobegincollectinganydisabilitybenefits.However,thehospitalconfinementriderwillbeginpayingtheregulartotaldisabilitybenefitduringtheeliminationperiod,ifyouarehospitalized.However,thebenefitswillbepaidonlyaslongasyouareinthehospital.

Example:Seanhasadisabilityincomepolicywitha30-dayeliminationperiodanda$1,000monthlybenefitfortotaldisability,payabletoage65.Healsohasthehospitalconfinementoption.Heishospitalizedforminorsurgeryforaperiodoftwodays.Followingthehospitalization,hereturnstoworkwithinthreedays.Seancanclaimtotaldisabilitybenefitsfortheperiodoftwodays.Theamountpaidwillbe2/30of$1,000or$67.

Non-DisablingInjuryRider

Thisoptiondoesnotpayadisabilitybenefit.Rather,itprovidesforthepaymentofmedicalexpensesincurredduetoaninjurythatdoesnotresultintotaldisability.Inshort,it'saformofhealthinsurance.

Example:Arthurhasadisabilityincomepolicythatincludesthenon-disablinginjurybenefit.He'sinjuredinarecreationalbaseballgameatapicnic.HeistakentothehospitalforX-raysandtreatmentforabadlysprainedankle.Heincursmedicalexpensestotaling$550,butreturnstoworkthenextday.Hedoesn'treceiveanydisabilityincomebenefits,buthewouldbereimbursed$550forhisnon-disablinginjury.

Thisisakindofcoveragethatmakesmostsenseforpeoplewhohavetroublequalifyingfortraditionalhealthinsurance.Itisakindofloopholeforinsuringmedicalcosts.

WaiverofPremium

Thisriderspecifiesthat,intheeventofadisability,premiumswillbewaivedretroactivelytothedateofthedisability.Thewaiverusuallyrequirespermanentandtotaldisability,thoughsomepoliciesallowbroaderclaims.

Acaveat:Manypeopleassumethatallformsofinsuranceincludethiskindofwaiver.Unlesstheyincludeitspecifically,almostnonedo.

AccidentalDeathandDismemberment

Likestand-aloneaccidentaldeathanddismembermentinsurance,AD&Dridersincludeadeathbenefit,whichispayableintheeventofdeathresultingfromaccidentalbodilyinjury.Acompanioncoverage

isprovidedforlossoflimbsorsight,oftencalleddismembermentcoverage.

Whenyoubuythisadditionalcoverage,yourinsurancecompanywillattachaschedulethatlistsvariousdismembermentsandlossesofsightforwhichspecifiedsumswillbepaid.Thesumspayableusuallyareexpressedaspercentagesofthedeathbenefitlimit,orsometimesaspercentagesofalimitinthepolicyknownastheprincipalorcapitalsum.

Theintentofthedismembermentfeatureistoprovideyouwithalumpsumthatwillhelpyouthroughanyperiodofrehabilitationorpayfortrainingforworkotherthanwhatyouusedtodo.

Insomecases,however,youmightbedisabledforawhileandduringthedisabilitysufferoneofthelosseslistedintheschedule.Inthissituation,

youwouldbepaiddisabilityincomeuptothetimeofthelossoflimborsightonly,thenyouwouldreceivethelumpsum.

Mostcompanypoliciesprovidethat,evenifyouarenotdisabledafteranaccident,ifalossoflimborsightoccurswithin90daysofthedateoftheaccident,thesumsintheschedulewillbepaid.

Accidentaldeathanddismembermentcoverageprovidesbothalifeinsuranceandahealthinsurancebenefit.However,thelifeinsurancebenefitappliesonlytoaccidentaldeathandisnotpaidfordeathbynaturalcauses.

PresumptiveDisability

Thisbenefitusuallyisconsideredoptionalandprovidesfortotaldisabilitybenefitstobepaidifaninjuryorsicknesscausesyouthetotalandirrecoverablelossof:

speech;

hearinginbothears;

sightinbotheyes;or

useofbodilylimbs(hands,legs,etc.).

So,ifyouhaveastrokeandasaresultlosetheabilitytospeak,youhavesufferedapresumptivedisabilityandwouldbeentitledtototaldisabilitybenefitsforthedurationofthebenefitperiod.

Usually,therequirementthatyoubeunderthecareofaphysicianiswaivedduetothenatureofpresumptivedisabilities.

Theclaimsprocesstypicallyissimplifiedwithpresumptivedisabilities.Normally,whenyouhaveadisabilityclaim,youandanattendingphysicianmustcompleteaclaimsformperiodicallyeverymonthoronceaquarterforthedurationoftheclaim.

Forapresumptivedisabilityclaim,thereisasingleclaimsformtobecompletedattheonsetoftheclaim.Duetotheseverityofthedisability,nofurtherclaimsformsusuallyareneeded.

HowInsuranceCompaniesPriceDisabilityCoverage

Inordertomakegooddecisionsasaconsumerofdisabilityincomeinsurance,youshouldhavesomeunderstandingofhowinsurancecompaniespricethecoveragestheysell.We'lltakeabrieflookatthispricingprocessandgiveyousometoolsforaskingtherightquestionsifaninsurancecom-

panyquotesyouapremiumthatseemstooexpensive.

Theinsurancecompany'ssourcesofinformationinclude:

theagent,alsoknownasafieldunderwriter;

theapplicationincludingtheagent'sstatement;

inspectionreports;

medicalinformationandattendingphysician'sreports;and

otherinformation,suchasoccupationaloravocationalquestionnaires.

Thefieldunderwriterisusuallytheonlypersonwhoactuallyseesyou.So,it'shisorherjobtodealwithsubjectiveorpersonalissuesandtoprovidetheinsurancecompanywithclearandaccurateinformationaboutyou.

Inthisprocess,oneoftheunderwriter'smostimportantresponsibilitiesisthecompletionoftheinsuranceapplication.Itcontainssuchinformationas:

yourageandsex;

youroccupationalhistory;

informationaboutanyunusualhobbiesoravocationsyoumayhave;

yourpastmedicalhistory,yourfamily'smedicalhistoryandcurrentphysicalcondition;

yourmoralhabits;

informationregardingotherinsurancethatyouown;and

yournetworth.

AgeandSex

Fromtheperspectiveoftheinsurancecompany,yourageandsexareimportant.Thisisespeciallytrueregardinggender.

Afactthatmostpeoplefindsurprisingiswomenbecomedisabledmorefrequentlythanmendo.Therefore,womenpresentahigherdisabilityrisk.Thisisoppositetomosttrendsinthelifeinsurancemarketwherewomenareusuallyalowerrisk.

Insuranceexpertshavevarioustheoriesaboutwhywomenmakedisabilityclaimsmoreoftenthanmendo.Themostcommon:Womenpaymoreattentiontotheirhealththanmendoand,therefore,usedisabilityinsurance

morefrequently.Thiscontributestotheirlongerlifeexpectancyandlowerlifeinsurancerates.Theyalsogetpregnantoccasionally.

Whateverthereason,theunderwritingimpactremainsclear:Becausewomenposeabiggerdisabilityrisk,thedisabilityincomepremiumsforwomenareusuallyhigherthanformen.

Ageisalsoafactorinpricingcoverage,becausethedurationofadisabilitygenerallyincreasesasyougetolder.Yourbodydoesnotrespondtotraumaasitdidwhenyouwereyounger.Forexample,smallchildrencanexperiencemajoraccidentsorsicknessesand''bounceback"muchmorequicklythanolderpeople.

Anotherfactorthatmightincreasethedurationofdisabilitiesamongolderpeopleismotivation.Insurancecompaniesthatdoalotofbusinessindisabilitycoverageclaimthatolderpeoplesometimessubconsciouslydecidetoeasetheirwayintoretirementasaresultofadisability.Accordingtothisscenario,a55-or60-year-oldsimplymaynotbeasmotivatedtoreturntoworkfollowingaseriousdisability.

OccupationalClassification

Thekindofworkyoudoisaveryimportantfactorthataffectsthecostandstructureofdisabilityincomeinsurance.Mostinsurancecompaniesgroupjobsaccordingtotheriskofinjurytheypose.ThesegroupstypicallyareidentifiedasClasses1,2,3and4orA,B,CandD.Class1(orA)occupationsaretheleasthazardousandClass4(orD)occupationsarethemosthazardous.

Thefollowingchartillustratesatypicaloccupationalclassificationtable.

OccupationalClassificationsClass1(or

Physicians,dentists,lawyers,accountants,schoolteachers,actuaries,insurancesalesrepresentatives,corporateofficers,mostengineers,

A) architects,corporateexecutives.Class2(orB)

Generalclericalemployees,banktellers,insidesalespersons,outsidesalespersonswithlimitedtravel,mostbuildingcontractors(officedutiesonly),barbers,electricians(nohighvoltagework),chemists,registerednurses,practicalnurses.

Class3(orC)

Bartenders,waitersandwaitresses,cooks,gasstationattendants,salespersonswithextensivetravel,high-voltageelectricians,plumbers,mechanics,mostfactoryworkers.

(Continuedfrompreviouspage)Class4(orD)

Bridgeworkers,constructionworkers,truckdrivers,sanitationworkers,firefighters,policepersonnel,mineworkers,treetrimmers,windowwashers.

IfyouworkinaClass3or4occupation,aninsurancecompanywillmultiplythebaserateforcoveragebyafactorofanythingfrom1.1to3.0todeterminethepremiumyouhavetopay.Thesemultiplesusuallywillbedetermined,atleastinpart,byacompany'sclaimshistoryforparticularoccupations.

Pricingmodelsfordisabilityincomeinsurancearenotstandard.Differentinsurancecompanieswillsometimesclassifythesamejobdifferently.Andthemultiplesthatoneinsurancecompanyappliestojobclassificationsmaybedifferentthanthoseusedbyanothercompany.Soitpaystoshoparound.

Anotheroccupationalpricingfactor:Anaccidentorsicknessthatwouldbeconsideredminorforsomeoneinmostoccupationscouldbetotallydisablinginotherjobs.Forexample,abeauticianwithaninfectedfingerduetoatorncuticlemightbeunabletoperformthedutiesofheroccupationandbedisabled.Abankpresidentwithaninfectedfingerisnotlikelytobetotallydisabled.Therefore,inthiscontext,abeauticianwouldpresentahigheroccupationalriskthanabankpresident.

Thebenefitamountalsomayberestrictedbyoccupation.Forexample,adoctormaybeabletopurchaseupto$15,000amonthofdisabilityincomeprotection,butaplumberwhomayhavethesameearnedincomeasthedoctorislimitedtoamaximumbenefitof$5,000permonthduetothehigheroccupationalrisktowhichthedoctorissubject.

Stillotherrestrictionsorlimitationsmayapplyduetoaperson'soccupation.Forexample,afirefightermayhavearestrictedmaximumbenefitamountandonlymaybeabletopurchaseadisabilityincomepolicywithamaximumbenefitperiodoftwoyearsandnothingshorterthana90-dayEP,duetotheoccupationalrisksinvolved.

Sometimes,thereisarangeofriskswithinagivenoccupation.Forinstance,asalespersonworkinginaclothingstoredoesnotpresentanyunusualdegreeofriskbutatravellingsalespersonwhodrives60,000to80,000milesperyearisexposedtoamuchhigherlevelofrisk.

Hobbies

Evenifyouroccupationisrelativelyrisk-free,whataboutyourhobbies?Suchhobbiesasskindiving,scubadiving,skydivingandautoracingare

certainlymorehazardousthangolfortennis.Forthisreason,theinsurancecompanywillaskifyouhaveanyhigh-riskhobbieswhenit'sconsideringyourapplicationfordisabilityincome.Ifyouansweryes,you'llhavetofilloutanavocationquestionnaire,providingmorespecificinformationaboutyourhobby.

Example:Gailworkedherwaythroughschoolasascubadivinginstructor.Now,asamarketingexecutiveforacomputersoftwarecompany,shestilldivesoccasionallyonweekends,vacationsandwheneverelsetimeallows.Aftershesubmitsanapplicationfordisabilityinsurance,thecompanywritesbacktoherandaskshertofilloutaquestionnaireaboutherhobby.Itincludesquestionsaboutthelocationofthesedives,frequency,depths,etc.

TheinsurancecompanymaydeterminethatGaildivesoccasionallyenoughthatthehobbydoesn'tposemuchofanadditionalrisk.Morelikely,though,itwilldeterminethatherdivingdoesmakehermorelikelytosufferadisablinginjury.

ThecompanymaysellGailthepolicy.Butitprobablywilladdasurchargetoherpremiumstoreflecttheaddedriskthatscubadivingpresents.

MedicalProfile

Naturally,theinsurancecompanywillbeinterestedinyourmedicalhistoryandyourcurrentcondition.Ifyouhavechronicbackproblems,youobviouslyaremorelikelytobecomedisabledthanifyouarecompletelyhealthy.

Mostdisabilityinsurancecompaniesaskyouaboutyourmedicalhistoryandyourfamily'sonapolicyapplication.Theyalsomayaskyoutotakeaphysicalexam(usuallyatthecompany'sexpense).

Ifyouhavetohaveaphysicalexaminationperformedbyadoctorinlieuofsimplyansweringmedicalquestions,yourapplicationnormallyisreferredtoasamedicalapplication.Ifthecompanyobtainsmedicalinformationsimplybyreviewinganswerstoquestionsontheapplication,itisreferredtoasanon-medicalapplication.Dependingonthemedicalproblem,yourpersonalphysicianmaybeaskedtocompleteanAttendingPhysician'sStatement.Thepurposeofthisreportistoprovidemoredetailedinformationaboutyourmedicalhistoryorcurrentphysicalcondition.

Pastmedicalhistoryreferstowhatwas;currentphysicalconditionreferstowhatis.Thesetwofactors,plushereditarytraitssuchasheartdiseaseordiabeteswouldindicatewhatwillbe(oraprognosisforthefuture).

Example:Ralphhasjustbeengivenacleanbillofhealthfollowinga

physicalexam.Aweeklater,hehasasevereheartattackandbecomestotallydisabled.

Howcanthishappen?Thefamilyphysiciannormallyislookingatthepatienttodayataspecificmomentintime.Itisentirelypossiblethatatthatprecisemoment,Ralphappearedtobeinexcellentcondition.

Hecamefromafamilywithahistoryofheartproblems,though.Andformanyyearshehadbeenoverweight,withahighcholesteroldietandasedentarylifestyle.Eventhoughhehadtrimmeddownabitbeforehisphysical,hewasacandidateforheartproblems.

Duetotheevasivenatureofdisability,aninsurancecompanywilllookatyourmedicalhistoryandyourfamily'smedicalhistory,aswellasyourcurrentcondition,initsattempttodeterminewhetherthereisanyunusualphysicalormedicalriskinvolved.

MoralHazardsandMoraleHazards

Aninsurancecompanywillalsotrytodeterminewhetherornotyoupresentamoralhazardoramoralehazardthatis,whetheryoubehaveinawayorhavechosenalifestylethatsuggestsyoumighthaveclaimsproblemsorthatinvitesdisabilityrisks.

Apersonwhopresentsamoralhazardmightbethetypewhowouldfileafraudulentdisabilityclaimintimesoffinancialdistress.Theoldinsuranceindustrysaying"paindoesn'tshowuponanX-ray"getstotheissueofmoralhazard.Adisabilitypolicyholdercouldclaimawhiplashneckinjuryastheresultofarelativelyminorautoaccidentwhen,infact,heisnotdisabled.Anytendencytousethedisabilityincomepolicywrongfullyisanexampleofamoralhazard.

Indeterminingwhetheryouposeamoralhazard,theinsurancecompanywilllooktoseeifyou'vehadyourdriver'slicensesuspended

orrevoked,orifyouhaveahistoryofsubstanceabuseorarecordofcriminalactivities.

Inadditiontomoralhazards,adisabilityinsurancecompanyalsowilltrytoavoidinsuringanymoralehazards.Amoralehazardisanindifferentattitudedisplayedbyapersonthatincreasestheriskofloss.Fromaninsurancecompany'spointofview,apersonwhoregularlyreceivesspeedingticketsmightbedemonstratinganindifferentattitudetowardtheriskofinjuryduetohighspeeds.

Again,thepolicyapplicationisthemainmechanismbywhichacompanyevaluatesmoralormoralehazards.Ifthecompanydoesconcludethatyouposeeitheroftheseadditionalrisks,itwilladdasurchargetothedisabilitypremiumormorelikelydeclinetheapplication.

OtherInsurance

Anotherfactorthatimpactshowmuchadisabilityinsurancecompanywillchargeforcoverageishowmuchandwhatkindofotherinsuranceapersoncarries.

Onceithasobtainedaccurateinformationregardingtheamount,eliminationperiodandbenefitperiodofothercoverageyoucarry,thecompanywillpriceitspolicyaccordingly.

Thecompany'sgoalinthisprocessistopreventoverinsurance.Thecompanyalsowantstomakesurethatitgeneratesenoughpremiumincomefromthepolicytocoveronaverageamaximumbenefitclaim.

NetWorth

Yourtotalnetworthalsomayaffecttheamountandpriceofdisabilityincomecoverageacompanywillsellyou.Apersonwith$1millioninthebankprobablydoesn'tneeddisabilityincomeinsurance.

Theamountoftotalnetworthandtheliquidityofsuchassetswilldeterminewhetherareducedamountofdisabilitycoveragewillbeissuedornocoverageatall.Ifyourassetsareeasilymarketableorifyouhavealargeamountofunearnedincome,thentheunderwritermaydecidethatyouarenoteligibleforanycoverage.

Forexample,Joeisanorthopedicsurgeonwhoearns$120,000ayear.Hisinsurancecompany'sissueandparticipationlimitis60percentofearnedincome.ItcharacterizeshimasaClass1occupationalrisk.So,atthisstage,Joewouldbeinsurablefor$6,000amonthofdisabilityincomecoverage.

ButJoealsohasabout$60,000ayearofunearnedincomefromrentalproperties,interestanddividends.Thiscomplicatesthings.

Thecombinationof$6,000ofmonthlydisabilitycoverageplus

$60,000annuallyofunearnedincomemayremoveJoe'sincentivetoreturntowork.Joe'sinsurancecompanythereforemayreducetheamountofdisabilityincomeprotectionitwillsellhimtoreflecttheimpactofhisunearnedincome.ItcoulddecidetoissueJoeonly$3,000permonthofdisabilityincomecoverage.

APersonalInterview

Afteryou'vesubmittedadisabilityinsuranceapplication,apersonalinterviewusuallyisperformedbyatrainedinterviewer.Theinterviewnormallyiscompletedoverthetelephone.

Generally,thepurposeoftheinterviewistoverifyapplicationinformation.Specifically,dataregardingmedicalhistory,hobbiesandoccupationaldutiesmayhavetobeexplainedoradditionalinformationmayneedtobe

gatheredthroughthisreport.(Youwillbenotifiedofthisinterviewinadvance.Typically,thisisdoneinwriting.)

StandardandSubstandardRisks

Oncealltheinformationhasbeenreviewed,aninsurancecompanymakesadecisionabouttheacceptanceoftherisk.

Mostapplicantsareclassifiedasstandardrisks,whichbasicallymeansthattheyfittheprofileofanaveragepolicyholder.Inthesecases,apolicywillbeissuedasappliedforbytheapplicant.Therateorpremiumchargedwillbethestandardpremiumrelativetotheperson'sage,sexandoccupationaswellasthebenefitamount,eliminationperiodandbenefitperiodselected.

Occasionally,anapplicantfordisabilityincomewillbeclassifiedasasubstandardrisk.Thisusuallyresultsfromaproblemwithoneormoreofthefactorswehaveconsideredsuchasapastorcurrentmedicalproblemorevidenceofamoralhazard.

Onepointmentionedbeforebearsrepeating:Thefactorsthatimpactdisabilityinsurancecoveragearedifferentthanthefactorsthatmightinfluencelifeinsuranceorothercoverages.Ifyouhaveahistoryofbackproblems,youmighthavenotroublegettinglifeinsurancebutalotoftroublegettingdisabilityinsurance.Youwon'tusuallydieduetoabackache,butyoucertainlycouldbecomedisabledbecauseofone.

Ifyouareclassifiedasasubstandarddisabilityrisk,aninsurancecompanyhasseveralalternativesavailableforissuingaspecialpolicy:

anextrapremiummaybechargedwherebythecoverageisissuedasappliedforandthehigherpremiumisusedtocompensateforthehigherriskinvolved;

aridermaybeattachedtothepolicy,modifyingthecoverage(afullexclusionriderisusedwhenthenatureoftheconditionislikelytoresultinrecurrentdisabilitiesforexample,afullbackexclusionridermaybeusedforpeoplewithchronicbackdisorders);

aqualifiedconditionexclusionridermaybeusedtoexcludecoverageforaspecifiedmedicalproblemforaspecifiedperiodoftime;

thecompanymaychangetheeliminationorbenefitperiodfordisabilitiesrelatedtoaparticularmedicalcondition,(example,Larryhasadisabilityincomepolicywitha30-dayelimi-

nationperiodandariderthatcallsfora90-dayeliminationperiodforanydisabilityduetoagallbladderdisorder.Theinsurancecompanywillcoveradisabilityduetogallstones,butnobenefitswouldbepaiduntilafter90days);

theinsurancecompanymayincreasetheeliminationperiodorshortenthebenefitperiodforthewholepolicytocompensateforthemedicaldisorder(example:Ellenhasaproblemwithulcersandappliesfordisabilityincomeprotectionwitha30-dayeliminationperiodandato-age-65benefitperiod;duetothenatureofthedisorder,herinsurancecompanydecidestoissueEllenapolicywitha180-dayeliminationperiodandafive-yearbenefitperiod).

Ofcourse,afinalalternativeavailabletotheinsurancecompanyissimplytodenycoverage.

GroupCoverage

Manypeoplehaveatleastasmallamountofdisabilityincomeinsurancethroughbenefitsofferedbytheiremployers.Thesegroupdisabilityincomepolicies(likegrouplifepolicies)areunderwrittenonveryliberalterms.

Policiesusuallyareprovidedwithoutanyreferencetoanindividual'smedicalinformation.Mostinsurancecompanies,however,willrequirethatacertainnumberofemployeesparticipateinagroupplan(suchas10,25,etc.)forthatplantobeissuedwithoutevidenceofinsurability.

Generally,you'rerequiredtoprovideinformationregardingyouraddress,socialsecuritynumberandcertainwork-relatedinformation.

Theinsurancecompanywillconcentrateonsuchgroupfactorsasoccupationalduties,industrytypeandtheamountsofdisabilityincomebeingoffered.Duetothenatureorriskofanoccupation,the

insurancecompanymaylimitorrefusetowritegroupdisabilityincomecoverageforcertaingroupssuchasfortheminingindustry,thelumberindustry,theentertainmentindustry,etc.

Groupdisabilitycoverageusuallywillbelimitedtonotmorethan70percentofyourearnedincomeandsubjecttoalowmaximumbenefitsuchas$1,000or$2,000permonthforayear.

Becausethereisnomedicalunderwritinginvolvedwithgroupcases,theunderwriter'sprimaryjobistoprotectagainstoverinsuranceorlargeamounts

ofcoverageandadverseselectionagainsttheinsurancecompany.Adverseselectionoccurswhenaninsurancepolicyencouragespeoplewiththehighestriskprofilestousethecoverageandencouragesthosewithlowerriskprofilestofindmorecost-effectiveinsurance.

Toavoidadverseselection,theinsurancecompanymaylimittheamountofcoverageoffered,declinetowritethegrouppolicyatallorofferthecoverageonanon-occupationalbasis.Non-occupationalcoveragewillnotofferbenefitsforwork-relateddisabilities.

Althoughnotgroupinsurance,strictlyspeaking,associationcoverageofferedtomembersofatradeassociationorothergrouphassomeofthesameunderwritingcharacteristicsasgroupcoverage.Associationcoveragemightbedescribedasindividualpoliciesadministeredasgroupinsurance.

Mostassociationplansrequiresomemedicalunderwritingorwhatissometimesreferredtoassimplifiedorprogressiveunderwriting.Associationunderwritingmaytaketheformofthreeorfourmedicalquestionsaskedoftheindividual.Duetothesizeoftheassociationmembership,relativelyminormedicalproblemsmaybeoverlookedandpoliciesissued.

Nevertheless,evenwithsimplifiedunderwriting,itispossibleforamembertobedeclinedfortheinsuranceunlesstheassociationoffersaguaranteed-issueplan.

Inaddition,theunderwritingprocedureissimplifiedbythefactthattherearelimitsastotheamountofcoveragethatmaybeissued,aswellasthelengthoftheeliminationandbenefitperiods.Thereisalsononeedtooccupationallyclassifyassociationmembers,sincetheyallhaveessentiallythesameoccupation,whichisnormallylowrisk.

Premiumsforassociationcoveragenormallyarebandedbyageandamount.Forexample,everyonebetweentheagesof25and30pays

thesamepremiumfora30-dayEPanda$1,000monthlybenefitpayabletoage65.Fromage31to35,anewbandofpremiumswouldbeused,andsoon.

Anotherunderwritingconsiderationwithregardtoassociationcoveragespertainstotheplacewheretheassociationmemberconductshisorherbusiness.Normally,individualswhoworkoutoftheirhomescannotqualifyfordisabilityincomecoveragebecauseitisdifficulttodetermineif,infact,theydobecomedisabled.Theirworkplaceisalsotheirrecoveryplaceand,thus,aconflictarises.

Often,theunderwritersimplymaydeclinetoofferthistypeofassociationanycoverageatall.

Conclusion

Adisabilityincomeinsurancepolicyispricedaccordingtoyourage,sex,occupationandhealthfactorsyoucan'ttypicallychange.

Butaswithothertypesofinsurancesthereareotherfactorsthatyoucanchangethatwillaffectthepolicy'spremiumandhelpyoucustomizethebenefitstosuityourneeds.Thesefactorsarethelengthoftheeliminationperiod,thelengthofthebenefitperiodandthebenefitamount.

Thefollowingchartillustratesthesepoints.PremiumConsiderations

Objective Actions

Lowerthepremium

ReducethebenefitperiodIncreasetheeliminationperiodReducethebenefitamountEliminateoptionalbenefits

Raisethepremium IncreasethebenefitperiodDecreasetheeliminationperiodIncreasethebenefitamountAddoptionalbenefits

Otherfactorsthatwillaffectthepriceofyourpolicyincludeanyoptionalcoveragesyoumaybuy.Thepurposeoftheseoptionalbenefitsistoenhanceoverallprotectionandtohelpmeetyourspecificneeds.ThemorecommonoptionalbenefitsincludetheFutureIncreaseOptions,CostofLivingRider,SocialSecurityRiderandtheAdditionalMonthlyIncomeRider.

KeyQuestions

1)Whatisyourcurrentmonthlyearnedincome?(RefertotheDisabilityNeedsAssessmentWorksheet.) _______________

2)Whatisyourcurrentmonthlynon-earnedincome?(Again,refertotheDisabilityNeedsAssessmentWorksheet.) _______________

3)Howmuchtotalmonthlyincomedoyouneedtoinsure?(ThisfigureisthebottomlineontheDisabilityNeedsAssessmentWorksheet,anditwouldbeequaltoyourmonthlybenefit.) _______________

4)Wouldyoulikea30-day,60-day,90-dayorlongereliminationperiod?(Alongereliminationperiodmeansalowerpremium.) _______________

5)Wouldyoulikeaone-year,two-year,three-year,five-yearorto-age-65benefitperiod?(Alongerbenefitperiodmeansahigherpremium.) _______________

6)WouldyouliketheFutureIncreaseOption,alsoknownastheGuaranteedInsurabilityorGuaranteedPurchaseOption?

Yes No

7)Wouldyoulikethecostoflivingbenefit? Yes No

8)Wouldyoulikethelifetimebenefitsoption? Yes No

9)Wouldyoulikerehabilitationbenefits? Yes No

10)WouldyoulikeaSocialSecurityRider?

11)WouldyoulikeanAdditionalMonthlyBenefitRider?

12)Wouldyoulikeahospitalconfinementrider?

13)Wouldyoulikeanon-disablinginjuryrider?

14)Wouldyoulikethewaiverofpremiumoption?

15)Wouldyouliketheaccidentaldeathordismembermentrider?

16)Wouldyoulikethepresumptivedisabilityoption?

17)Doyouhaveanyriskyhobbies?

Ifyes,whatarethey?__________________________________________________

___________________________________________________________________

18)Doyouhaveanymedicalproblemsthatmightmakeyouasubstandardrisk?

Ifyes,whatarethey?___________________________________________________

___________________________________________________________________

19)Whatotherdisabilityinsurancedoyouhave(e.g.,agrouppolicythroughwork)?____________________________________________________

INSURINGYOURLIFE

Chapter14TheDifferentKindsofLifeInsuranceLifeinsurancehasbeenboughtandsoldintheUnitedStatessincethemid-1700s,butitwasn'tuntilthe1840sthattheindustrymadeasignificantimpactontheAmericanbusinessscene.Sincethattime,individuallifeinsurancehasgrownsteadily.

Lifeinsuranceplaysanimportantroleinthefinancialplanningofmanyfamilies.Morethan80percentofAmericanhouseholdshavepurchasedindividuallifeinsurancepolicies.

Inthepurestsense,lifeinsuranceissomethingthatpaysadeathbenefittosomeonewhenyoudie.Itsprimarypurposeistoprotectagainsttheriskofyoudyingtoosoon.Yourprematuredeathwouldexposeyourfamilyorbusinesstocertainfinancialrisks,suchasburialexpenses,payingoffdebts,lossoffamilyincomeandlossofbusinessprofits.

Youalsomaywantyourlifeinsurancepolicytopayestatetaxesortosetupacollegefundforyourchildren.

Ifyoudon'thavedependents,youprobablydon'tneedlifeinsurance.Butifyouhaveaspouse,childrenorelderlyparentswhorelyonyourincome,youneedtoconsiderbuyinglifeinsurancetopayexpensesforthem.Youalsomaywanttoconsiderinsuringthelifeofaspousewhoisnotearningmoneyparticularlyifthatspouseiscaringforyourchildren.(Notonlywouldyouhavefuneralexpenses,butyou'dhavetostartpayingforchildcare.)

Lifeinsuranceistheonlyfinancialservicesproductthatguaranteesaspecificsumofmoneywillbeavailableatexactlythetimeitisneeded.Savingsaccounts,mutualfunds,stocks,bondsandotherinvestmentsdonotmakesuchaguaranteeand,infact,theycanbetiedupinprobateatthetimeofyourdeath.Lifeinsurancewillbeavailableimmediatelyanditcreates,inessence,anestatethatdidnotpreviouslyexist.

Overtheyears,lifeinsurancepolicieshaveevolvedfromfairlystraightforwardcontractsthatprovidedasimpledeathbenefitintocomplexcontractsthatoftenincludenumeroustypesofbenefitsandfeatures.Lifeinsurancecompanieshavebeenparticularlycreativeinthelastcoupleofdecades,introducingnewcombinationproductsataremarkablerate.Manyofthesearedesignedtoserveaparticulartypeofclientorinresponsetochangingeconomicconditionsandconsumerpreferences,andthattrendisexpectedtocontinue,makingitevenmoredifficulttochoosetherightpolicy.

TheBasics

Withlifeinsurance,yougetwhatyoupayfor.Whatyoupayforisthepolicy'sfaceamounttheamountthelifeinsurancecompanywillpaywhenyoudie.

Sincethefaceamountofthepolicyispayableuponthedeathoftheinsuredperson,theelementofrisktotheinsurancecompanyismuchdifferentthanitisforanautomobilepolicy.Whenaninsurancecompanyissuesanautopolicy,ithopesyouwillbeasafedriverandwillneverhaveanaccidentsoyou'llneverfileaclaim.Whenaninsurancecompanyissuesalifepolicy,itknowsitwillbecalledupontopayaclaimsomeday,becauseeveryhumanbeingdies.Fortheinsurancecompany,theonlyunknowniswhethertheclaimwillbemadeinoneyearorin50.

Notsurprisingly,lifeinsurancecostsvarybasedonyourage,healthandtheamountofinsuranceyoubuy.

Thetermordinaryinsuranceissometimesusedtodescribeindividuallifeinsurance.Therearethreebroadtypesofindividualorordinarylifeinsurancewholelife,termlifeandendowmentpolicies.

Acaveat:Therearenostandardpoliciesinlifeinsurance,asthereare

forhomeownersorautomobileinsurance.Thismakesittoughertocomparisonshopamongcompanies.

Deathbenefitsaretheonethingthatalltypesoflifeinsurancehaveincommon.Ifitdoesn'tpayadeathbenefit,itisn'tlifeinsurance.Thedeathbenefitisthepurelifeinsuranceprotection.

Youcouldarguethatanyonewhoknewforcertainheorshewouldlivetoanoldagewouldbefoolishtospendmoneyonlifeinsurance.Thepremiumscouldbeputtobetteruseoverthecourseofalonglifeanditwouldonlybenecessarytosetasideasmallsumfortheeventualfuneral.

Butnoneofuscanbecertainthatwewillliveforalongtimeevenif

ourancestorsarelong-lived.Thereisalwaysthepossibilitythatadiseaseoraccidentwillresultinaprematuredeath.Anyonecanbecomeavictimofanaturaldisasteroranactofviolence.

MoreThanJustDeathBenefits

Theneedtocoverexpensesandreplacelostfamilyincomeifapersondiesyoungisthemainreasonpeoplepurchaselifeinsurancebutitisnottheonlyreason.Today,manyformsoflifeinsuranceincludeothertypesofbenefits,inadditiontoadeathbenefit,andpeoplealsobuylifeinsurancetoprotectagainsttheriskofnotdyingprematurelytoprotectagainsttheriskoflivingforalongtime.

Certainlydeathbenefitscontinuetoplayamajorroleinlifeinsurancesalespresentationsandpurchasedecisions,butthemanyusesoflifeinsurancetodayextendfarbeyondtheoriginalconceptofadeathbenefit.

Manytransactionsthatmayaddtoyourfamily'sfinancesandsecuritycanbebackedupbylifeinsurance.Forexample,whenyougotoborrowmoneyforarealestatepurchase,aninvestmentopportunityorstartingasmallbusiness,thefundsmaynotbeavailableunlessyoupurchaseinsuranceonyourlifetoprotecttheinterestsofthelender,incaseyoudiebeforeyoupayofftheloan.Inthisway,lifeinsurancecanbeusedtohelpyoubuildpersonalassetsandfamilysecurity.

Inadditiontodeathbenefitsandinvestmentopportunities,manylifeinsurancecontractsincludeothertypesofinsurancebenefits.Thesenon-lifeinsurancebenefitsmaybeincludedinapolicy,ortheymaybeattachedasoptionalriders.

Oneofthemostcommonisknownasawaiverofpremium.Thisisactuallyadisabilityinsurancebenefit,whichpaysthelifeinsurancepremiumswhileyouaredisabled.Youalsocanattachadisability

incomebenefittolifeinsurancepolicies,whichwillpayamonthlyincomeifyoubecometotallydisabled.

Dismembermentbenefitsmaybeattachedtoalifeinsurancepolicy,too,mostfrequentlyintheformofaccidentaldeathanddismembermentbenefits.Thispaysanadditionaldeathbenefitifyoudiebecauseofanaccident.(Whentwicethefaceamountofthepolicyispaidupondeathoccurringaccidentally,suchcoveragepopularlyisknownasdoubleindemnity.However,asanyonewho'severreadadetectivenovelcanattest,anaccidentaldeathissometimeshardtodetermine.)

Thedismembermentpartofthebenefitpaysaspecifiedsumifyouloseoneormorelimbs,orsightinoneorbotheyesand,insomecases,hearingas

theresultofanaccidentalinjury.Sinceyouarestillaliveandthisisnotadeathbenefit,itisnottechnicallyaformoflifeinsurance.

Inrecentyears,theconceptsoflivingoracceleratedbenefitsandlong-termcarecoveragehavebeenshowingupincreasinglyasbenefitsattachedtolifeinsurancecontracts.Inthecaseoflivingbenefits,aportionoftheproceedsthatwouldotherwisebepayableasadeathbenefitisadvancedifyouhaveaterminaldiseaseandaneedforspecialmedicalcare.Itiswidelyacknowledgedthatthisisahumaneapplicationoflifeinsuranceproceeds,becausethefundsoftenareusedtoeasepain,sufferinganddiscomfortduringthefinalperiodoflife.Thesebenefitsusuallyareprovidedwithoutcharge,becausethepaymentofadeathclaimisimminent.

Long-termcarebenefitspayfornursingcare,homehealthcareorcustodialcare(assistancewiththetasksofdailyliving,suchaseating,bathing,dressing,etc.),whichmaybeneededfollowingaperiodofhospitalization.Thisisactuallyahealthinsurancebenefit;however,itisoftenavailableasaridertoalifeinsurancepolicy.

Whensoldasaseparatebenefit,anadditionalpremiumischargedandthebenefitwillnotaffectthepolicy'sfacevalueorcashvalue.Whensoldaspartofanintegratedplan,anadditionalpremiumisnotchargedforlong-termcarebenefits,sincetheyaresimplyborrowedfromthelifeinsurancebenefitsandaccordinglyreducetheremainingfacevalueandcashvalue.

TermLife

Thetwomostcommonformsoflifeinsurancepoliciesaretermlifeandwholelife.Thenamesareremarkablyapt.Atermlifepolicylastsforasetperiod,say10years.Ifyoudieduringthat10-yearterm,thepolicywillpay.Ifyoudon't,itexpiresandthat'sthat.

Awholelifepolicylastsforyourwholelife.Youabsolutelywilldieduringthepolicyperiodforawholelifeinsurancepolicy(althoughmostwillpayyouthebenefitbeforeyoudie,ifyoulivetobe100).

Typically,termlifeinsuranceprovidesprotectionforaperiodoffromoneto20years.Thebestwaytothinkoftermlifeisastemporaryinsurance.Awholelifepolicyispermanentinsurance.

Termproductsusuallyareusedwhenyouhaveatemporaryneed,suchasamortgage,businessobligationsoraparticularneedforincomewhenyourchildrenareyoung.

Wholelifeproductsareeffectivewhenyouhaveapermanentneed,suchastosupplementyoursurvivingspouse'sincome,coverfuneralcosts,paycapitalgainstaxes,tomakecharitabledonationsandevenpassafamilybusinessfromonegenerationtothenext.

Atermpolicydoesnotbuildanycash,loanorsurrendervalues.Itessentiallyprovidesadeathbenefitonly.

Forthisreason,itisusuallytheleastexpensiveformoflifeinsuranceandtheonemostlikelytobeusedbycash-strappedyoungfamilies.Itslowcostallowsyoutobuyhigherlevelsofcoverageatayoungerage,whenyourneedforprotectionisoftengreatest.

Ofcourse,itwouldbesimplyiftherewereonlyonekindoftermlifetoconsider.Instead,therearethree.Leveltermprovidesaconsistentamountofinsurancethroughoutthepolicyperiod.Decreasingterm,whichisagoodtypeofinsurancetousetocoverashrinkingdebtobligation(suchasamortgage),startswithaspecifiedfaceamount,whichdecreasesannuallyuntilitreacheszerowhenthepolicyexpires.Increasingtermprovidesagrowingamountofinsurance,buttheneedforthistypeofprotectionisrare.

Sometermpoliciesarerenewable.Thebenefithereisthatyoudon'tneedtoprovetotheinsurancecompanythatyouarestill''insurable"(youwouldn'thavetomentionyournewheartcondition,forinstance)torenewthepolicy.But,eachtimeyourenew,thepremiumswillbehigherbecauseyouareolderand,therefore,morelikelytodieduringthepolicy'sterm.

Manytermpoliciesarealsoconvertible,whichmeanstheymaybeexchangedforanothertypeoflifeinsurance.Choosingaconvertibletermlifepolicyisonewaytomakesureyouwillbeabletogetpermanentcoverageatalatertime,withouthavingtoprovethatyouarestillinsurable.

Youwon'twanttostickwithtermlifeinsuranceforyourentirelife(assumingthatyoulivealongtime).Bythetimeyoureach70or80yearsofage,thepremiumsforatermpolicyusuallyapproachtheface

amountoftheinsurance,becausetheinsurancecompanyfiguresyou'regoingtodiesoon.

WholeLifeInsurance

Wholelifeinsurance,sometimescalledstraightlifeorpermanentlife,isprotectionthatcanbekeptaslongasyoulive.Thisiswhatistypicallythoughtofastraditionallifeinsurance.Itenablesyoutopaythesamepremiumovertheyearsaveragingthecostofthepolicyoveryourlifetime.

Wholelifeinsurancebuildsacashvalueasumthatgrowsovertheyears,tax-deferred.Ifyoucancelthepolicy,youreceivealumpsumequaltothisamount(andyoupaytaxesonitonlyifthecashvalueplusanydividendsexceedsthesumofthepremiumsyoupaid).Ifyouneedtostoppayingpremiumsduetoatemporaryfinancialcrisis,youcanusethecashvalueinthepolicytopaythosepremiumsforaperiodoftime.Youalsocanwithdraw

partofthecashvalueintheformofapolicyloan.(Ifyoudiebeforerepayingit,theloanandanyinterestdueisrepaidfromthedeathbenefitamount.)

Thefaceamountinawholelifepolicyisconstant,andthisamountispaidifyoudieatanytimewhilethepolicyisineffect.Thepolicyisdesignedtomaturewhenyoureach100yearsofage.Ifyoudolivetobe100,youwon'thavetopayanymorepremiums,andthepolicy'scashvaluewillbeequaltothefaceamount.So,theinsurancecompanyusuallywillpayyouthefaceamounteventhoughyou'restillalive.

Althoughwholelifepoliciesareamongthemostcommonformsofinsurancesold,mostindividualsdonotplanonpayingpremiumsuntilage100.Morecommonly,wholelifeinsuranceisusedasaformoflevelprotectionduringtheincome-producingyears.Atretirement,manypeoplethenbegintousetheaccumulatedcashvaluetosupplementtheirretirementincome.

Wholelifeinsuranceplaysanimportantroleinfinancialplanningformanyfamilies.Inadditiontothedeathbenefitoreventualreturnofcashvalue,awholelifepolicyhassomeothersignificantfeatures.

Forinstance,itmaypaydividends.Whetherornotisdoesistheprimarydifferencebetweenaparticipating(par)policy,issuedbyamutuallifeinsurancecompany,andanonparticipating(non-par)policy,issuedbyastocklifeinsurancecompany.Aparticipatingpolicyisoneinwhichthepolicyholdersreceivedividends(ifadividendisdeclared).

Manypeopleusethesedividendstobuyadditionalamountsofinsurance,insteadoftakingthecash.Thisisreallynodifferentthantakingafewextradollarsoutofyourpocketandmakingaseparate

purchase.Still,dividendsareoftenasuccessfulsalestool,becausesomepeopleliketheideaofgettingsomethingextrabackeventhoughthey'vepaidmoreinitially.

Oneofthebenefitsofawholelifepolicyisthatitguaranteesthelevelofpremiumsyoupay,thedeathbenefitandthegrowingcashvalueswithinthepolicy.Italsoguaranteestheinterestrateonanyloansyoutakeoutagainstthecashvalueofthepolicy.(Whileyoualsocangetabankloanusingthecashvalueofthepolicyascollateral,theguaranteedinterestrateinthepolicymaybemuchlowerthanthatavailablefromabank.)Theonlyfeaturethatisnotguaranteedisadividendinaparticipatingpolicy.

UniversalLifeInsurance

Anothercommonformoflifeinsuranceisuniversallife.Withthiskindofpolicy,youmaypaypremiumsatanytime,ofvirtuallyanyamount,sub

jecttominimums.Theamountofcashvaluethepolicybuildsisbasedbothonthepremiumspaidandontheinterestearned.Theinsurancecompanysubtractsmoneyfromthefundeachmonthtocoverthecostoftheinsuranceandexpenses.

Whileuniversallifepoliciesbuildcashvalue,theyseektocompeteintheterminsurancemarketplace.Theyofferstandardratesthatcanbesubstantiallycheaperasmuchas30percentormorethanstandardrateschargedbyinsurancecompaniesforcomparabletermcoverage.

Someuniversallifepoliciesfeatureprogressiveunderwriting(whichmeansit'seasiertogetcoverage,evenifyoudon'tlookinsurableonpaper).Thesepoliciesusuallyarestructuredsothatifyoupaythelevelminimumannualpremiums,coveragewon'tlapsefor15or20years.

Anotherformofthisinsuranceisvariableuniversallife.Itprovidesdeathbenefitsandcashvaluesthatvaryaccordingtotheinvestmentreturnsofstockandbondfundsmanagedbythelifeinsurancecompany.Thesepoliciesalsoallowyousignificantdiscretionregardingthepremiumspaideachyear.

Formanypeople,variableuniversallifeisasmuchaninvestmenttoolasatrueinsurancetool.

Targetpremiumsarefixedinthefirstyearbutpolicyholders,becauseoftheflexiblenatureoftheproducts,arenotcontractuallyentitledtothoseamountsinsubsequentyears.Infact,targetpremiumsforvariableuniversallifeinsuranceareamongthehighestintheindustry.Thisiswhymarketerssellvariableuniversalsoaggressivelybecausetheircommissionsareoftenbasedontargetpremiums,sotheycanmakemoresellingthisthananyotherkindoflifeinsurance.

Insomecases,thecostbasisofvariableuniversallifebecomestoo

uncertainformostpeoplebecauseoftheopen-endedmethodofpremiumpayment.There'stroubleiftheinsurancecompanycan'tprojectcosts.

ChoosingtheRightKind

Determiningwhattypeandamountoflifeinsuranceisrightforyourequiressomecarefulthoughtand,itsometimesseems,asecretdecoderring.

Inadditiontotermlife,wholelifeanduniversallifepolicies,thesedays,thereareanumberofderivativeinsuranceproducts,manyofwhicharemarketedbyaggressivesalespeople.Theseproductsusuallyarebasedonthethreemajorkindsofinsurance,butthey'recomplex.Theyusuallyhavebeen

designedtofitextremelyspecializedsituationsandoftendon'tmakesenseformostconsumers.

Tohelpyoumakeaninformeddecision,we'llconsiderwhenyouwouldwanttopurchaseatermlifeorawholelifepolicy.Thenwe'lltakealookatsomeofthehybridsonthemarket.

Thedebateoverwhethertermlifeorwholelifeisthebetterdeallikelywillgoonaslongasthereisinsurance.Peoplewhobelievein(andoftensell)termswearwholelifeisarip-off.Peoplewhobelievein(andoftensell)wholelifeswearthattermistherip-off.

LiketheLilliputiansinGulliver'sTravelswhowenttowaroverwhichendtheycrackedfirstwheneatinganegg,bothsidesmayseemobsessedwithtrivia.Buttherearesomeimportantdifferencesbetweenthetwokindsofpolicies.

Anoldinsuranceindustryruleofthumbholdsthatpeoplewhorenttheirhousestendtobuyterminsurance,andpeoplewhoowntheirhousestendtopurchasewholelife.There'ssomelogicbehindthis.Thefactorsthatinfluencesomeonetorentaretypicallythatheorsheis:

shortoncash;

intransitionnotsettledinjob,familyorplace;

facingfinancialuncertainty;

notinapositiontomakelong-termcommitments;

interestedininvestingmoneyinotherways.

Thesearethesamereasonspeoplegivetoexplainwhytheypurchasedterminsuranceinsteadofwholelifeinsurance.

Otherfactorsinfluencepeopletobuyahome.Thesewhicharesomeofthesamereasonspeopleforbuyingwholelifetypicallyinclude:

beliefinowningandbuildingequity;

focusonlong-termthoughtsandplans;

sufficientstabilitytomakecommitments;

adesiretoaccumulatewealthandbuildsavings;

aneedfortaxbenefits;

adesiretoaccomplishfinancialgoalsduringworkingyears;

adesiretopasswealthandassetsontochildren.

Thefollowingquestionnairewillhelpyoudecidewhichcategoryofinsurancewouldbebestforyou.

AreYouaTermoraWholeLifeBuyer?AvailableCashDoesyourcurrentcashflowallowyoutosavemoney? YesNoIfyouranswertothisquestionis"no,"thenterminsuranceisyouronlyoption.AvailableSavingsAreyouconsistentlysavingeverymonth? YesNoAreyousavingasmuchasyouthinkyoucouldifyouhadasystematicplan?

Ifyouanswered"no"tothesequestions,thenthesystematicsavingsfeatureofcash-value(orwholelife)insurancemaybeofinterest.SpecificSavingsGoalsDoyouneedtostartorincreaseyourretirementsavingsplan? YesNoNotApplicableDoyouneedtostartorincreaseyourcollegesavingsplanforthechildren?YesNoNotApplicableIfyouanswered"yes,"thenthetax-freeaccumulationinsideawholelifepolicymaybeinterestingtoyou.RetirementandTax-FreeIncentivesAreyouinahightaxbracket? YesYesDoyouplantowork10ormoreyearsbeforeretiring? YesNoIfyouanswered"yes,"thenwholelifeprobablymakesthemostsenseforyou.

Wholelifeandothercash-valuelifeinsurancemakesthemostsenseforpeopleinhighertaxbracketsandforpeoplewhoareplanningtokeepthecoverageformorethan10years.

Incontrast,eventhemoststructuredkindoftermpolicywillofferyouasteadypriceforafewyearsbuttheinsurancecompanycanraisethepremium(sometimes900percent...ormore)ifyoudon'tpassamedicalexamattheendoftheterm.

TroublesWithTerm

Themostimportantrightyouhaveinalifeinsurancepolicyistherighttokeepthepolicyinforcewithoutrestrictionsordramaticpremiumincreases.Sometermpoliciesareguaranteedrenewableandsomearenot.Somerequireaphysicalattheendofthetermandsomedon't.

Ifthecompanyrequiresyoutopassamedicalexaminationtoavoidapremiumincreaseinthefuture,youhaveassumedabigrisk.Yougetadiscountfortakingtherisk,butisitworthit?

Somecriticsofterminsurancearguethatterminsurancecompaniesreducethepremiumforafewyearssothattheycancoerceyouintoamedicalexaminationinthefuture.Thisviewmaybeextreme,butthereisanelementoftruthtoit.Manyconsumersareseducedbythelowpremiumsonpoliciesthatrequiremedicalrequalificationtomaintainareasonablepremium.

Toavoidthiskindofproblem,askthefollowingquestionsaboutanytermpolicyyou'reconsidering:

IfIdon'tpassthemedicalrequalification,whatwillthepremiumsbe?

Aretheywritteninthecontract?Aretheyguaranteed?

Ifyou'rerequiredtotakeandpassamedicalexaminordertoavoiddramaticincreases,howextensiveistheexam?

Whatstandardsofunderwritingwillbeappliedatthattime?

Willtheunderwritingstandardsbethesameforrequalificationasfornewapplicants?

Willthereonlybea"pass"or"no-pass"standard,orwilltherebearangeofratings?

Iftheanswerstothesequestionsaren'tinwritinginthepolicy,getanotherpolicy.

MoreHelpDeciding

Youdon'thavetohaveanin-depthunderstandingoflifeinsurancetoeliminatesomeoptions.Hereareafewscenariosthatmayhelpyouto

decidewhichkindofcoverageisrightforyou.

Ifyou'reyoungandhaveafamilyandyou'rebroke,atermpolicyiswhereyoustart.

Ifyou'reayoungfamilytryingtosavemoneybuthavingatoughtimeatit,amixoftermandcashvalueinsurancemightbeideal.

Ifyou'redivorcedandneedto(orarerequiredto)maintainlifeinsuranceuntilyourchildrenaregrown,aleveltermpolicyforthenumberofyearsnecessarywillbestfulfillthisneed.

Ifyouneedlifeinsuranceforfewerthan10years,terminsuranceisabetterchoice.Ifyouclearlyneeditformorethan15years,wholelifeorcashvaluewinstherace.Ifyouneeditforonly10to15years,it'satoss-up.

Forpeopleover60,termisrarelyuseful,becausepremiumsquicklybecomeunaffordable.

Thehigheryourtaxbracket,themorevaluablewholelifeorothercash-accumulatinginsurancewillbeifyouproperlyunderstandit.

Ifyou'vedecidedtostartacollegesavingsplanforyourchildrenorgrandchildren,arapidlyaccumulatingcash-valuepolicymightbebest.

Ifyou'reinyourfortiesandrealizethatyouneedtoincreaseyourretirementsavings,severaltypesofcash-accumulatingpolicieswillmakesense.

Ifyou'reover60andneedlifeinsurancetopayestatetaxes,you'llalmostcertainlyneedacash-accumulatingplan.

Ifyou'reanactiveinvestorunder50andwanttoaccumulatecashforretirement,avariableuniversallifeplanmaybeofinterest,becauseyougettocontroltheinvestment.

Ifyouareanequityinvestor,youcanusecash-valuelifeinsuranceastheliquidpartofyourtotalportfolio.

Whateveryoudo,don'tbuyapolicythatyouareafraidyoucan'tcontinue.Cash-valueinsuranceonlymakessenseifmaintainedformorethan10years.

Whyiscash-valueinsuranceapoorshort-terminvestment?Thecostsofoperations,commissions,marketing,etc.,areloadedintothefirstfewyearsofthepolicy.Therefore,thecashaccumulatesslowlyat

first.

Whyiscash-valueinsuranceagoodlong-terminvestment?Thecashaccumulatestax-free.Therefore,forpeopleinhighertaxbracketswhoneedtheinsuranceformorethan15years,cash-accumulatingpoliciesarethemostcost-effective.

Youhavetodecideforyourselfonwhichsideofthisissueyourcircumstancesplaceyou.It'susuallyfairlyclearwhetheryouneedtermorcash-valuelifeinsurance.

Thefollowingchartwillhelpyoucomparecostsforthreekindsofpoliciesterm,wholelifeandablendofterm/wholelife.

Termvs.WholeLife

FinancialComparisonfor30YearsInsuranceAlternativesfora40-Year-OldMaleInsuranceBenefit:$100,000

AnnualOutlay

Term(PlanA)

BlendedTerm/WholeLife

(PlanB)

WholeLife

(PlanC)

Year1 $159 $1,287 $1,884Year10 194 1,287 1,884Year11 249 1,287 0Year20 525 1,287 0TotalOutlay(Age40-76) $16,111 $46,314 $18,840OngoingInsurance $0 $238,713 $160,303CashValue $0 $174,257 $110,038AnnualLifetimeIncome

$0 $17,406 $11,038

PlanA:Premiumincreasesannually.Insuranceendsatage70.PlanB:Levelpremiumpayments.PlanC:Levelpremiumpaymentsforonly10years.Thesefiguresareforillustrationpurposesonly.

AFewoftheHybrids

Ifthedecisiontobuytermorwholelifeseemscomplicated,thenyou'renotgoingtolikewhatcomesnext.Notonlyaretherecombinationsofthetwo,therearealsoaplethoraofderivativeorhybridpoliciesonthemarketnow,sinceinsurancecompanieshavebeenscramblingtocreateproductsthatwillmeetparticularneedsormarketniches.

Someofthesepoliciesofferadditionalbenefits.Someofferadditionalnon-insurancebenefits.Somewillbeappropriateforfirst-timeinsurancebuyersbutmostwillnot.

Wecouldn'tpossiblydiscussallthedifferentkindsoflifeinsuranceproductshere.(Itsometimesseemsasifeverylifeinsurancecompanyhasatleastoneuniquepolicy.)Butwewillconsidersomeofthemostcommoncombinationandderivativeproducts.

FamilyIncomePolicy

Oneofthemostpopular,andperhapsmostuseful,ofthecombinationlifeinsurancecontractsisthefamilyincomepolicy.Thispolicycombineswholelifeinsurancewithdecreasingtermcoverage.Thetermportionofthecoverageprovidesmonthlyincomebenefitsforthefamily,andthewholelifepartofthepolicyprovidesalumpsumpayment.

Somefamilyincomepoliciessplitthelumpsumintotwoparts.Inthiscase,one-halfthepolicy'sfaceamountwouldbepaiduponyourdeath,toassistinpayingforthefuneralexpensesandthecostsofthelastillness.Thiswouldthenbefollowedbyincomepaymentstoyourdesignatedbeneficiary(orbeneficiaries)foraperiodofyearsassumingthetermpartofthecoveragehadnotexpired.Attheendofthepaymentperiod,therewouldbeanotherlumpsumpaymentequaltoone-halfthefaceamountofthepolicy.

So,afamilyincomepolicyhastwotimeelements.Thefamilyincomeportionofthepolicycorrespondstothedecreasingtermtimeperiod.Thebase,orlumpsum,partofthepolicyisusuallywholelifethus,somedegreeofprotectionisprovidedforyourwholelife.

Thefamilyincomepolicyfulfillstheneedforhigheramountsofcoverageduringtheinitialchild-rearingyears.Whenyourchildrenbecomeself-supporting,theneedforprotectionandcoverageusuallyisreduced(unlessyoubegincaringforelderlyparentsatthatpoint).

JointLifePolicies

Jointlifepoliciesarewholelifecontractswrittenwithtwoormorepersonsasnamedinsureds.Forinstance,youandyourspousemightdecidetopurchaseajointlifepolicy.

Mostcommonly,thepolicyisissuedinthiswaywiththeinsuredamountpayableonthedeathofthefirstinsuredonly.

However,somepoliciespayonbothdeaths.Someevenpayonthefirstdeathandthenincreasetheamountofcoverageontheremaininginsuredorinsureds,sothatthetotalcoverageremainsthesame(usuallyforbusinessinsurancepurposes).

Typically,ajointlifepolicywillprovideaconversionorexchange

privilegeforthesurvivinginsured,sothatpersoncancontinuethecoverageonhisorherlifefollowingthedeathoftheotherinsured.

Avariationonthejointlifepolicyisthelastsurvivorpolicy.Itpaystheinsuredamountnottothebeneficiariesofthefirstinsuredtodie,buttothoseofthelast.

ModifiedLife

Modifiedlifeistypicallyawholelifeproductthatispurchasedataverylowpremiumforashortperiodoftime(threetofiveyears)followedbyahigherpremiumforthelifeofthepolicy.Thepolicymaybeacombination

withtermforthemodifiedperiod,convertingtoawholelifepremium.Inthisway,premiumsarelowerthanaverageduringthemodifiedperiodandslightlyhigherthanaverage(tomakeupfortheearlydeficit)thereafter.

Generally,thistypeofpolicyissoldtopeoplewhowantwholelifebut,forthenextfewyears,willbeunabletopaythetypicalpremium.

Gradedpremiumwholelifeissimilartomodifiedwholelifeinthat,initially,thepremiumisverylow.Unlikemodifiedlifewhichincreasestoahigherlevelpremiumforthelifeofthecontract,gradedpremiumpoliciesprovideforanincreaseinpremiumeachyearforthefirstfiveto10yearsofthepolicy.Afterthisstepratedpremiumperiod,thepremiumremainslevel.

Gradedpremiumandmodifiedlifepoliciesdobuildcashvaluebuttheamountofcashvalueisusuallylessthanforastraightwholelifepolicy,becauseofthesmalleroutlayofpremiumupfront.Typically,agradedpremiumpolicywillhaveverylittle,ifany,cashvalueduringthegradedpremiumperiod.

DepositTermInsurance

Incontrast,depositterminsuranceisalevelterminsurancepolicythathasamuchhigherpremiumforthefirstyearthanforsubsequentyears.Theinitialpremiumissignificantlyhigherthantheaveragepremiumneededtocoverthecostofmortalityduringthetermperiod.

Theexcessfrontendpremiumthedepositisthensetasidetoearninterest,andthesedollars(thedepositplusinterest)willbeappliedtoreducethepremiumpaymentsrequiredinthefollowingyears.Thepremiumlevelsaresetsothattheentiredepositwillbeexhaustedwhenthefinalannualpremiumispaid.Ineffect,thisarrangementprovidesamethodofpayingaportionofthepremiuminadvance.

Example:Theannualpremiumfora10-yearleveltermpolicymaybe$500(atotaloutlayof$5,000).Thesametypeofpolicymaybepurchasedasadeposittermcontractforaninitialpremiumof$2,500,followedbyannualpremiumsof$200(atotaloutlayof$4,300).Theinitialdepositandinterestareusedtomakeupthedifferenceinpremium.Mathematically,theinsurancecompanyactuallyreceivesanequalamountofpremiumforthesetwopolicies,whenthetimefactorandinterestearningsaretakenintoaccount,butyougetadiscountof$700.

Split-LifePolicy

Thesplit-lifepolicyisacombinationofawholelifeoratermlifeinsurancecontractandanannuitycontract,whichprovidesasavingsfeature.(We

gointoannuitiesinmoredetailinChapter16.)Thissavingsfeatureisaretirementannuitytoage65,andthelifeinsurancefeatureisusuallyyearlyrenewableterminsurance.

Thesaleofthesplit-lifepolicyhasnotbeenapprovedinallstates,becauseitseemstodiscriminateinfavorofthoseindividualswhopurchaseannuities.Thosewhodonotpurchaseanannuityalongwiththeirlifeinsurancedonotreceivethesamelowcostbenefitsasthosewhodo.

Theinsurancecontractmayberenewedaslongastheannuitypremiumcontinuestobepaid.Themostcommonamountofcoveragefoundisupto$10,000ofterminsuranceforeach$10ofannuitypremiumpaid.

AdjustableLifeInsurance

Anadjustablelifepolicyoffersyoutheoptionofadjustingthepolicy'sfaceamount,premiumandlengthofprotectionwithouthavingtocompleteanewapplicationorhaveanotherpolicyissued.Thiskindofinsuranceintroducestheflexibilitytoconverttoanyformofinsurance(suchasfromtermtowholelife)withoutadding,droppingorexchangingpolicies.

Adjustablelifeisbasedonamoneypurchaseconcept.Thequestion,then,isnotsomuchwhichtypeofpolicyyoubuy,butratherhowmuchmoneyyouwillspend.

Example:IfBetty,whois25,saysshecanaffordtopaya$500annualpremium,anadjustablepolicymaybemostlytermforthefirstfewyears,thenablendoftermandwhole,thenfinallyawholepolicyseveralyearslater.BythetimeBettyis50andplanningforretirement,thesame$500premiumwouldbeusedforsomeformofpermanentinsuranceprotectionwithguaranteedcashvalues.

Thistypeofpolicyisflexible,butifyoumakeanadjustmentthatresultsinahigherdeathbenefit,proofofinsurability(thatis,arelativelycleanbillofhealth,asdeterminedbyaphysical)mayberequiredfortheadditionalcoverage.

IndustrialLifePolicy

Theindustrialpolicyiswrittenforasmallfaceamount,usually$1,000orless,andthepremiumsarepayableasfrequentlyasweekly.ThiscoveragederivesitsnamefromthefactthatitwasoriginallysoldinEnglandtotheindustrialclassoffactoryworkers.

Ifyouboughtanindustrialpolicy,youwoulddeterminehowmuchyoucouldpayeachweek,andthiswoulddeterminethefaceamountofcoverage.

Traditionally,acompanyrepresentativewouldcallonthepolicyownereachweek,usuallyathome,tocollectthepremium.Thepolicybenefitusuallywasusedtopayforfinalillnessandburialexpenses.Grimstuff.

Sellingpoliciesthiswayisveryexpensivefortworeasons.First,themortalityratesarehighforindustrialpolicyholders;thesepeopletendtohavehigher-than-averagehealthrisksandpoorer-than-averagelivingstandards.Second,havinganagentcollectthepremiumeachweekboostsoverheadcosts.

Themarketforindustriallifehasdecreasedconsiderablyoverthelastseveraldecades.Today,industrialliferepresentsabout1percentofalllifeinsuranceinforce.

However,avariationontheindustriallifeconcept,knownashomeservicelifeinsurance,hasemergedrecently.Policiesareusuallymodestinsize,rangingfrom$10,000to$15,000infacevalue,andtheyoftenaresoldasamonthlydebitplan(thepremiumsarepaidviaautomaticwithdrawalfromyourbankaccount).Ingeneral,thesepoliciesaremoreexpensiveperdollarofcoveragethanstandardtermlifepolicies.

CreditLifeInsurance

Ifyou'repayingoffaloan(ortwo...orsix)orhavesomecreditcarddebttocontendwith,yourunexpecteddeathcouldcreateseriousfinancialproblemsforyourfamily.Creditlifeinsuranceprovidesthat,intheeventofyourdeath,theoutstandingbalanceswillbepaidoffinfull.

Creditlifeinsurancecanbewrittenonagroupbasisorinindividualcreditlifepolicies.Itusuallyiswrittenasadecreasingtermtypeofcoverage,sotheamountofinsuranceshrinksastheamountofthe

debtshrinks.Levelterminsurancealsomaybewritten,whichwouldremainlevelforthetermofthepolicy(appropriate,forexample,ifyoutypicallylivewithacertainamountofcreditcarddebt).

Withthissortofinsurance,youpaythepremium.Ifyoudie,thebenefitsarepaidtoyourcreditortoreduceorextinguishyourdebt.Itisnotusuallythemostcost-effectiveformofinsurance.

Andit'snotmeanttobe.Thesepoliciesareoftenaddedtothefinancecontractforamajorpurchasesothat,ineffect,theinsurancepremiumisbeingfinancedalongwiththeitembeingpurchased.

RidersandOtherModifications

Onemechanismthatsmartconsumersusetotailorinsurancepoliciestotheirneedsistheuseofridersandothermodifications.Thisway,youcanbuy

amorebasicpolicyandcustomizeityourself,ratherthanhavingtotakesomebenefitsyouwantalongwithsomeyou'drathernotpayfor.

Riderscanbeusedtoenhanceoraddbenefitstothepolicy,ortheycanbeusedtotakeawaybenefitsfromthepolicy.

Ridersusuallyrequirethepaymentofarelativelysmalladditionalpremiumforthebenefitsprovided.Amongthemostcommonkindsofriders:

AccidentalDeath(DoubleIndemnity).Thisprovidesanadditionaldeathbenefitandadismembermentbenefitforlossofcertainbodyparts,ifthedeathorthelossisduetoanaccident.Theaccidentaldeathbenefit,usuallyreferredtoastheprincipalsum(therider'sfaceamount),paysanadditionaldeathbenefitifthecauseofdeathisduetoanaccidentasdefinedbythepolicy.Usually,deathmustoccurwithin90daysoftheaccidentforthebenefittobepaid.

Theinsurancecompanymayelecttohaveaveryliberaldefinitionofaccidentaldeathoraverystrict,limiteddefinition.Regardless,ifadeathclaimissubmitted,itmustcomplywiththepolicy'sdefinitioniftheadditionalaccidentaldeathbenefitistobepaid.

Example:Johnhasa$10,000wholelifepolicythatcontainstheaccidentaldeathrider(doubleindemnity),whichalsohasa$10,000value.Ifheiskilledaccidentallyasdefinedbythepolicy,thetotaldeathbenefitwillbe$20,000.

WaiverofPremium.Thisprovidesthat,intheeventoftotaldisabilityasdefinedbythepolicy,premiumsforthepolicywillbewaivedforthedurationofthedisability.Therideristemporary,inthatitusuallyexpiresatage65.

Thereisusuallyasix-monthwaitingperiodbeforetherider'sbenefitsarepayable.Thismeansthatyoumustbetotallydisabledforsixmonths(afewinsurancecompaniesrequireonlythreemonths),andthenfuturepremiumswillbewaivedforthedurationofthetotaldisability.

AvariationonthisriderisWaiverofPremiumwithDisabilityIncome.Thesameconceptapplies,butthisrideralsowillpayaweeklyormonthlydisabilityincomebenefit.

GuaranteedInsurability.Thisguaranteesthatatspecifieddatesinthefuture(oratspecifiedagesorupontheeventofspecifiedoccurrences,suchasmarriageorthebirthofachild),youmaypurchaseadditionalinsurancewithoutevidenceofinsurability.Therateforanyadditionalcoveragepurchasedwillbebasedonyourattainedage,nottheageatwhichthepolicywasissued.

Theamountofinsuranceontheoptiondatesusuallyislimitedtotheamountandtypeofthebasepolicy.Forexample,ifyouhada$10,000wholelifepolicywiththeguaranteedinsurabilityrider,youcouldpurchaseuptoanadditional$10,000ofwholelifecoverageontheoptiondates.

Thebiggestadvantageofferedbythisrideristheopportunitytobuyadditionalamountsofinsuranceasyourresponsibilitiesandneedschange,withoutproofofinsurability.

Theoptiondatesareusuallythepolicyanniversarynearestyourbirthdayatages25,28,31,34,37and40.Inaddition,marriageandthebirthofchildren(whenyouarebetweentheagesof25and40)alsotriggeradditionaloptions.

ReturnofPremium.Thisriderwasdevelopedprimarilyasasalestooltoenablethesalespersontosay,''Inadditiontothefaceamountpayableatyourdeath,wewillreturnallpremiumspaidifyoudiewithinthefirst20years."Theriderissimplyanincreasingamountofterminsurancethatalwaysequalsthetotalofpremiumspaidatanypointduringtheeffectiveyears.Technically,theriderdoesnotreturnpremiums,butpaysanadditionalamountequaltopremiumspaidtodateofdeath.Thepolicyownerwhopurchasestheriderissimplybuyingadditionalterminsurance.

ReturnofCashValue.Thisseldom-usedriderwasdesignedtooffset

thecommonthoughinvalidcomplaint,"WhenIdie,thecompanyconfiscatesthecashvalue."Thiscomplaintisbasedonlackofunderstandingofthemathematicsinvolvedinalevelfacevaluelifeinsurancepolicy.However,ifthesalespersoncansay,"Wecanattachariderreturningthecashvalueinadditiontothefaceamount,"theobjectionismoreeasily

answeredthanifitisnecessarytoexplainthemathematicsinvolved.

Thereturnofcashvalueriderissimilartothereturnofpremium,inthatitismerelyanadditionalamountofterminsurancethatisequaltothecashvalueatanypointwhileeffective.Ifyoubuyit,youaresimplygettingadditionalterminsurance.

CostofLivingAdjustment.Thisriderisimportanttopeoplewhoareinapositiontobeimpactedstronglybyinflation.Becauseofthehigh-inflationyearsofthe1970s,manypolicyownerswereconcernedthatthefaceamountsofpoliciespurchasedwouldnotbeadequatetocoverexpensesbythetimethedeathbenefitwaspaid.Thecostoflivingriderchangesthefaceamountofthepolicyeachyearbyastatedpercentage,suchas5percent.Thisamountiscompoundedannually.

Thisridercanbeusedtobothincreaseanddecreasethefaceamountofthepolicy,dependingonthatyear'scostofliving.Therearelimitsonhowmuchthefaceamountcanbedecreased,however.

AdditionalInsureds.Theseridersarecommonlyattachedtolifeinsurancepoliciestoprovidecoverageonthelivesofoneormoreadditionalpeople.Usually,theseareterminsuranceriderscoveringaspouse,oneormorechildren,orallfamilymembersinadditiontothenamedinsured.Manycompanieswillissueadditionalinsuredridersonrequest.Somecompaniesactivelymarketcombinationcoveragepoliciesforfamilymembersasafamilyprotectionpolicy.

LivingNeed.Thisriderisarecentdevelopmentinlifeinsurance.Itallowsaterminallyillindividualtoobtainpartoftheinsuranceproceedspriortodeath.Tobeeligibleforthisbenefit,youmustpresentmedicalproofofaterminalillness.Mostcompaniesofferingthisbenefitwilllimittheamountoftheinsuranceproceedsthatmaybepaidinthismanner.Companiesusuallydonotchargeanadditional

premiumforthisrider,becauseitisanadvanceagainstthedeathproceedsforwhichyouarealreadypayingpremiums.

Acaveat:Sometimescompaniesofferawidevarietyofridersandoptionsassalestoolstoallowasalespersontofocusontheridersanddistractyourattentionfromthepoorqualityofthecompanyandthebasicproduct.Bewareofagentspushingtheuniquebenefitsandridersascompellingreasonstobuyalifeinsurancepolicy.

ExclusionsandLimitations

Lifeinsurancepoliciesmaycontaincertainexclusionsorrestrictions.Themainexclusionsare:

Suicide.Initially,lifeinsurancecontractsexcludedtheriskofsuicideentirely.Thisexclusionleftdependentswithoutprotection,whichdefeatedthepurposeofpurchasinginsurance.Also,itwasincorrecttoexcludesuicidecompletely,becausedeathbysuicideisincludedinthemortalitytablesuponwhichpremiumsarebased.So,themajorityoflifeinsurancepoliciesissuedtodaycontainatimeprovisionthatrestrictsliabilityintheeventofsuicide.Usually,thetimelimitontherestrictionistwoyears,although,occasionally,itisonlyoneyearorless.Atypicalprovisionisthatintheeventofsuicidewithinthisperiod,theliabilityofthecompanyshallberestrictedtoanamountequaltothetotalofpremiumspaid,withoutinterest,lessanyindebtedness.

Aviation.Inthepast,aviationexclusionswereverycommon.Today,thistypeofexclusionisrarelyfoundinlifeinsurancepolicies.Amongthetypesofaviationrestrictionsstillfoundare:

1)Exclusionofallaviation-causedor-relateddeaths,exceptthoseoffare-payingpassengersonregularlyscheduledairlines.Somepoliciesdonotincludethephrase,regularlyscheduledairlines,thuscoveringnonscheduledflightsalsobutonlyforafare-payingpassenger.

2)Exclusionofdeathsinmilitaryaircraftonlyordeathwhileon

militarymaneuvers.

3)Exclusionofpilots,crewmembers,studentpilotsand(sometimes)anyonewithdutiesinflightorwhiledescendingfromanaircraft(forexample,parachuting).

Companiesusinganyoralloftheserestrictionswillaffordcoverageofcivilaviationdeathsforanextrapremium.The

exclusionsorrestrictionsapplyonlytothoseunwillingtopaytheextrapremiumrequiredandtomilitaryduties.

WarandMilitaryService.Inwartime,ithasbeencommonforcompaniestoincluderestrictionsthatlimitthedeathbenefitpaidtoarefundofpremium,plusinterestusuallyorpossiblyanamountequaltothepolicy'scashvalue.Also,inthepast,thepolicy'sbenefitsoftenweresuspendedduringawaroranactofwar.(ThetermactofwarhasbeenusedtodescribetheKoreanandVietnamconflicts.)

Traditionally,therearetwotypesofrestrictionsorclausesthatmaybeused.Thestatusclauseexcludesthepaymentofthedeathbenefitwhiletheinsuredisservinginthemilitary.Theresultsclauseexcludesthepaymentofthedeathbenefitiftheinsurediskilledasaresultofwar.Today,mostinsurerswillprovidesomeformoflifeinsurancecoverageforthoseonmilitaryduty.

HazardousOccupationsandAvocations.Bytoday'sunderwritingstandards,fewapplicantsaredeclinedlifeinsurancebecauseoftheiroccupations.Forexample,firefightersandpolicepersonnelcanpurchaselifeinsuranceatstandardrates.Evencommercialairlinepilotsusuallycanpurchaselifeinsurance(althoughpossiblyathigher-than-standardrates).

Muchoftheunderwritingattentionisfocusedonavocations,orhobbies.Ifyouparticipateinahazardoushobbysuchasautoracing,skydiving,scubadiving,etc.thentheamountofinsurancethatcanbepurchasedmaybelimited,oranextrapremiummaybechargedduetotheadditionalrisk.Dependingonthehobby,thedeathbenefitalsomaybeexcludedifdeathisaresultofthehazardousavocation.

ProvisionsNotPermitted

Moststates'insurancedepartmentshavemadecertainprovisions

illegalinlifeinsurancepolicies.Inmoststates,lifeinsurancepoliciesarenotpermittedtocontainthefollowingprovisions:

Aprovisionthatlimitsthetimeforbringingalawsuitagainsttheinsurancecompanytolessthanoneyearafterthereasonforthelawsuitoccurs.

Aprovisionthatallowsasettlementatmaturityoflessthanthefaceamount,plusanydividendadditions,lessanyin-

debtednesstothecompanyandanypremiumdeductibleunderthepolicy.

Aprovisionthatallowsforfeitureofthepolicybecauseofthefailuretorepayanypolicyloanorinterestontheloanifthetotalowedislessthantheloanvalueofthepolicy.

Aprovisionmakingthesolicitingagenttheagentofthepersoninsuredunderthepolicy,ormakingtheactsorrepresentationsoftheagentbindingontheinsured.(Theagentmustonlybeanagentoftheinsurancecompany.)

Further,thelawofthestateinwhichthepolicyissoldgovernsthecontract.Thepolicymaynotcontainaprovisionbywhichthelawsofthehomestateoftheinsurancecompanygovernthepolicyprovisions.

Conclusion

Inspiteofallthechoices,thebasicsoflifeinsuranceareprettysimple.Itsprimarypurposeistopayadeathbenefit,andadeathbenefitistheonefeaturethatallformsoflifeinsurancehaveincommon.Deathbenefitsusuallyarepurchasedandusedtocoverfinalexpenses,payoutstandingdebts,andprovideincomeandsecurityforsurvivors.Theyalsocanbeusedtopayestatetaxesandsetupaneducationfundforyourchildren.

Lifeinsuranceproductshaveevolvedinresponsetochangingeconomicconditionsandconsumerpreferences.Alllifeinsurancepoliciesincludesomeformoftruelifeinsuranceprotection.Manypoliciesalsoincludeothertypesofinsurancebenefitsandnon-insuranceelements.

Ifyoudon'thaveanydependentsandyoudon'townabusiness,youprobablydon'tneedlifeinsurance.Andevenifyoudohavepeoplewhoarecountingonyouforfinancialsupport,itisimportanttoinsure

onlywhatyouneedtoinsure.

Forexample,adisabilitywaiveronasmalllifeinsurancepremiumisexpensiveforwhatyoucanexpecttoget.Ifyou'reconfidentthatyou'llbeabletopaythesmalllifeinsurancepremium,evenifyoubecometotallydisabled(forinstance,ifyouhaveashort-termdisabilityincomeplanthroughworkorhavepurchaseddisabilityincomeinsurance),thenyoucanskipthewaiverandsaveyourmoney.

Anotherkeypointaboutlifeinsuranceisthatyourbeneficiarywillnothavetopaytaxesonthedeathbenefit.Thisisonewaylifeinsuranceenablesyoutoprovideanestatewithouttheburdenofestatetaxes.

KeyQuestions

1)Doyouhaveanydependents? YesNo

2)Doyouownabusiness? YesNo

Ifyouanswerednotobothofthesequestions,youprobablydon'tneedlifeinsurance.Ifyouansweredyestooneorboth,readon.

3)Doyouwanttopurchaseatermorwholelifepolicy,oracombinationpolicy?

TermWhole Combo

4)Doyouwanttopurchaseafamilyincomepolicy? YesNo

5)Doyouwanttopurchaseajointlifepolicy? YesNo

6)Doyouneedapolicythatallowsyoutopaylessmoneynowandmoreinthefuture,suchasamodifiedlifepolicy?

7)Wouldyouprefertopaymoremoneynowandlessinthefuture,suchasforadepositterminsurancepolicy?

8)Areyouinterestedinapolicythatcombineslifeinsuranceandanannuity?

9) Wouldyoulikeanyofthefollowingriders:

Accidentaldeath? Yes NoWaiverofpremium? Yes NoGuaranteedinsurability? Yes NoReturnofpremium? Yes NoReturnofcashvalue? Yes NoCostoflivingadjustment? Yes NoAdditionalinsureds? Yes NoLivingneed? Yes No

Chapter15DealingwithLifeInsuranceSalesTacticsSo,nowyouknowhowmuchinsuranceyouwant(atleastroughly).Youknowwhoyourbeneficiariesare.Andyouknowhowtocompareinsurancecompanies.

You'rereadytostartshopping.Unfortunately,thisusuallymeansdealingwithinsurancemarketers,agentsandsalespeople.

Inanincreasinglycompetitiveinsurancemarket,somecompaniesandtheiragentsorsalespeoplewillpressthelimitsoflegalandethicalsalespractices.It'suptoyoutoproceedcarefully.

ThePresentation

Agentsandsalespeoplearesubjecttoanumberoflawsandregulationsthatshouldshapetheirbehaviorduringsalespresentations.Andsomeagentsarequiteprofessionalandethical.Unfortunately,thebasicsalespresentationsthatinsurancesalespeopleandagentssometimesusecalledsalesillustrationscanbeverymisleading.

Problemscropupespeciallybecausesomecompanies:

makeoverlyaggressivereturnprojections;

arbitrarilyassumefuturemortalityimprovements(theyfudgethedeathprojections,sopeoplewilllivelongerandtheywillhavetopayfewerclaims);

compoundmortalityimprovementsintothefuture(theycarrytheirfudgingtothenthdegree);

assumefuturelapsestodramaticallyimproveprojections;

fabricatefutureearningsthathavenohistoricalbasis;and

mistreatexistingpolicyholderstoimprovefutureprojectionsfornewpolicyholders.

Financialassumptionsarethemagicofactuariesandlifeinsurancecompanies.Bychangingsmallassumptions,actuariescanmakeamouselooklikeanelephantdowntheroad.

Example:Adollarinvestedat5percenteveryyearfor40yearsgrowsto$126.Thesamedollarinvestedat10percenteveryyearbecomes$486in40years.That'sadifferenceofnearlyfour-foldcausedbyonlya5percentchangeinaperformanceassumption.

Theimportantthingtorememberisthatinsurancecompaniesarenotrequiredtomeettheprojectionsincludedinsalesillustrations.Intheend,yousimplycannotrelyonillustrationsforcomparison.

It'sfarbettertorelyonthecompany'sactualhistoricalperformancethanaparticularpolicyorillustration.Actualhistoriesareavailable.Ifacompanycannotorwillnotprovideitsinvestmentperformanceandfinancialhistoryforcomparison,lookforacompanythatwill.Ifyouragentcannotprovidethisinformation,findsomeonewhocan.

Inmanyjurisdictions,agentsalsomustprovideyouwithapolicysummaryandabuyersguidewhenyouapplyforcoverage.

Apolicysummaryisadocumentthatsummarizesthecoverages,benefits,limitations,exclusionsandtermsofthepolicyforsale.

Abuyersguideisaconsumerpublicationthatdescribesthetypeofcoveragebeingoffered,andprovidesgeneralinformationtohelpyoucomparedifferentpoliciesandreachadecisionaboutwhethertheproposedcoverageisappropriateforyou.

Evenifthesesupportdocumentsaren'trequiredwhereyoulive,youcanalwaysaskanagentorsalespersontosendthemalongwiththeapplication.Strongcompanies,whichdon'tmindusefulcomparisons,won'tmindgivingyoubackgroundinformation.Iftheagenthesitates,

beconcerned.

TheFourKeyDeceptions

Salespeopletendtousethesamesortsoftricksoverandover.Herearethefourkeyonestowatchoutfor.

One:PremiumDeception.Thelowestpremiummaybethelowestpremiumonlybecausethecompanymadeunrealisticallyaggressiveassumptions.Supposeyouarea45-year-oldmale,andhavetoldtheagentthatyouwant$500,000ofcoverageandwanttopayapremiumforonly10yearsat

whichtimethepremiumwillvanish(thatis,thepolicywillbecomeself-financingandyouwon'thavetopayanymorepremiums).Theagentshowsyoutwodifferentcompanies:

CompanyA $4,772 10-yearvanish

CompanyB $7,285 10-yearvanish

Thisappearstobeaneasydecision,right?Sameamountofinsurance,samepaymentperiod,butdramaticallydifferentpremiums.

Actually,CompanyBmaybeabetterchoice(butyouwillneedmoreinformationtoknowwhetheritis).

Whathappenswhenacompanyarbitrarilydecidestoassumepolicyholderswilllivelonger?Premiumsdropdramatically.Let'slookattheeffectonpremiumfora45-year-oldmale,basedonimprovedmortality.Male,Age45500,000FaceAmount10Payments,6.25%InterestRate

LifeExpectancy Age RequiredPremium35years 80 $7,29539years 84 $6,08243years 88 $4,772

Asinsurancecompaniestrytoout-illustrateeachotherintheirsalespresentations,somehavebegunfabricatingnewmortalitytablesthathavenobasisinreality.

Howcaninsurancecompaniesdothis?Imaginethataninsurancecompanycanshowa1percentmortalitydecreaseinthepastyear.Itcanassumea1percentdecreasecompoundedfor80yearsandsaythenewmortalityissupportablebasedonahistoricaltrend.

However,youshouldexpectsomevolatilityfromaprojectionbasedonaone-yearhistoricaltrend.

Two:CashValueDeception.Thehighestcashvalueprojectedforfive,10or40yearsinthefuturemaybetheresultofmanipulatingmortality,lapseratios,interestassumptions,expenseprojections,persistencybonuses,etc.

Sayyouarelookingattwoillustrations.Thepremiumisthesameforboth.Thefaceinsuranceamountisthesameforboth.After20years,thecashvaluesare:

CompanyA CompanyB

$69,300 $92,298

YoumightassumethatCompanyBisabettervalue.Butthere'sverylittlereasontomakethatassumption.Afast-growingprojectedcashvaluedoesn'tmeanthatthepolicywillactuallybuildthatcashvalue.Itmaysimplymeanaggressiveassumptionsontheinsurancecompany'spart.

Wholelifepremiumstypicallyassumethatthelifeinsurancecompanywillbeabletoearna4percentinterestrateonitspremiumincome.Itmayperformsubstantiallybetter,butthepremiumiscalculatedonaworst-casescenarioof4percent.Thisiswhywholelifepremiumsarehigherthanuniversallife.They'realsoguaranteedatthisrate,sotheyaresafeassumptions.

Universallifepremiumstypicallyassumeanon-guaranteedcurrentrateofinterest.Obviously,ifaninsurancecompanyassumesthatitwillearna6percentor8percentinterestrateonitsinvestment,itcanfigurethatitwillusethatmoneytocoversomeofitsoperatingcostsandcalculatealowerpremiumthanaguaranteed4percentrate.Butifcurrentinterestratesfall,thepremiumforthecurrentrateuniversallifepolicymayincreaseinthefuture.

Thiskindofinterestrateassumptionhasbeenabigproblemandabigsurprisetopeoplewhoboughtuniversallifeinsuranceinthelate1980s.Atthattime,interestratesweremuchhigher,sopremiumswerelow.Whenratesfell,policiescollapsed.

Three:VanishingPremiumIllustrationDeception.Manysmartconsumerslookforvanishingpremiums.Theseusuallyareassociatedwithwholelifeorrelatedpoliciesthatbuildenoughcashvaluein10

or15yearsthattheirdividendsandinterestincomepaythepremiums.

Buyingvanishingpremiumsisexpensiveintheshortrun,butcanmakealotofsenseinthelongrun.

Acaveat:Thelowestpremiumorshortestnumberofyearstovanishinasalesillustrationmaybetheresultofaggressiveandbaselessassumptions,liketheoneswe'vealreadyseen.

Four:HighestRetirementIncomeDeception.Asalespersoncanfalselyillustratesignificantretirementincomeimprovementsinacashvaluepolicybyonlyrunningtheillustrationtoages85,90or95ratherthantheusual100.Theinsuranceindustryhasbeensoundlycriticizedformakingprojectionslookandsoundlikereality.Onthebottomofeverysalesillustration,thelawrequiresaparagraphofdisclaimersthatsay,effectively:

Everythingyouseeisaprojection,notapromise.Thesearenotestimatesorguaranteesoffutureresults.Actualresultsmaybebetterorworseinthefuture.

Assumethey'llbeworse.

EconomicPressuresAreIntense

Alastcaveat:Asactualinterestratesfellbelowprojectionsduringthelate1980sandearly1990s,consumersbecamewaryofinterest-sensitivepolicies,likeuniversallife.Andasaggressiveassumptionswereprovedwrong,consumersfoundtheirvanishingpremiumsdidn'tvanishandtheirlevelpremiumpoliciesrequiredmoremoney.

Someinsurancecompaniesconcludedthattheyhadtocarryouttheillustrationwarinthearcaneinvisibleworldofundisclosedassumptions.Theybegantomanipulatemortalityassumptionsandlapseratios.Thesechangescanhaveabigimpactonpricingandprojectedcashvaluesyetarevirtuallyimpossibletodebunkbecausethey'reundisclosedincompliancedocuments.

Asmallreductioninmortalitycanlowerapremiumsignificantly.Suddenly,companiesthathavenohistoryofextraordinaryperformanceareabletoout-illustrateeveryoneelse.Othercompaniesthenjumpinwithevenmoreaggressiveassumptions.

Onetricksomeinsurancecompaniesusetoappearmorecompetitivethantheyareiscalledsegmentation.Thecompaniesclassifytheirpoliciesbyageandchangetheirportfoliomanagementtocreditnewerpolicieswithhigherdividends,lowerexpensesandlowermortalityassumptions.

Thispunishesexistingpolicyownersinordertoseducenewones.Eventuallythreeorfouryearslaterthenewpolicyownerswillbecome

subjecttothesametreatmentthat''old"customersreceived.

Somelargercompanieshaveacknowledgedthattheyusesegmentation.Andthejustificationothercompaniesofferforwithholdingactualhistoricalperformancewhichwouldrevealsegmentationisthattheoldpoliciesdon'treflectthecurrentplansoffered.

PurchasingStrategies

Aswithmanyotherproducts,youhaveawiderangeofoptionswhenconsideringwhichlifeinsurancepolicytobuy.Tomakecost-effectiveselections,therearetwobasicmethodsyoucanfollow:thetraditionalnetcostmethod,andtheinterest-adjustedcostmethod.Thereareadvantagesanddisadvantagestoboth.

Thetraditionalnetcostmethodaddsthepremiumsyouexpecttopayover10years(orthemaximumnumber,ifthetermislessthan10years),thensubtractsthecashvalueexpectedtobeaccumulatedanddividendstobepaidbytheendofthe10-yearperiod.Thisnumberisaveraged(dividedby10,inthiscase),forafinalnumberthatisreferredtoastheaverageannualsurrenderednetcost.

Todothiscalculation,youshouldgetpremium,dividendandcashvaluenumbersfromeachoftheinsurancecompaniesyou'reconsidering.Calculationsshouldbecomparedonaper$1,000ofinsurancebasis.

Bymakingthiscalculationwithseveralpolicies,youcandeterminethepolicywiththelowestnumberand,theoretically,thelowestcost.

However,therearethreemainproblemswiththiscalculation.One,itassumesthatyouwillhavethepolicyforexactly10years.Theaverageswouldbedifferentfora20-yearperiod.(Youcancomparefiguresforothertimeperiods,ifyousochoose.)Two,dividendsareonlyassumptions.Ifdividendsarehigherorlowerthanpredicted,costaveragesareaffected.Three,thiscomparisondoesnottakeintoaccountwhenpremiumsandbenefitsarepaidthetimevalueofmoney.

Theinterest-adjustedcostmethodissimilartothetraditionalnetcostmethod,withtheexceptionthatitaccountsforaninterestrate.Aftertheselectionofatimeperiodforanalysis(suchas10years)andtheselectionofaninterestrate(suchas5percent),thecalculationproceedsasfollows:

addtheannualdividendsatinteresttothecashvalueattheendoftheperiod;

dividethisamountbyaninterestfactor,whichconvertsittoalevelannualamount;

subtractthisresultfromtheannualpremium.

Evenwiththismethod,comparisonofpolicycostsisstillinexact.Coveragesprovidedmaydifferinpolicies,anddividendamountsareassumptionsonly.Nopolicyiscost-effectiveforitsownerifitdoesnotmeetthatperson's(orinstitution's)needs.

PaymentSchedules

Inadditiontochoosingalifeinsurancecompanyandalifeinsurancepolicy,you'llgettochoosehowoftenyouwanttopayyourpremiums.Mostlifeinsurancecompaniesbasetheirpremiumpaymentscheduleonayearlycycle.Butyoucanpayonasemi-annual,quarterlyormonthlybasis.

However,ifyouopttopaymorethanonceayear,youmaygethitwith

anincreasedservicechargetooffsettheaddedexpenseofprocessingadditionalpaymentsandthefactthatthecompanyhastowaittogetyourmoney.

Usually,youwilllettheinsurancecompanyknowhowareyougoingtopaywhenyouapplyforthepolicy.Mostcompaniesalsowillallowyoutochangethefrequencyofyourpaymentsatyourdiscretion.

Directwithdrawaloffundsfromyourcheckingaccounttopaypremiumshasbecomeastandardfeaturewithinthelifeinsuranceindustry.Don'tbesurprisedifyourcompanyhasthisrequirementtiedtoitsmonthlypremiumarrangement.Thisassurestheinsurancecompanythatyourpaymentwillbereceivedontime,anditcutsdownonadditionalpaperworkcosts.

TimetoApply

Andnow,themomentyou'vebeenwaitingfor:It'stimetoapplyforcoveragefromacompany.Becausetheapplicationprocessforlifeinsurancemayinvolveaphysicalandabloodtest,youprobablyarenotgoingtowanttoapplytomorethanoneormaybetwocompanies.Inotherwords,you'lldefinitelyhavetodoyourhomeworkbeforeyoustartfillingoutapplications.

Nonetheless,anapplicationisnotabindingcontract.Eventhoughyousignit,youarenotcommittingtobuyinsurance.Youarerequestingthattheinsurancecompanyreviewyourinformationandofferyoucoverage.Thisiswhenyoufindoutwhatthepricewillbe.

Somehard-sellagentsorcompaniesmaytrytotellyouthatyouhavetoacceptthecoverageoffered.Thisisnevertrue.Insuranceisnotinforceuntilpremiumsarepaidandevenafteryouhavepaid,youusuallyhavetherighttocancelthepolicywithinasmanyas10daysandgetafullrefund.

Itisveryimportanttoreadthepolicyassoonasyoureceiveitpayingparticularattentiontoanyexclusionssoyoucanbesurethisisindeedthecoverageyouwanttobuy.

TheApplication

Theformoftheapplicationmaydifferfromonecompanytoanother.However,mostapplicationsaskforthesamebasicinformation.

Part1oftheapplicationasksforsomegeneralinformationaboutyou,includingyourfullname,address,phonenumber,dateofbirth,businessaddressandoccupation,maritalstatus,socialsecuritynumber,billingaddressandotherinsuranceowned.

Part2oftheapplicationisdesignedtoextractinformationregarding

yourmedicalhistory,currentphysicalconditionandpersonalmorals.Itwillaskaboutcurrentmedicaltreatmentforanysicknessorcondition,aswellasthetypesofmedicationtaken.

Usually,Part2willincludequestionsregardingalcoholanddruguse,aswellasavocationsandhigh-riskhobbies.(Hint:Scubadiving,hanggliding,flyingsmallaircraftandbungeejumpingareconsideredhigh-risk.)

Ifyou'reapplyingforarelativelylargeamountofinsurance,youalsomayhavetoundergoamedicalexamination(paidforbytheinsurancecompany)inwhichcasePart2oftheapplicationwouldbecompleted.

Increasingly,underwritersarerelyingonparamedicalexamsandbloodtestsforinformationinordertoaccuratelyevaluateahealthrisk.Bloodtestingisalmostuniversallyusedtodeterminecholesterollevels,elevatedliverenzymesandthepresenceoftheAIDSvirus.

Afterareviewofthemedicalinformationcontainedontheapplicationorprovidedbythemedicalexam,theunderwritermayrequestanAttendingPhysician'sStatement(APS)fromyourdoctor.Usually,theAPSisdesignedtoobtainmorespecificinformationaboutaparticularorpotentialmedicalproblem.

Somesimplifiedformsoflifeinsurancerequirenomedicalexamandaskonlyverybasichealth-relatedquestionsontheapplication.Usually,thistypeofinsuranceisavailableonlyinlowfaceamounts.

Theapplicationalsowillaskyoutoselectthemodeofpremium(monthly,annually,etc.),theuseofdividends(willyouusethemtobuymorecoverageorwillyoucollectthem?)andthedesignationofabeneficiary.

Tosupplementtheinformationontheapplication,theunderwriteralsomayorderaninspectionreportfromanindependentinvestigatingfirmorcreditagency,whichcoversfinancialandmoralinformation.Thisinformationisusedtodetermineyourinsurability.Iftheamountofinsuranceappliedforisaverage,theinspectorwillwriteageneralreportconcerningyourfinances,health,character,work,hobbiesandotherhabits.Whenlargeramountsofinsurancearerequested,theinspectorwillmakeamoredetailedreport.

Atthetimeyoucompletetheapplication,yousignanddateittoconfirmthatalltheinformationyouhavegivenistruetothebestofyourknowledge.Mostcompanieshaveaclauseregardingmisstatedinformation.Thisgivesthecompanytherighttoreviewitsdecisionifyouhaveprovidedfalseinformationoromittedinformation.

Thecontestabilityperiodwhichusuallylastsfortwoyearsisthetimewithinwhichaninsurancecompanymaydenyaclaimbasedoninformationyouhavestatedintheapplication.Afterthisperiod,thepolicybecomesincontestableandthecompanymaynotdenyaclaim,eveniffraudulentorconcealedinformationisdiscovered.Theonlywaytheinsurancecompanycandenyaclaimafterthecontestabilityperiodisonthegroundthataninsurableinterestwasnotpresentbetweentheinsuredandthepolicy'sowneratthetimeofapplication.

GenderandAIDS

Inrecentyears,therehavebeenvariousstateandfederalcourtdecisionsholdingthatsexcannotbeusedasafactortodeterminealifeinsuranceorannuitypolicypremium.Asaresponsetodiscrimination,variouslawswerepassedduringthelate1970s,prohibitingtheuseofgenderasaratingfactorinfinancialmatters.

Usinggenderasafactorindeterminingrateshadgenerallyresultedinwomenpayinglowerlifeinsurancepremiumsthanmen.

AIDSisbeginningtohavealargeimpactontheinsuranceindustry,too.ThecostsassociatedwithAIDSarethoseofprematuredeathandmedicalcosts,includinglonghospitalstaysandveryexpensivedrugtreatments.Thesecostsaffectmedical,disabilityandlifeinsurancecoverages.

(Ironically,assophisticateddrugtherapieshavebeguntolengthenlifeexpectancyforpeoplewithAIDS,somehavebeencaughtinadifficultplace.They'veexhaustedhealthandlifeinsurancebenefitsthelatterbyusing"livingneed"benefits,whichpaythefaceamountoftheinsurancepolicybeforeyourdeathbutstillhaveyearstolive.)

AIDStestingpriortopolicyissuancehasbecomeacommonunderwritingrequirement.Typically,thistakestheformofablood

test.Inmanyjurisdictions,HIVtestingrequiresinformedconsentoftheapplicant,confidentialityofresultsandpropernotificationprocedures.

AnAIDStestisparticularlylikelytoberequiredifyouareapplyingforalargeamountofinsurance.DifferentcompanieswillsetdifferentagesandamountsasthresholdsatwhichbloodtestsfortheAIDSvirusarerequired.

PolicyReceipts

Oncetheunderwritingprocessiscompleteandyouhavebeenapproved,thelifeinsurancepolicywillbeissuedbytheinsurancecompany.Thecoverageisnoteffectiveuntilthepolicyisdeliveredandtheinitialpremiumhas

beenpaid.Smartconsumersproceedcarefullythroughthisstageoftheapplicationprocess.

Often,youwillpaytheinitialpremiumwiththeapplication.Whenthisoccurs,theagentwillprovideyouwithareceiptfortheinitialpremium,andtheeffectivedateofcoveragewilldependonthetypeofreceiptissued.

Afewcompaniesuseanunconditionalorbindingreceiptthatmakesthecompanyliablefortheriskfromthedateofapplication.Thiscoverageusuallylastsfor30to60daysoruntiltheinsurancecompanyeitherissuesapolicyordeclinestheapplication,whicheverisearlier.

Withabindingreceipt,regardlessofyourinsurability,youarecoveredforaspecificperiodoftimefollowingcompletionoftheapplicationandpaymentoftheinitialpremium.Notsurprisingly,useofthisreceiptisrare.

Atemporaryinsuranceagreementisanothertypeofreceiptthatprovidesyouwithimmediatelifeinsurancecoveragewhiletheunderwritingprocessistakingplacewhetherornotyouareinsurable.Ifyoushoulddieduringthisperiod,thecoverageisinforce,regardlessofyourinsurabilityorriskclassificationasaresultoftheunderwritingprocess.

Onceyoureceiveyourpolicy,it'stimetostartlookingitovercarefully.Remember,evenifyou'vepaidthefirstpremium,youcanrefusetoacceptapolicyfor10daysafterreceivingitandstillgetafullrefund.

Whatshouldyoulookfor?Makesureyoureviewthetypeofplan,thenamedinsured(s),beneficiary,premium,faceamountandscheduleoffuturepremiumsthoroughlybeforeacceptingapolicy.Besureyouunderstandtheexclusions,thelengthoftimethepolicywillbein

forceandanyoptionalvalues.Ifyouuseanagent,heorsheusuallywillprovideasummarypagethatminimizesanyconfusion.

Alsobesureyouunderstandwhatrightsthecompanyhastomakechangesandwhatassumptionswereused.

Ifyoureceivearated(orclassified)policy(whichmeansyou'rebeingchargedmorethanthestandardrate)andyoudidn'texpectone,youmaywanttoapplyforcoveragewithanothercompany.Underwritingstandardsvaryfromcompanytocompany.

ChangesYouCanMake

Atanypointduringthelifeofalifeinsurancepolicy,youhavetherighttochangecertainprovisions.Theseinclude:

changingtoalowerfaceamount;

changingtheprimarybeneficiaryorcontingentbeneficiary;

changingthetypeofplan,insomecases;

changingthepayer;

changingtheowner(bysaleorgift,orbytransferringorassigningthepolicy);and

changingthebillingcycle.

ChangingfromOneKindofInsurancetoAnother

Duringthe1980s,therewasatermpricewarandeveryyearcompaniesofferedlower-pricedproducts.AgentswouldsellCompanyA'spolicyoneyear;thenextyearthey'dcomebacktothesameclientofferingCompanyB'spolicyatbetterrates.

Agentsencouragedthischurningbecausetheyreceivedanewfirst-yearcommissioneverytimetheysoldanewpolicy.Sincethesefirst-yearcommissionswerehigherthanrenewalservicingcommissions,manyagentssimplyreplacedtheirownpolicieseverytwoorthreeyears.

Aspricecompetitionincreased,consumersquicklyrealizedthatbyreplacingtheoldpolicywithacheapernewoneeverytwoorthreeyears,theycouldgetafreemedicalexaminationandsavemoneyontheirpolicy.

However,someconsumersendeduptradinglargerbenefitsforsmalleronesorevenworsepaid-upcash-valuepoliciesfortermpolicies.

Inthewakeofalltheproblemswithagentschurningandcustomers

jumpingship,insurancecompaniesneededtodoseveralthings:

keepthepolicyholderpayingpremiumsforalongerperiod(fiveto10years);

keeptheagentsfromreplacingthepolicieseverytwoyearswithcheaperproducts;and

offerlowattractiveprices.

Cleveractuariesfoundasolutioninthearcanelawsgoverningtheamountofmoneyinsurancecompanieshavetoreserveper$1,000ofinsurance.Thesolutionwastoofferlevelterminsuranceforfive,10,15or20years.Attheendofthelevelperiod,thepremiumwouldincreaseliketraditionalannualrenewableterm.

Thissolvedalloftheproblems:

Thecustomerwasprovidedtheincentivetokeepthepolicyforthefulllevelperiod;

Theagentcouldn'teasilypersuadethecustomertochangepolicies;and

Theinsurancecompanyfoundawaytolockintheconsumerforafive-,10-or15-yearperiod.

Still,replacinganexistingpolicycanbeaperilousprocessforeveryoneinvolved.

TheReplacementGame

Becauseofthecashvaluethatcanbuildupinapolicy,andthefavorableloaninterestratesinolderpolicies,replacementcanbebadforconsumers.Thereasonsforthisaremany.Forexample:

thenewinsurancemayrequireyoutoproveinsurability;

thepremiumsmaybehigherforanewpolicy;

thenewpolicyprovisionswillhavetobecompliedwith,suchasanewincontestabilityperiod;

theexistingpolicy'sprovisionsmaybemoreliberalthananewpolicy'sprovisions;and

anewpolicyusuallywillnothaveanycurrentcashvalue.

Becauseoftheproblemsthathavebeenexperiencedwithreplacingpolicies(includingscandalsatseverallifeinsurancecompaniesconcerningchurning),ifreplacementisinvolvedinanyinsurancesaleortransaction,theagentorbrokerisrequiredto:

listallexistinglifeinsurancepoliciestobereplaced;

givetheapplicantacompletedComparisonStatement,signedbytheagentorbroker,andaNoticetoApplicantsRegardingReplacementofLifeInsurance(acopyoftheformsshouldbeleftwiththeapplicant);and

givetheinsurancecompanyacopyofanyproposalsmade,andacopyoftheComparisonStatementwiththenameoftheinsurancecompanythatistobereplaced.

Thedutiesofthereplacinginsurancecompanyinclude:

makingsurethatallreplacementactionsareincompliancewithstateregulations;

notifyingeachcompanywhoseinsuranceisbeingreplacedand,uponrequest,furnishingacopyofanyproposalandComparisonStatement;and

maintainingcopiesofproposals,receiptsandComparisonStatements.

Eachstatehasitsownrulesandregulationsregardingthereplacementoflifeinsuranceproducts,andtheserulesaredesignedtoprotecttheinterestsofthepublic.

ThingstoLookOutforinaTrade

Employer-sponsoredgroupinsuranceorassociationgroupinsuranceusuallycanbecancelledatthecompany'sdiscretion,butthisusuallyisn'tsoforindividualpolicies.Therefore,you'llwanttobecarefulabouttradinganindividualpolicythatcan'tbeunilaterallycancelledforagrouppolicythatcan.

Therearenumerouspoliciesinwhichbenefitsareonlyavailablefora10-yearperiod,a20-yearperiodortoage70.Makesureyou'renottradingalong-termpolicyforonethathasmoretimerestrictions.

Lowpremiumsmaymeanhiddenrestrictions.Manycompaniesoffer10-or20-yeartermpolicieswithlimitedconversionrights.

Guaranteedrenewabilityisanotherstandardtermyouwillseeoften.Itmeansthatthepolicyisguaranteedtogivetheoptionofcontinuinginsuranceatsomepointinthefuture.Itmayberenewablefor10years,toage70,toage100orforlife.Therenewingofthepolicyassuresyouthatthepolicycannotbecancelledbythecompanyuntilthatfuturedatearrives.

Someunwarypeoplewilltradeapolicywithguaranteedrenewabilityforonewithout.Avoidthisatallcostsespeciallyifyou'reover40.

ReinstatingLapsedPolicies

Ifyouhadalifeinsurancepolicyandletitlapse,therearemanybenefitstoreinstatingthatpolicyandpayingbackpremiums,insteadofapplyingforanewone.

Thelapsedpolicy,writtenatanearlierdate,mayhavemoreliberalcontractprovisionsthanacurrentpolicy.

Theinterestratesonthepolicyloansmayhavebeenlower.

Apolicyissuedatayoungeragemostlikelyhasalowerpremiumschedulethanonewrittenatyourcurrentage.

Ifthepolicydateismorethantwoyearsold,suicideandincontestabilityclausesmaynolongerapply.

IfYou'reUninsurable

Ifyourlifeinsuranceapplicationisrejectedbecauseofinformationinaninvestigativereport,youmustbenotifiedandgiventhenameandaddressofthereportingcompany.

Ifyourhealthproblemsaresoseverethatyouareclassifiedasuninsurableorevenifanewlifeinsurancepolicyisjusttooexpensiveforyouit'sgoodtoknowthatsomecompaniesofferguaranteed-issuelifeinsurance.Thisinsuranceisavailableinsmallerfaceamounts,like$10,000.

Thefullfaceamountispayableintheeventofaccidentaldeath,butfordeathfromnaturalcauses,thebenefitislimitedtothetotalofpremiums,plusinterest,atleastforthefirstfewyearsofthepolicy.Afterthat,thebenefitequalsthefaceamount.

Guaranteed-issuelifeinsuranceisagoodsolutionforcoveringexpenses,suchasfuneralcosts,forotherwiseuninsurablepeople.

Ifyouareratedasubstandardrisk,thereareanumberofthingsyoucandotogetatleastsomelifeinsurancecoverage.Whileuncommon,aninsurancecompanymayissueawaiverwiththepolicy,statingthatdeathbyaparticulareventwillnotbecovered.Thismightbedoneifyouhaveaparticularlyhazardousoccupationorhobby.Morecommonly,aninsurancecompanymightissueamorelimitedpolicyorofferalowerfaceamountthanthatappliedfor.

SavingMoney

Whatdoinsurancecompanieslookforinanapplicant?Immortalitywouldbenice.Butthey'llsettleforsomeonewhoseemslikelytoliveaslongaspossible.Thatway,theycancollectallthepremiumsandearninterestonthemforyearstocome.

Amongthethingsinsurancecompanieslookforinapreferredrisk:

Someonewhohasnopersonalhistoryofheartdisease,stroke,diabetes,cancer,alcoholismordrugaddiction.

Someonewhohasnofamilyhistoryofheartdiseasepriortoage60.

Someonewhoisnotaprivatepilotorstudentpilotandwhohasnotparticipatedinaviationduringthetwoyearspriortoapplying.

Someonewhosebloodpressuredoesnotexceed150/90andwhohasnohistoryofhypertensiontreatment.Somecompanieswillallowtreatmentifyourbloodpressurehasbeenundercontrolfortwoyears,aslongasitdoesn'texceed140/90.

Someonewhosecholesterolleveldoesn'texceed260.

Someonewhoseweightfitswithinthepreferredlimitsforhisorherheight(thoughslightlyhigherweightsmaybeallowedifyoudon'thaveaprobleminanyoftheotherareas).

Asampleweighttableformenfollows,forillustration.Height PreferredWeightLimits StandardWeightLimits5'3'' 175 2045'4" 180 2095'5" 185 2155'7" 195 2255'8" 200 2305'9" 205 2355'10" 210 2425'11" 216 2516'0" 222 2566'1" 229 2636'2" 236 2716'3" 243 2796'4" 250 2866'5" 257 2936'6" 264 3006'7" 272 3076'8" 280 3166'9" 288 325

6'10" 296 3336'11" 305 341

Weallknowthatlosingweight,reducingourcholesterollevelsandourbloodpressure,quittingsmokingandgettingoffalcoholanddrugscanadd

yearstoourlives.Notsurprisingly,thesesamemovescancutyourlifeinsurancecosts.Ifyoucanshowconsistentimprovementinoneormoreoftheseareasforayearortwo,mostinsurancecompanieswillconsiderthatevidenceofpermanentimprovementandwillconsideryouforpreferredstatus.

Quittingsmokingisaparticularlygoodwaytoloweryourlifeinsurancerates.Believeitornot,smokersaretwiceaslikelytodiewhiletheyareinsuredasnon-smokers.So,ifyouquit,youcansave20percentto30percentonyourpremiums.

Timingiseverything,sotheysay.Andtheydohaveapointwhenitcomestolifeinsurance.Justbeforeyourbirthdayandsixmonthsafteryourbirthdayarereallygoodtimestoshopforinsurance.That'sbecauseyourratesareraisedtothenextageintheratingtableseitheratyourbirthdayoratyourhalf-birthday.Ifyoubuyrightbeforehand,you'llbeconsideredayearyoungerandpayless.

Ifit'srightafteryourbirthday,askaboutbackdatingtosaveage.Manycompanieswillallowyouto"backdate"apolicyuptosixmonthstogiveyouabetterrate.However,thecompanywillexpectyoutopay"back"premiumsforthisperiod.Iftheamountofbackpremiumsexceedsthesavingsforayoungeragerating,youobviouslywon'twanttodothis.

Sometimes,youcanbuyalittlemorecoveragewithoutspendingsignificantlymore.That'sbecausecompaniestypicallydiscountratesat$100,000,$250,000,$500,000and$1millionofcoverage.Youdon'twanttobuyapolicywithafacevaluejustbelowoneofthesepoints.

Inaddition,youalsomaybeabletosavemoneybyconsolidatingseveralsmallerlifeinsurancepoliciesintoonelargerpolicythatoffersthesamecoverage.However,beforeyougetridofanolderpolicy,

comparetheratesandbenefitscarefullyandwatchoutforpenalties.

Conclusion

Thewaylifeinsuranceissoldischanging.It'sbecomingaprice-driven,commoditymarket.Long-timeprofessionalsintheindustryaren'tsurewherethebusinessultimatelywillland.Alotofagentsaregettingoutofinsurance;alotofthosewhoarestayingare,frankly,scared.Morethanever,buyershavetobeware.

It'sincreasinglylikelythatyou'llbuyyournextlifeinsurancepolicyoverthephone,viacomputerorthroughthemail.You'lllikelybedealingdirectlywiththeinsurancecompany(andevenifyouuseanagentorbroker,thatpersonisincreasinglylikelytobeworkingforasinglecompany).You'llneedallthecriticaltoolsyoucanfindtodeterminethebestdealforyou.

KeyQuestions

1)Ifyou'reconsideringaparticularpolicy,whatisthelifeinsurancecompany'shistoricalinvestmentperformanceandfinancialhistory?_______________________________________

_________________________________________________________________

2)Didtheagent,salespersonorcompanygiveyouapolicysummary?

3)Didtheagent,salespersonorcompanygiveyouabuyersguide? Yes

4)Iftheagentorsalesperonsispitchingapolicywithvanishingpremiums,haveyouascertainedhowthecompanycomputesthemandareyouconvincedthattheinterestratestheyprojectareattainable? Yes

5)Haveyoucomputedtheinterest-adjustedcostwhencomparingtwoormorepolicies? Yes

6)Willyoubepayingmonthly,quarterly,semi-annuallyorannually? ____________

7)Doestheinsurancecompanyrequirethatthepremiumsbewithdrawnautomaticallyfromyourbankaccount? Yes

8)Areyouhealthyandhappytoproveit? Yes

Ifso,youmaywanttobesuretheinsurancecompanygivesyouaphysical

9)Doyouparticipateinanyhigh-riskhobbies? YesNo

Whatarethey?_____________________________________

_________________________________________________

10)Areyoureplacinganexistingpolicy? YesNo

Ifso,you'llneedtocompareclosely,tobesureyouaren'tgivingupamorefavorableinterestrateorsacrificingcashvalueforterm

insurance.

11)Isthepolicyyou'reconsideringguaranteedrenewable?(Thisisanimportantconsiderationifyouarereplacingapolicy,aswell.) YesNo

Chapter16LifeInsurance,AnnuitiesandRetirementPlanningLifeinsuranceandrelatedannuityproductsfrequentlyareusedtoprovidethefundingforretirementplansandothertypesofplans,duetothetaxadvantagetheycanoffer.Someoftheseplansalsomaybefundedwithotherproducts,suchasmutualfunds,certificatesofdeposit,stocksandbonds,cashheldinbankaccounts,etc.

Forexample,aretirementincomeinsurancepolicyaccumulatesasumofmoneyforretirementwhileprovidingadeathbenefit.Whenyouretire,thepolicywillpayyouanincome,suchas$10per$1,000oflifeinsuranceforyourlifetimeorforaspecifiedperiod.Oncethecashvalueinthepolicybecomesgreaterthanthefaceamount,thatcashamountbecomesthedeathbenefit.

However,thesepoliciesareexpensive,andcash-valueaccumulationishightopayforthemonthlyincome.

Retirementplansthatincludeinsuranceandothercorporateandindividualplansmaybedescribedasqualifiedornon-qualified.Allplansmustbeinwritingandbecommunicatedtotheparticipantsbeyondthesesimilarities,therearemanydifferencesbetweenthequalifiedandnon-qualifiedretirementplans.

Qualifiedplans:

mustbefiledandapprovedbytheIRS;

usuallyareestablishedbyanemployerforthebenefitofemployees(thereareafewexceptions);

cannotdiscriminateastoparticipation(alleligibleemployeesmustbeincluded);

willprovideataxdeductionfortheemployerforplancontributions;

generallyexcludeemployercontributionsonbehalfoftheemployeefromtheemployee'sgrossincomenotaxisdueuntilbenefitsactuallyaredistributedtotheemployee;and

defertaxesoninvestmentincomerealizedbytheplanuntilitisreceivedbyplanparticipants.

Non-qualifiedplans:

arenotfiledwiththeIRS;

maydiscriminateastoparticipationtheymaybeselectiveastowhoiscovered;and

donotprovideataxdeductionfortheemployerforanycontributionsmade.

Thefactthatanon-qualifiedplanisnotapprovedbytheIRSdoesnotimplythatitisillegalorunethical.Anon-qualifiedplanisalegalmethodofaccumulatingmoneyforretirementfundsandotherpurposes.Itjustdoesn'tprovidetaxbenefitsthewayaqualifiedplandoes.

Forexample,apersonbuysanindividualannuityforthepurposeofaccumulatinghisorherownretirementbenefits.Whenthispersonpaystheannuitypremiumorpayment,thereisnotaxdeductionforthepaymentofthepremium(astherewouldbeforaqualifiedplan,suchasanIRAor401[k]).

Pensionplansandotherqualifiedplansmayincludelifeinsurancebenefits,butthesemustbeincidentaltothepurposeoftheplan.Theprimarypurposeoftheplanmustbetoprovideretirementbenefits.

Generally,thecostforinsuranceprotectionunderapensionorprofitsharingplanistaxableasincometoanemployeetotheextentthatany

deathbenefitispayabletotheemployee'sbeneficiaryorestate.Thecostforanyprotectionforwhichtheproceedsarepayabletoandmayberetainedbytheplan,trusteeoremployerisnottaxableasincometotheemployee.

Example:Anexecutiveinsuredunderakeypersonlifepolicydoesnothavetopaytaxonthecostofthatcoverage.

RetirementOptionsWithCashValue

Whenyouretire,youcanuseacash-valuelifeinsurancepolicyinseveralways.Youcanborrowcashvaluesorannuitizepaymentplans.Bothmethodswillallowyoutouseyourmoneyforretirement,buteachhasdistinctprosandcons.

Ifyouhaveaccumulatedcashvalueinalifeinsurancepolicywhenyou

retire,youcanbeginwithdrawingthemoneyonatax-freebasis.Ontheotherhand,moneythatyouwithdrawfromqualifiedretirementplans,suchasKeoghsorIRAs,willbetaxedasincome.

Borrowingallowsyoutoavoidincometaxes.Thisisthegoodnews.However,ifyouborrowallofyourcashvalueandthepolicyterminates,youwillbehitwithcapitalgainstaxonanyamountinexcessofthepremiumsyoupaidformoneyyouspentyearsago.That'sthebadnews.Thiskindofcapitalgainstaxcanbeanastysurpriseatage80or85,whenmostpeoplearebusyworryingabouthealthcoverageorestatetaxes.

Dependingontheindividualpolicycharacteristics(thecreditingrate,thedividend,etc.)andtheactualamountyoudecidetowithdraw,youmaybeabletoavoidpayingbackapolicyloan.Ifyouarecarefultokeepenoughcashinthepolicytokeepitinforce,uponyourdeath,thelifeinsuranceproceedswillpayofftheloan.

Acaveat:Beverycarefulabouttherateofreturnyouassumewhenfiguringouthowmuchmoneyyoucantakeout.Overzealousagentssometimeswillshowillustrationsthatleadtoabigretirementbenefit.Youhavetorememberthatillustrationsarebasedontheassumptionthatthecompanywillcontinuetocreditthecashvalueofthepolicyatacertainrate.However,manypeoplelostalotofmoneyontheseinvestmentsinthe1980s,wheninterestratesfellandpoliciesweren'tperformingthewayconsumersexpected.

Annuities

Annuitiesarenotstrictlyspeakinglifeinsurance,buttheyoftenaresoldbylifeinsurancecompaniesandagents,soabasicunderstandingofhowtheyworkmaybeuseful.

Lifeinsuranceisdesignedtoprotectagainsttheriskofpremature

death.Annuitiesaredesignedtoprotectagainsttheriskoflivingtoolong.Annuitiesaresometimescalledupside-downlifeinsurance.Fromtheinsurancecompany'sstandpoint,anannuitypresentstheoppositemortalityriskfromlifeinsurance:Lifeinsurancepaysabenefitwhenyoudie;anannuityonlypaysabenefitifyouand/oryourbeneficiaryareliving.

Thebasicfunctionofanannuitypolicyistoliquidateasumofmoneysystematicallyoveraperiodoftime.

Annuitycontractsofferyouatremendousrangeofoptions.Youcanbuyanannuitywithasinglepaymentoraseriesofperiodicpayments.Youcanschedulebenefitstobeginimmediatelyorbedeferreduntilaspecificfuture

date.Youcanchooseanannuitythatpaysbenefitsforaspecificperiodoftimeorforthelifetimeofoneortwoindividuals.Itcanbeginpayingthosebenefitsonaspecificdate(suchaswhenyoureachastatedage)oracontingentdate(suchaswhenyourspousedies).

Usually,butnotalways,anannuityguaranteesalifetimeincomefortherecipient.

Anannuitythatpaysyoubenefitsimmediatelytypicallywillprovideyouwithasteadystreamofretirementincomeinreturnforyourpurchase.Anannuitythatpaysyoubenefitsatalaterdate(adeferredannuity)typicallywillhelpyouaccumulatemoney.

Theannuitantistheinsured,thepersononwhoselifetheannuitypolicyhasbeenissued.Asisthecasewithlifeinsurance,theownerofthecontractmayormaynotbetheannuitant.Unlikeinsurance,though,theannuitant,inmostcases,isalsotheintendedrecipientoftheannuitypayments.

Dependingonthetypeofannuityandthemethodofbenefitpaymentselected,abeneficiaryalsomaybenamedinanannuitycontract.Inthesecases,annuitypaymentsmaycontinueafterthedeathoftheannuitant,forthelifetimeofthebeneficiaryorforaspecifiednumberofyears.

Fixedvs.VariableAnnuities

Therearetwoprincipaltypesofannuities:fixedandvariable.

Afixedannuityisafullyguaranteedinvestmentcontract.Principal,interestandtheamountofthebenefitpaymentsareguaranteed.Inotherwords,themoneyinafixed-incomeannuityislegallyprotected,shouldtheinsurancecompanybecomeinsolvent.

Byguaranteeingboththeprincipalandtheinterest,afixedannuityis

notunlikeacertificateofdeposit(CD)purchasedfromabank.However,aCDisbackedbytheFederalDepositInsuranceCorp.(FDIC).Afixedannuityisnotitssecurityisdirectlyrelatedtothefinancialhealthofthecompanysellingit.

Therearetwolevelsofguaranteedinterestforafixedannuity:currentandminimum.Thecurrentguaranteereflectscurrentinterestratesandisguaranteedatthebeginningofeachcalendaryear.Thepolicyalsowillhaveaminimumguaranteedinterestratesuchas3percentor4percentwhichwillbepaidevenifthecurrentratefallsbelowthepolicy'sguaranteedrate.Theminimumguaranteeissimplyapredeterminedlowestrate.

Avariableannuitylikevariableuniversallifeinsuranceisdesignedtoprovideahedgeagainstinflationthroughinvestmentsinaseparateac-

countoftheinsurancecompany,consistingprimarilyofcommonstock.Iftheportfolioofsecuritiesperformswell,thentheseparateaccountperformswell,sothevariableannuitybackedbytheseparateaccountalsowilldowell.Ifthecompany'sinvestmentsdon'tdowell,neitherdoesyourannuity.Inotherwords,thereisinvestmentriskinvolved;thereisnoguaranteeofprincipal,interestorinvestmentincomeassociatedwiththeseparateaccount.

Aninsurancecompanyorsalespersonwillprovideaprospectuswhenyouareconsideringavariableannuity.

Differentannuitieswillofferyoudifferentinvestments,whichofferdifferentdegreesofriskandreward.Theinvestmentoptionsincludestocks,bonds,combinationsofbothoraccountsthatprovideforguaranteesofinterestandprincipal.Bychoosingamongtheavailablefundoptions,youcancreateanannuitythatmeetsyourobjectivesandyourtoleranceforrisk.

Ifthefundingoptionsyouchooseforyourannuityperformwell,theymayexceedtherateofinflationortherateforfixedannuities.Iftheydon't,youmaylosenotonlypriorearnings,butevensomeofyourprincipal.However,somepolicieswillguaranteethatthevaluecannotfallbelowaminimumlevel.Afixedaccountoptionwillguaranteebothprincipalandinterest,muchlikeafixedannuity.Thisway,youhavetheoptionofdividingyourmoneybetweenthelow-riskfixedoptionandhigher-riskfundingoptions,suchasstocks,allinoneannuity.

Witheithertypeofannuity,expensesaredeductedfromearnings.Eitherafixedoravariableannuitycanguaranteeexpenses,whichmeansanyexpensedeductionsmadetoannuitybenefitsareguaranteednottoexceedaspecificamountorapercentageofthepaymentsmade.Aslongasthey'rereasonable,theseexpensescanbe

worthabsorbing.

Mortalityalsocanbeguaranteed,whichprovidesforthepaymentofannuitybenefitsforlife.

Occasionally,youmaydecidethatitisinyourbestinteresttopurchaseanannuitythatofferssomeguarantees,butalsooffersprotectionagainstinflation.Thistypeofannuityusuallyisidentifiedasacombinationorbalancedannuity.

Bothsortsofannuitiesmaybepurchasedwithasinglepayment,oryoumaymakeperiodicpayments.Asingle-premiumorsingle-paymentannuityusuallyispurchasedbymakingonelump-sumpayment.Example:Youcashina20-year-oldcash-valuelifeinsurancepolicysoonafteryouretire.Thisgeneratesasizablelumpsumofcashsay,alittleover$100,000.Youcanusethecashtobuyasingle-premiumannuitythatcreatesincomefor

youandforyourspouse,ifyoushoulddiefirst.

Variableannuitiesalsomaybepurchasedwithavariable-premiumfeature,knownasaflexible-premiumdeferredannuity(FPDA)contract.Likevariableuniversallifeinsurance,thistypeofannuityallowsyoutopayasmuchoraslittleasyoulikeduringeachpremiumperiodalthoughthereusuallyisaminimumpaymentrequired.

WhenanAnnuityPays

Ifyoupayforanannuityinasinglepayment,thebenefitsmaybeginimmediately(typically,withinamonth)ortheymaybedeferred.Ifyoubuyanannuitywithaseriesofperiodicpayments,thenthebenefitswillbedeferreduntilallpaymentshavebeenmade.(Thissecondkindofannuityiscommonlycalledaperiodic-paymentdeferredannuity.)

Therearetwoperiodsoftimeassociatedwithanannuity:theaccumulationperiodandtheannuityorbenefitperiod.

Theaccumulationperiodisthetimeduringwhichyouaremakingcontributionsorpaymentstotheannuity.Theinterestpaidonmoneycontributedduringthistimeistax-deferred.Thatinterestwillbetaxedeventuallybutnotuntilyoubegintoreceivethebenefits.

Theannuityperiodistheperiodfollowingtheaccumulationofyourpayments(principalandinterest),duringwhichannuitybenefitsarereceived.Youcanchoosetoreceiveincomepaymentsmonthly,quarterly,semi-annuallyorannually.

Avariableannuityposesseveralotheruniqueissues:

Asevidenceofyourparticipationintheseparateaccount,unitsofthetrustareissued.Thisisverysimilartosharesofamutualfund,whichareissuedtomutualfundinvestors.Duringtheaccumulationperiod,

theseunitsareidentifiedasaccumulationunits.Boththenumberofunitsandthevalueoftheseunitswillvaryinaccordancewiththeamountofpremiumpaymentsmadeandthesubsequentperformanceoftheseparateaccount.

Example:Jackinvests$100permonthinhisvariableannuity.Onthedaytheinsurancecompanyreceiveshis$100payment,thevalueofanaccumulationunitis$10.Thus,Jackiscreditedwith10additionalaccumulationunits.

Whenyoureachtheannuityperiod,theseaccumulationunitsareconvertedtoannuityunits,andthenumberofannuity

unitsremainsconstant,sincenofurthermoneyisbeingcontributedtotheannuity.

Whilethenumberofannuityunitsremainsconstant,theirvaluewillvaryinaccordancewiththedailyperformanceoftheseparateaccount.Accordingly,duringtheannuityperiod,thesizeofthemonthlybenefitcheckwillvarydependingonthevalueoftheannuityunitsatthetimethecheckisissued.

Annuitysettlementoptionsdecidewhenandhowtheannuitywillpayandtowhom.Generally,whenyoudecidetotakemoneyfromtheannuity,anannuityoptionwillbeselectedasamethodofdisposingoftheannuity'sproceeds.Evenifanannuityoptioniselectedatthetimeofpurchase,itmay(andprobablywill)bechangedattheannuityperiodtoreflectyourchangingneeds.(Thesechangesusuallyhavesomethingtodowithretirementorthedeathofaspouse.)Bothvariableandfixedannuitiesofferthesameoptionsforsettlementofthecontract.

Theamountofmoneyavailableduringtheannuityperiodisdeterminedbytheannuityoptionselected,theamountofmoneyyou'veaccumulatedandyourlifeexpectancy.

Alife-onlyorstraight-lifeoptionprovidesforthepaymentofannuitybenefitsforyourlifetimewithnofurtherpaymentfollowingyourdeath.Thereisariskinvolvedinthatyoumustlivelongenoughoncetheannuityperiodbeginstocollectthefullvalue.Ifyoudieshortlyafterbenefitsbegin,theinsurancecompanykeepsthebalanceoftheunpaidbenefits.Thisoptionwillpaythehighestamountofmonthlyincome,becauseitisbasedonlyonlifeexpectancy,withnofurtherpaymentsafteryourdeath.

Arefundoptionwillpayyouforlife,toobut,ifyoudieshortlyafter

theannuityperiodbegins,theremaybearefundofanyundistributedprincipalorthecostoftheannuity.Therefundmaytaketheformofcontinuedmonthlyinstallments(inthecaseofaninstallmentrefundannuity)oritmaybeinonelumpsum(acashrefundannuity),whicheveryouhaveselected.Thisoptionassuresyouthatthefullpurchasepriceoftheannuitywillbepaidouttosomeoneotherthanthecompanyissuingtheannuity.Ifyoulivewellbeyondtheaveragelifeexpectancy,thenallofyourinvestmentintheannuityprobablywillhavebeenpaidandtherewillbenorefund.

Lifewithperiodcertainisbasicallyastraight-lifeannuitywithanextraguaranteeforacertainperiodoftime.Thisoptionprovidesforthepaymentofannuitybenefitsforyourlifetimebut,ifyoudiewithinthepredetermined

periodoftime,annuitypaymentswillbecontinuedtoasurvivorforthebalanceofthatperiod.

Theperiodcertaincanbejustaboutanylengthoftimefive,10,15or20years.Mostoften,theperiodselectedis10years,because10yearsisapproximatelytheaveragelifeexpectancyofamalewhoretiresatage65.Thus,ifyouretireatage65,selectlifewith10yearscertainanddieatage70,yoursurvivorwillcontinuetoreceivethemonthlyannuitypaymentsforthebalanceoftheperiodcertain(fivemoreyears).

Thejoint-survivoroptionprovidesbenefitsforyourlifetimeandthelifeofyoursurvivor.Astatedmonthlyamountispaidtoyouand,uponyourdeath,thesameoralesseramountispaidforthelifetimeofthesurvivor.Thejoint-survivoroptionusuallyisclassifiedasjointand100percentsurvivor,jointandtwo-thirdssurvivor,orjointand50percentsurvivor.

Thejoint-survivorannuityoptionshouldbedistinguishedfromajoint-lifeannuity,whichcoverstwoormoreannuitantsandprovidesmonthlyincometoeachofthemuntilonedies.Followingthefirstdeath,allincomebenefitscease.

WhenDoYouWanttoGetPaid?

Yourstagesoflifeusuallywilldeterminewhetheryoushouldbuyanannuitythatpaysimmediatelyordeferspaymentuntilalaterdate.Here'saquickquiztohelpyoufigureoutwhichkindisbestforyounow.

ToDeferorNottoDefer

1)Savingforfutureretirementisoneofmymaingoals. YesNo2)IwillnottouchmyprincipalorinterestuntilIamatleast59½yearsold. YesNo3)IcontributethemaximumdeductibleamounttomyIRA,401(k)or403(b)retirementplan. YesNo

4)Ineedaninvestmentthatwillearntax-deferredinterest. YesNo5)Iamretiredorverynearretirementnow. YesNo6)Ihavealumpsumofmoney,andIwanttobegindrawinganincomefromit. YesNo

it. YesNo7)Iwanttoreceiveanimmediatereturnfrommyinvestment. YesNo8)Iwanttoreceiveasteadymonthlycheckfortherestofmylife. YesNo

Ifyouansweredyestoquestions1through4,adeferredannuitymaybeappropriateforyou.Ifyouansweredyestoquestions5through8,you'remorelikelytoneedanimmediateannuity.Source:MetLife

Asyoucansee,whetheryouwanttodeferincomefromanannuityorreceivethepaymentsrightawayusuallydependsonhowcloseyouaretoretirementage.

Ifyoustillcan'tdecide,youcanpurchasesplitannuitiesonethatprovidesincomepaymentsbeginningimmediately,theotherthataccumulatesatax-deferredfundtoprovideincomeatalaterdate.

AnnuitiesandRetirementPlanning

Mostoften,theprimarypurposeofanannuityistoprovideretirementincome.ReceivingregularmonthlypaymentsfromanannuityisagreatsourceofretirementincomebeyondwhatyouwillreceivefromSocialSecurityoryourpensionplan.

Ifyouareplanningaheadforyourretirement,anannuitymaybeagoodvehicleforyouespeciallyifyouarealreadymakingthemaximumcontributionsallowedtoyourIRAor401(k)planbecauseitenablesyoutoaccumulatemoneywithoutpayingtaxesontheearningsrightaway.Youpostponepayingincometaxesuntilyouwithdrawmoney,typicallyduringretirement,whenyoumaybeinalowertaxbracket.Plus,therearenoIRSrestrictionsontheamountofmoneyyoucancontributeeachyeartoadeferredannuitysinceyouarecontributingafter-taxdollars.

Receivingaseriesofpaymentsfromanannuity,insteadofalumpsum,allowsyoutospreadthetaxliabilityoverseveralyears.Meanwhile,tax-deferredearningscontinuetoaccumulateontheremainingprincipalandearningsthathaven'tbeendistributed.

Anotheradvantageofadeferredannuityisthatyoucantakeadvantageofnon-taxabletransfers.Thismeansthatyoucanchangetoadifferentfundingoptionwithinyourvariableannuitywithoutpayingtaxesonanyearningsyou'vemade.Theabilitytoswitchwithout

payingtaxesletsyouchangeyourinvestmentstrategyovertime,whetheryouarebecomingmoreconservativewithageorsimplyrespondingtochangingmarketconditions.

Youalsocanuseadeferredannuitylikelifeinsurancetoprovideadeathbenefittoabeneficiary,withoutthecostsanddelaysofprobate.Inaddition,ifyourbeneficiaryinheritstheannuityduringtheaccumulationphase,heorshecansimplytakeoverasthenewowneroftheannuityandcontinueaccumulatingfundsonatax-deferredbasis.Yourbeneficiaryalsocouldchoosetotakethecashoutoftheannuityrightaway,evenifithasn'treachedthedistributionstage,withoutpenalty.However,thebeneficiarywouldhavetopaytaxesonanyearnings.

Ifyouhavereachedretirementage,animmediateannuitycanprovideadependablestreamofincomefortherestofyourlifeorforaperiodyouselect.Forthisreason,animmediateannuitymaybeagoodplacetoputalargelumpsumofmoneyaccumulatedthroughadeferredannuity,aretirementplanoranothersavingsvehicle.

Ifyouandyourspouseplantoretireatage65andyouwillhave10yearsofmortgagepaymentsleftatthattime,youmaychoosetogetanannuitywithajointandsurvivoroptionanda10-yearperiodcertain.Thatway,youknowyoucancontinuetomakethepayments.And,ifyoubothdiebeforetheguaranteeexpires,themortgagecouldbepaidoffforyourheirs.

Otherkeyfeatures:

Likelifeinsurancepolicies,annuitycontractsmayincludenon-forfeitureprovisionstoprotectyoufromtotalforfeitureorlossofbenefitsifyoustopmakingtherequiredperiodicpaymentsaswellassurrendercharges,orpenaltiesforcashingintheannuitybeforethepayoutperiodbegins.

Annuitiesmaybepurchasedonanindividualbasistohelpsolveindividualretirementneeds.Inthiscase,theannuitantistheowneroftheannuity.

Groupannuitiesoftenareusedtofundanemployer-sponsoredretirementplan,withtheemployerasthecontractowner.Theannuitants,then,aretheemployees.Ifanannuitantdiesduringtheaccumulationperiod,themoneyaccumulatedwillbepaidtoasurvivor.

Acommonillustrationistheannualpremiumretirementannuitycontract,inwhichthetotalaccumulationiscalculatedbasedonanannualpremium,anassumedinterestrateandretirementage(usually

Duringtheaccumulationperiod,theannuitycontractisflexible,inthatyoumayormaynotmakepayments.Inaddition,youhavewithdrawaloptions.Themoneyaccumulatedcanbewithdrawntotally,orinpart,duringtheaccumulationperiod.

Annuitiesmaybeusedtofundindividualretirementaccounts(IRAs),inwhichcasepremiumpaymentsmaybetax-deductible.But,inthisapplication,therearemorerestrictionsonwithdrawals(includingtaxpenaltiesforwithdrawalsbeforeage59).

ShoppingTips

Whenyouareconsideringpurchasinganannuity,compareprospectusesfromseveralcompanies.Notethetypesofinvestmentvehiclesoffered,theinterestratesthatareguaranteedandtheexpenses,whichcanvarywidely.

Expensesforafixedannuityusuallywillbelowerthanforavariableannuity.Withfixedannuities,alloftheexpenses(suchasmaintenanceandcontractfees)havebeentakenintoconsiderationbeforethecompanydeclaresperiodicinterestratesordeterminesthepaymentamount.

Feesforvariableannuitiesaremorecomplicated.Theycanincludeanannualcontractchargethatcoversadministrativeexpenses,surrenderfees,andamortalityandexpenseriskcharge(toguaranteethedeathbenefit,theavailabilityofpayoutoptionsandthelevelofexpenses).Atypicalmortalityandexpenseriskchargeis1.25percent.Avariableannuityalsowillchargefeesthatarededucteddailyformanagementandoperatingexpenses.(Thegoodnewsisthatmanagementexpensesforthesefundstypicallyarelowerthanformutualfundswiththesameinvestmentobjective.)

Independentratingservices,suchasMorningstarandLipperAnalyticalServices,publishreportsthatcomparethefeesforvariableannuities.Whileitsometimespaystopaymore,ifacontractistooexpensive,itcouldoffsetanygainsyouwouldmakefromthetax-deferredstatus.

Agoodruleofthumb:Iftheexpensechargesaremorethan1.5percentgreaterthanforacomparablefinancialvehicle,suchasamutualfund,andyourtimeframeislessthan10years,anannuitymaynotbetheoptionforyou.

Remember:Youcanlosemoneywithavariableannuity.Ifyoucan'taffordtoloseadime,you'llwanttolimittheannuitiesyouconsidertofixedannuitiesorconsiderthefixed-interestoptionsofvariableannuities.

Whileyoumaywanttominimizeyourriskandgowithafixedannuity,itisimportanttonotethatincomepaymentsmaynotkeeppacewithinflation.So,youmaywanttodivideretirementsavingsbetweenfixedandvariableoptionstohedgeyourbets.

Rememberthatdeferredannuitiesarelong-termaccumulationvehicles.Don'tinvestanymoneythatyoumayneedsooner,ratherthanlater.Ifyouwithdrawincomebeforeage59½,theIRSusuallywillhityouwitha10percentpenaltyinadditiontoordinaryincometax.Plus,thecompanythatsoldyoutheannuitymayimposeitsownearlywithdrawalpenalty.

Ifyouthinkyoumaywanttoswitchannuitiestoadjustyourportfolio,respondtochangesininterestrates,etc.besuretopurchaseacontractthatdoesnotincludewithdrawalchargesifyoudomakeachange.Andifyoursalespersonorbrokerencouragesyoutochangeannuitieseventhoughyouwillbepenalized,besureit'sawisemoveforyounotacommission-generatingploy.Arethebenefitsofthenewannuity(ahigherinterestrate,moreflexibility)sufficienttomakeupforthewithdrawalcharges?

You'rebetteroffpickingavariableannuitythatalreadyoffersyouseveralfundingoptions,soyoudon'thavetopullyourmoneyoutandinvestitinacompletelydifferentannuity.Lookforavariableannuitythatincludesarangeoffunds.

Also,ifyouinvestedinastockandheldontoitforseveralyears,whenyousoldit,youwouldpaycapitalsgainstax,whichis28percent.Ifyourtaxratewillbehigherthanthatwhenyouretire,youmaynotwantanannuity,becauseearningsfromannuitiesaretaxedasordinaryincome.Theonlybenefitfromanannuity,inthiscase,wouldbethetaxdeferralonearnings.Withsomeotherinvestments,youcouldbesubjecttocapitalgainstaxesannually.

Finally,lookcloselyateachcompanyyouareconsidering.Anannuityisalong-terminvestment,andyouwantthecompanytobethereaslongasyouneedit.

Beespeciallycarefulifacompanyisofferinganinterestrateforaninitialperiodoftimethatseemstoogoodtobetrue.Thisismuchlikethecreditcardoffersyougetwitha5.9percentinterestrateforsixmonths,thena20percentinterestrateforeverafter.Investigatetheunderlyinginterestrateandthecompany'sviability.Oncethebonusratetermexpires,there'snoguaranteethatrenewalrateswillbecompetitive.Beespeciallycarefulifyou'reswitchingannuities.

Lookintotheannuity'ssurrenderfees.Usually,thefeeforwithdrawingyourmoneybeforethedistributionperiodwilldecreaseovertime.Seehowlongthesefeesareinplaceandhowhightheyare.Atypicalexitfeeis6percentto7percent,decreasingoveraperiodoffivetosevenyears.

Forvariableannuities,checkthetrackrecordofthefundingoptions.Lookforstrongreturnsoverathree-tofive-yearperiodorlonger.Thehistoryofvariousfundingoptionscanbefoundthroughtheratingservices.

Conclusion

Therearefewguaranteesassociatedwithavariableannuityorotherinsurance-relatedinvestmentvehicles.However,ifyou'reclosetoretirement

ortherealreadyandwouldliketoshieldassetsandincomefromtax,anannuitymaybeyourbesttool.

Thesecontractsusuallywillguaranteethatchargeableexpenseswillnotexceedaspecificamountorpercentage.Inaddition,theyalsomayguaranteemortalitywhichmeansabenefitcheckwillbeguaranteedforthelifeofthebeneficiaryorannuitant.However,theseinvestmenttoolsdonotguaranteetheamountofthebenefitsatretirement,nordotheyguaranteeprincipalorinterest.

Considerablecontroversyhasragedovertheregulatoryissueofwhethervariableannuitiesarereallyinsuranceproductsorequityinvestmenttools.Thisisgenerallytrueofallinvestment-typeinsuranceproducts.

BoththefederalSecuritiesandExchangeCommission(SEC)andstateinsurancedepartmentsregulatevariableannuities.Theyareconsideredsecuritiesandhavetocomplywithfederalsecuritieslawsandregulations,withcertainlimitedexemptions.Stateinsurancedepartmentslicenseinsurancecompaniesandagentstosellvariableannuitiesandapprovevariableannuitycontracts,aswellasprovidingotherregulatoryoversight.

Buyinglifeinsuranceorannuitiesasinvestmentsmaymakesensetosomepeopleastheyplanfortheirretirement.Ifyou'regoingtousethesetools,though,youshouldthinkofthemasanadditiontoyourbasicincome-replacementlifeinsurancecoverage.Inmostcases,theinvestment-typepoliciesentailadegreeofriskeitherinwhatyoupayinorwhatyoucantakeoutthatmakethemashakyfoundationforyouressentialneeds.

KeyQuestions

1)Doesyouremployerprovideanannuityorotherinsurance-relatedretirementplanaspartofyourbenefitspackage?

2)Areyouconsideringpurchasingretirementincomelifeinsurancepolicy?

3)Areyouinterestedinpurchasinganannuity? Yes

4)Areyouinterestedinafixedannuity,avariableannuityoracombinationofthetwo?_____________________________

5)Doyouwanttomakeyourpaymentfortheannuityinalumpsum,orwouldyouratherpayovertime?________________

6)Doyouwanttoreceivethepaymentfromtheannuitymonthly,quarterly,semi-annuallyorannually?___________________

7)Doyouwantpaymentstogotoyouandyourspouse? Yes

8)Doyouwanttodefertheincomefromanannuity?(RefertotheToDeferorNottoDeferchart.)

9)Whataretheexpensesassociatedwitheachannuityyouareconsidering?______________________________________________________

______________________________________________________

CONCLUSIONWHOYOUAREANDTHEINSURANCEYOUNEEDClearly,differentkindsofinsuranceanddifferentamountsareappropriateatdifferentstagesofyourlife.

Ifyou'reyoungandsingleanddon'townahome,youprobablyonlyneedautomobileinsuranceandrenter'sinsurance.Ifyouownaboat,ajetskiorasnowmobile,you'llneedspecialinsurancepolicyforthem,too.

Ifyouownahome,youcertainlyneedhomeownersinsurancealthoughyoumayopttopurchasedwellingcoverage,instead.Ifyouliveinanareathat'spronetocatastrophessuchasearthquakes,floods,hurricanesandtornadoesyouprobablyalsoneedtoaddoncoverageforlossesfromthesetypesofnaturaldisasters.

Ifyouaremarriedandhavesmallchildren,you'reaprimecandidateforlifeinsuranceandprobablyalsofordisabilityincomeinsurance.

Ifyouremployerprovideshealthinsurance,lifeinsuranceanddisabilityinsurance,youmaynotneedtopurchasesupplementalcoverage.Ifyourcompanydoesnotprovidethesethings,you'llbeshoppingforindividualpolicies.Andifyou'reahomemakerwhoisrecentlydivorcedorwidowed,you'veprobablyjustenteredthemarketforhealthinsuranceandlifeinsurance.

Ifyou'reapproachingretirementage,youprobablydon'tneeddisabilityincomeinsuranceanymore,butoddsareyou'llwantlong-termcarecoverage,incaseyouneedhelpwiththeactivitiesofdailyliving,suchasdressing,feedingandbathingyourselfandsoyoucanchoosewhethertoreceivehome-basedcareorenteranursinghomesomeday.

Eachtimecertainfactorsinyourlifechange,it'stimetoreassessyourinsuranceneedsandyourcurrentcoverage.Thesefactorsinclude:

yourage;

yourmaritalstatus;

yourparentalstatus(includingwhetheryourkidsaregrownandself-sufficient);

whetheryouownorrentahome(ortwoorhaveincomeproperty);

whetheryouareemployed,andthekindofcoverageofferedbyyouremployer;and

whetheryouworkathomeorelsewhere(e.g.,ifyouworkathome,youmayneedtoaddanendorsementtoyourhomeownerspolicyorpurchaseaseparatehome-basedbusinesspolicy).

It'simportanttokeepyourcoveragescurrentwhetherthatmeanslettingyourinsurancecompanyknowaboutanadditiontoyourhomeorgettinganewpolicywhenyoubuyaboat.

InsuranceHasBecomeUbiquitous

Whetherornotyouwanttothinkaboutinsurance,youprobablyareaskedaboutitfairlyregularly.Ifyougotorentacar,therentalcarcompanyprobablywilltrytosellyoucollisiondamagewaiverinsurance.

Ifyoubuyahome,themortgagelenderwillrequireyoutogethomeownersinsurance.

Whenyoustartanewjob,youoftenhaveachoiceofhealthinsuranceplansandgroupdisabilityplans,aswellastheoptionofparticipatinginacafeteriaplan(whichcanincludecoveragefordentalcare,chiropractor'svisitsandvisioncare).Ifyourcompanychangesinsurancecarriers,youmaybeaskedallthesequestionsalloveragain.

Youmayevenbeaskedtobuyinsurancethenexttimeyouplanavacationorawedding.

You'veprobablyalsobeenofferedinsurancecoveragebyphone(say,

fromoneofyourcreditcardcompanies),viathemailandevenovertheInternet.Thisdirectsalesapproachtomarketinginsuranceofallsortsisbecomingmoreandmorecommon,asinsurancecompaniestrytocutcostsbyeliminatingagentsandtheircommissionfromthesalesprocess.Thisnewapproachtoinsurancesalesmaymakepricesmoreaffordableinthelongrun(oratleastkeepthemlevel).Butitalsomeansthatyouasaconsumerbuyinginsurancedirectlyfrominsurancecompanieshavetoknowmorethaneveraboutthesepolicies.

Thegoodnewsis:Afterreadingthisbook,youknowenoughaboutthecoveragesyouwantandneedtoasktherightquestionsandtobuyyourinsuranceanywayyouseefit.Thiswillbesomehtingthatyoufindyourselfdoingmoreandmoreastheinsuranceindustrycompletesitsmovetoaself-servicefocus.

Goodluck.

APPENDIX1CONTACTSFORCONSUMERS

StateInsuranceDepartments

AlabamaCommissionerofInsurance135SouthUnionSt.Montgomery,AL36130(205)269-3591or(205)269-3595

AlaskaDivisionofInsuranceP.O.Box110805Juneau,AK99811(907)465-2515E-mail:insurance@commerce.state.ak.us

ArizonaDepartmentofInsurance3030N.ThirdSt.,Suite1100Phoenix,AZ85012PhoenixArea:(602)912-8444TucsonArea:(520)628-6371Statewide:(800)325-2548

ArkansasInsuranceCommissioner1123SouthUniversity,Suite400UniversityTowerBuildingLittleRock,AR72204(501)686-2900

CaliforniaDepartmentofInsuranceConsumerServicesDivision300SouthSpringStreetLosAngeles,CA90013(800)927-HELP

ColoradoDivisionofInsuranceCommissionerofInsurance1560Broadway,Suite850Denver,CO80202(303)894-7499

ConnecticutInsuranceCommissionerP.O.Box816Hartford,CT06142(203)297-3900

DelawareInsuranceCommissioner'sOfficeRodneyBldg.841SilverLakeBlvd.Dover,DE19903(302)739-4251or(800)282-8611

DistrictofColumbiaSuperintendentofInsurance613GSt.NW,6thFloorWashington,DC20001(202)727-8000or(202)727-7434

FloridaDepartmentofInsurance200E.GainesSt.Tallahassee,FL32399(904)922-3100or(800)342-2762

GeorgiaInsuranceCommissioner2MartinLutherKingJr.Dr.FloydMemorialBuilding704WestTowerAtlanta,GA30334(404)656-2070

HawaiiInsuranceCommissionerP.O.Box3614Honolulu,HI96811(808)468-4644,ext.2790,or(800)548-5450

IdahoDepartmentofInsurance700W.StateSt.J.R.WilliamsBuilding,3rdFloorBoise,ID83720(208)334-2250or(800)721-3272SHIBA(SeniorHealthInsuranceBenefitsAdvisors),208-334-4350

IllinoisDepartmentofInsuranceDirectorofInsurance320W.WashingtonSt.,4thFloorSpringfield,IL62767(217)782-4515or(217)782-7446E-mail:director@ins084r1.state.il.us

IndianaCommissionerofInsurance311W.WashingtonSt.,Suite300Indianapolis,IN46204(317)232-2385or(800)622-4461

IowaInsuranceDivisionLucasStateOfficeBuilding,6thFloorDesMoines,IA50319(515)281-5705

KansasInsuranceDepartment420SWNinthSt.Topeka,KS66612

(913)296-3071or(800)432-2484

KentuckyDepartmentofInsuranceP.O.Box517Frankfort,KY40602(502)564-3630or(800)595-6053

LouisianaDepartmentofInsurance950N.FifthSt.BatonRouge,LA70804(504)342-5900or(800)259-5300or-5301

MaineBureauofInsurance35StateHouseStationAugusta,ME04333(207)582-8707

MarylandInsuranceAdministration525St.PaulPl.Baltimore,MD21202(410)468-2000or(800)492-6116

MassachusettsOfficeofConsumerAffairsandBusinessRegulation1AshburtonPl.Boston,MA02108(617)727-7780E-mail:ask@consumer.comMassachusettsPropertyUnderwritingAssociation(FAIRPlan):(800)392-6108

MichiganInsuranceBureauCommissionerofInsuranceP.O.Box30220Lansing,MI48909(517)373-9273

InsuranceDivisionoftheMinnesotaDepartmentofCommerce133E.SeventhSt.St.Paul,MN55101(612)297-7161

MississippiInsuranceDepartment

P.O.Box79Jackson,MS39205(601)359-3569or(800)562-2957

MissouriDepartmentofInsuranceP.O.Box690JeffersonCity,MO65102(573)751-4126or(800)726-7390

MontanaCommissionerofInsurance126N.SandersMitchellBuilding,Room270Helena,MT59601(406)444-2040or(800)332-6148

NebraskaDepartmentofInsurance941OSt.,Suite400Lincoln,NE68508(402)471-2201or(800)833-0920

NevadaDivisionofInsurance1665HotSpringsRd.,Suite152CarsonCity,NV89706(702)687-4270or(800)992-0900,ext.4270LasVegasOffice:2501E.SaharaAve.,Suite302LasVegas,NV89158(702)486-4009or(702)486-4007

NewHampshireInsuranceCommissioner169ManchesterSt.Concord,NH03301(603)271-2261or(800)852-3416

NewJerseyDepartmentofBankingandInsuranceP.O.Box325

Trenton,NJ08625(609)292-5360or(800)446-SHOPAutoandHomeownerInsuranceShopping:(800)446-SHOPReportingInsuranceFraud:(800)373-8568IndividualHealthCoverageProgramInformation:(800)838-0935SmallEmployerHealthBenefitsProgramInformation:(800)263-5912

NewMexicoSuperintendentofInsuranceP.O.Drawer1269SantaFe,NM87504(505)827-4592

NewYorkStateInsuranceDepartment25BeaverSt.NewYork,NY10004ConsumerServices:(212)480-6400AlbanyOffice:EmpireStatePlazaAgencyBuildingNo.1Albany,NY12257ConsumerServices:(518)474-6600

NorthCarolinaCommissionerofInsuranceP.O.Box26387Raleigh,NC27611(919)733-2032or(800)662-7777

NorthDakotaCommissionerofInsuranceCapitolBuilding,FifthFloor600EastBlvd.Bismarck,ND58505(701)224-2440or(800)247-0560

OhioDepartmentofInsurance2100StellaCt.Columbus,OH43215(614)644-2658or(800)686-1526OhioSeniorHealthInsuranceInformationProgram:(800)686-1578

OklahomaInsuranceDepartmentP.O.Box53408OklahomaCity,OK71352(405)521-2828or(800)522-0071

OregonInsuranceCommissioner440-1LaborandIndustriesBuildingSalem,OR97310(503)378-4271,(503)378-4636or(503)378-4484InsuranceConsumerAdvocate/SHIBA:(800)722-4134Information(503)947-7984ConsumerAssistanceUnit(503)947-7984

PennsylvaniaInsuranceDepartment1326StrawberrySquareHarrisburg,PA17120(717)787-2317

RhodeIslandAssociateDirectorandSuperintendentofInsurance233RichmondSt.Providence,RI02903(401)277-2223

SouthCarolinaDepartmentofInsuranceP.O.Box100105Columbia,SC29202(803)737-6140or(800)768-3467OfficeofConsumerServices:(803)737-6150

SouthDakotaDivisionofInsurance118W.CapitolPierre,SD57501(605)773-3563

TennesseeCommissionerofInsurance500JamesRobertsonPkwy.

Nashville,TN37243(615)741-2241or(800)252-3439

TexasDepartmentofInsurance333GuadalupeAustin,TX78701(512)463-6515or(800)252-3439Mail-P.O.Box149104,Austin78714-9104ReportFraud(512)475-4989or(512)475-1772

UtahCommissionerofInsurance3110StateOfficeBuildingSaltLakeCity,UT84114(801)538-3800or(800)439-3805ConsumerService(801)538-3805

VermontDivisionofInsuranceCommissionerofBanking,SecuritiesandInsuranceStateOfficeBuilding120StateSt.,Drawer20Montpelier,VT05602(802)828-3301ConsumerAssistanceline(802)828-3302

VirginiaCommissionerofInsurance1200JeffersonBuilding1220BankSt.Richmond,VA23219(804)371-9741or(800)552-7945

WashingtonOfficeoftheInsuranceCommissionerP.O.Box40255Olympia,WA98504(206)753-7301or(800)562-6900

http://www.wa.gov/ins

WestVirginiaInsuranceCommissioner2019WashingtonSt.EastCharleston,WV25305(304)558-3394or(800)642-9004

WisconsinOfficeoftheCommissionerofInsuranceP.O.Box7873Madison,WI53707(608)266-0103or(800)236-8517E-mail:ocioci@mail.state.wi.us

WyomingInsuranceCommissionerHerschlerBuilding122W.25thSt.Cheyenne,WY82002(307)777-7401NationwideInformationResources

InsuranceInformationInstitute110WilliamsSt.,4thFloorNewYork,NY10038(212)669-9200NationalInsuranceConsumerHelpline:(800)942-4242

NationalConsumersLeague81515thSt.NW,Suite928Washington,DC20005(202)639-8140

NationalInsuranceConsumerOrganization121N.PayneSt.Alexandria,VA22314(703)549-8050

U.S.OfficeofConsumerAffairsConsumerInformationCenterPueblo,CO81009WritetoDept.636BtoreceiveafreebookletcalledWhatYouShould

KnowAboutBuyingLifeInsurance.

NationalFloodInsuranceProgramFederalInsuranceAdministration(202)646-4623or(800)638-6620

Aaccidentaldeathanddismemberment289,303-304,319

accumulationperiod364,368

activitiesofdailyliving252-253,255,258,260,279-280,284,373

actualcashvalue19,21,63,76,79-80,92,105-107,127,152-153,157,168,177,184

agebracket41

agent1-5,20,27,30,36-37,45,49,54,58,61,65-70,73,76,88-89,97-98,111,137,147-149,152-154,157,170-172,177,181-183,188-192,229,243,260,272,275,277,279,294,305,332,336,338,341-343,347,350-352,356-357,361,371,374

AIDS348-349

annuity281,330-331,339,349,359-372

application30,51,186,189-191,229-230,268-269,272-278,290,297,305,308-310,320,331,342,347-350,354,368

assetsinventory53,94-96,166,177,206-207

assignedrisk183

assumption55,121,203,298,342-346,350,361

aviation336,355

avocation276-277,305,308,337,348

Bbankruptcy43,44,134

baserate40,45,47,307

basicform113,122,124,174,175

benefitperiod236,240,262,266-267,269-271,274,278-281,284,294-298,300,302,304,307,310-315,364

binding2,20,190,338,347,350

bloodtest230,347-349

boat2,53,73-91,119,166,198,210,214,217,220,222,373-374

bodilyinjury8-9,14-16,24-25,40,45,52,56,69,93,99,117,130-136,167,210,214-215,222,225,303

broadform113,124-125,175

broker3-4,58,137,190,275,352,356,370

buildingcode136,143,149,169,185

business1,5,7,13,22,24,27-29,44-45,50,54,58,60,77,93,102,107,114,119-120,123,135-139,145,156,169-171,174-178,181-183,186-190,196,199,209,213-214,219,223-224,227,256,287,290,298,306,313,317,319-320,329,338-339,347,356,374

businessuse22,44,77,107

buyersguide342,357

Ccafeteriaplan244-245,247-248,250,374

cancellation12,27,28,38,273

capitation234

catastrophic26,34,120,136,142,210-211,226,228,246,249,253,270,285

claimshistory307

co-payment226-227,234,237,239,243-244,250,255

COBRA245-246,248,250

cognitiveimpairment268,275

coinsurance152

collision8-9,11,14,18-20,23-25,31,37-39,43-47,53-56,61-65,69,71,73-74,79,84-90,93,95-96,106,109-110,204,374

comparison2,51,196,261,271,318,328,342,346,352-353

comprehensive9-11,19,37,53,56,61-62,65,69,71-74,87-90,93-96,109-110,116,126,194,202,211,214,218,222,225,226,238-239,241,244,270-271

computer58,119,125,144,156,168,175-177,194,202,211,214,218,222,225,226,238-239,241,244,270-271

condominium114-115,135-137,193,200,201,202,205-206,219

contestabilityperiod273,349,352

costcontainment32

costofliving264,279,286,298,300,314-315,335,340

credit41-44,84-86

creditcard4,24,44,126,199,332,370,374

creditlife332

Ddeathbenefit23,263,280,303,317-323,331,333,335,337-338,359-360,367,369

debris125,202,213

DeclarationsPage10-11,19-20,77,104-105

declaredvalue55,71,79-80

deductible9,19,21,24,46,54-55,61-65,69,71,78,81,95,106,110,140-143,149,153,169-170,175,178,184,189,194,206,210-211,214,216,225-226,228,234,236-241,243-244,246-249,261,270,272,294-295,338,366,368

defensecosts16-17,81,211,216-217,222

dentalinsurance243,250

directloss79,122-125

disabilityincome230,279,281,285-314,319,333,338,373

disappearingdeductibles95,110

disclaimer344

disclosure274

discount31,42,45,55-65,69-71,74,85,90,95,97,111,170-171,178,218,228,243,249,277,326,330,356

doubleindemnity319,333

drive-throughdelivery233

drivingrecord27,29,39-40,42-43,49,59,61,66,84,90,94-95,98,107,110

dwellingcoverage115-116,123,125-126,147-148,169,172-174,177,207,373

Eearnedincome281,290-292,294,297-299,307,310,312,315

earthquake5,118,120-122,140-145,149,169,181,186-187,189,373

effectivedate10,268,350

eliminationperiod261,266,269-271,276,278-279,281,284,294-297,302,310-315

employeebenefit223

endorsement11-12,14,19-20,22,40,67,76,79,91,95,102-111,114-115,121,128,140,148,167-170,174,175-177,184,196,200,203-204,206-207,217,219,275,374

entrustment75-76,99,136

exclusion4,12,20,26,37,43,74-77,79,81-83,85,98-100,102,104-105,107,113-114,120-121,126-127,135-136,156,172,175,200,203,210-211,221,228,244,261,271,273-274,278,284,311,336-337,342,347,350

Ffaceamount117,153,155,279-281,289,318-319,321-322,329,331,333-335,337,343,348-351,354,359

FAIRPlan143,182-192,219,221

fallingobject124,195,202

familyrisk60

FEMA41,137,140

financialinterest12

firstaid117,133,135

floater156,167,206

floodzone136-137,140,149

freelook5,231,263

funeralbenefit9,69

Ggapinsurance9

garage20,46,67-68,70,97,110,115-117,120,127,139,142,148,154-155,162-163,177

gatekeepermechanism260,278

gender49,305,349

golfcart14,91,100-104,110

goodstudent41,61

grievanceprocedure233-234

groupdisability287,291,293,302,312,374

grouphealth227,245,246,250

grouplife289,312

guaranteedbenefit32

guestliability96

Hhazard9,100,105,107,137,183,190,194,203,306,308-309,311,337,354

hazardousoccupation337,354

healthinsurance8,18,33,54,58,63,135,167,223,224,225,226,228,229,230,231,235,242-250,253,260,268,270,272,276,286,303-304,320,373-374

healthmaintenanceorganization(HMO)18,35,224-225,227,229,231-234,241-242,246,249

hobby120,164

homeowners2,5,19,23,27,42,53,56,70,73-76,79,82,91-92,94,98-103,108,110,113-119,121-123,126,128,130-136,138,140-147,151-157,166-177,179,181-183,185,187-193,195,198,200-206,209-210,214-222,261-262,294,318,373-374

hospice236-237,259,279,283

hospitalexpense225,235-235

Iillustration295,328,341-345,355,361,368

in-patient236-237,259

incomeloss9

indemnity86-87,206-261,283,319,333

individualretirementaccount(IRA)210,247-248,360-361,366-368

inflationguard148,169,178

inspection24,94,121,184,190,277,305,348

insuredlocation100-103,132,167

insuredperson2,13,22,120,123,131-134,136,196-199,318

insuringagreement18,126,211

intentionalact82,136

interstatetravel22

investmentrisk363

Jjewelry52-53,80,92,93,138,156,161-162,165-166,168,169,197,203,221

Llapse43,62,126,133,137,148,195,202,266-269,275,323,341,343-345,353

latentdefect77,79,127

leaseholdimprovement195

liability2,5,8-9,11-18,20-27,32-40,42-43,52-54,56,63-69,73-77,81-96,98-105,107-111,113,115,117-118,122-123,127,130-136,145-148,154,157,165-167,169,172-177,185-186,188-189,

192,193-202,204,206-222,241,336,367

liberalization12

license24,36,42,61,74,90,94,98,110,183,189,258,309,371

limitofinsurance2,20,211

limitofliability16-17,20-21,107,185,198-200,216-217

livingneed280-281,335,340,349

long-termcare248,251,253,255,257,260-264,266,270-272,274,276,279,281,289,320,373

lossassessment126,135

lossofuse16,116,123,125,131,195,202

lostwages9,31,33-34

lumpsum268,301,303-304,321,328-329,363,365-368,372

Mmajormedical223,225-226,243,276

maliciousmischief122,127,185,196

maritalstatus40-41,347,373

marketvalue47,52,151,166,256

Medicaid231,249,253-257,270,282

medicalbenefits8-9,64,69

medicalexamination326,348,351

medicalexpense17-18,32-33,93,96,109-110,117,131-132,167,223,225-229,235-238,244-247,249,272,280,289,291,303

MedicalSavingsAccount228,247,250

medicallynecessary228,234,236-237,247

Medicare225,234-242,249,254-255,258,282

mileage40,49,56,67,70

mobilehome115,137,144,174,184,219

moralhazard309,311

mortality286,330,332,336,341,343,345,354,361,363,369,371

mortgage2,119,137,153-154,165-166,182,285,290,292,320-321,368,374

motorvehicleregistration99-100,102-103,108,121,199

motorcycle7,14,91,95-99,104-105,108,110,219-220

Nnamedexclusion43

namedinsured118,130,135,174,329,335,350

named-perils79,114,124,125,194

naturaldisaster144,170,319,373

negligent23

netcostmethod345-346

networth43,52,165,218,221,297-298,305,310

network225,227,263

no-faultinsurance30-31,65

non-ownedauto11,24,85

nonforfeiture266-268,283

nursinghome2,247,251-258,260-264,266,269-270,276,278-280,282,373

Ooccasionaluse44

occurrence44,75,81,131-134,184,212,215,218-219,334

otherstructures115-116,118,122-125,127,148,154-155,174,177,184

otherthancollision(OTC)11,19

out-patient233,237,239

overinsurance310,312

Ppainandsuffering7,9,14,31,33,209,212

pairandset129

participatingpolicy322

pension52-53,61,165-166,221,256,289,360,367

peril74-75,79,113-114,117,120-126,128-129,152,173,175,194,202-204,206,210,352

permanentdisability14,296

permission77-78,82-83,85,103,132,167,204,224,242

personaleffects74,80,89,92-93,109,161-162

personalinjury34,169,178,214-217

personalpossessions52,79,155,165,256

personalwatercraft73,76-77,87-88,90

physicaldamage11,16,18,21,24,47,68,74-76,84-86,94-95,97,103-107

pleasureuse44,70,77

policyloan322,338,354,361

policysummary274,342,357

post-judgmentinterest17,133

preferredproviderorganization(PPO)3,19,22,27,31-34,42,45,81,118,138,167-168,174,186,188,224-225,227,229,242

pre-existingcondition228,230-231,234,268-269,273-274,276,278,284

premises91-92,100,102-103,108,114-116,118-120,122-123,126,132,135,145,148,167,173-175,186,198-199,206,210,213-214

premium2,5,9,11,12,20,22,26,28-29,31-34,37,39-42,44-48,51-52,54-60,63-67,71,78,84-86,90,94,97,102,104-108,113,128,130,133,140-141,144-145,149,151,156,169-172,175,178,181,187,190,195-197,203-204,206,217,219,223-224,227-228,232,234-235,238,241,244,247-250,256,261-272,274-278,284,289-290,292,294-300,303,305-311,313-323,325-338,340,342-354,356-357,360-361,363-364,368

probationaryperiod276,279

progressiveunderwriting313,323

projection341-345

propertydamage8,14-16,23,25,31,40,45,52,67,69,74,77,79,81,86-87,93,99,102-103,130-131,135-136,152,202,206,212-215

prospectus363,369

purchaseprice93,119,155,365

Rrating14,28,29,39-40,42-44,47-48,59-60,77,82,85,89-90,94,103,105,121,170,190,213,225,229,309,326,344,349,356,369,370

recreationalvehicle88,91,103

redlining28

rehabilitation8-9,233,301,303,315

reimbursement23,56,69,225-227,249,254,260-261,272,283

renewal12,38,42,97,141,184,274,351,370

rentalcar10,16,22-24,35,38,374

rentersinsurance120,147,154,193-197,201

replacementcost76,80,90,93,109,115,127-128,134,142,152-153,157,168,172,177,184-185,194,212

residenceemployee118,132,167,196-198

retainedlimit216

retirement42,52,100,165,235,247-248,255-256,270,272,281,290,306,322,325,327,331,344,359-362,365-373

revocation61

rider97-98,110,121,155,231,251,275,277-281,298,301-303,311-312,314,316,319-320,332-336,340

riskfactor26,46,47

Ssafedriver61,69,318

schedule46,77,85-86,105-106,139,168,172,177,206,226,303-304,336,346,350,354,361

segmentation345

separateaccount362-365

sliding66,120

slipsandfalls132

snowmobile91,97-98,101-103,106-108,110

specialdiscount55

specialtyvehicle91,103-104,108

splitlimits14,45,215

spouse2,81,118,130-131,145,174,235,245-246,254,317,320,329,335,362,364-365,368,372

the insurance buying guide: a practical method for figuring out how much-and what kind of-insurance

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