the insurance buying guide: a practical method for figuring out how much-and what kind of-insurance
TRANSCRIPT
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.
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TheInsuranceBuyingGuideAPracticalMethodforFiguringOutHowMuchand
WhatKindofInsuranceYouNeed
bytheSilverLakeEditors
SILVERLAKEPUBLISHINGLOSANGELES,CALIFORNIA
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TheInsuranceBuyingGuideAPracticalMethodforFiguringOutHowMuchandWhatKindofInsuranceYouNeedFirstedition,1999Copyright©1999bySilverLakePublishing
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.
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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
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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
193
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
359
Conclusion:WhoYouAreandtheInsuranceYouNeed. 373
Appendix:ContactsforConsumers 377
Index 387
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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-
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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
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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
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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.
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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
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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.
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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.)
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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.
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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.)
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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-
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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:
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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.
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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.
Page15MinimumLevelsofRequiredAutoLiabilityInsuranceThefigureslistedareinthousandsofdollars.(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
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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
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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-
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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).
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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
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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
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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.
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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
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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-
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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
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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-
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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.
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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-
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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.
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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
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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.
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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.
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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.
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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:
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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.
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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.
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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.
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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.
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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
BASETOTAL=PREMIUMRATExFACTOR
$BI$PD$BI/PDSL$MP$UM$COMP$COLL$TOWING
________________________
____________
________________________
____________
TOTAL
________________________________________________$_____
________________________
____________
________________________
____________
TOTAL
________________________________________________$_____
________________________
____________
________________________
____________
TOTAL
________________________________________________$_____
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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.
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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?
Car#1
_______________
Car#2
_______________
Car#3
_______________
Car#4
_______________
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2)Whatisthemileageofeachcar?
Car#1
_______________
Car#2
_______________
Car#3
_______________
Car#4
_______________
3)Howdoyouuseeachcaryouareseekingtoinsure(business,pleasure,farm,drivetowork)?
Car#1
_______________
Car#2
_______________
Car#3
_______________
Car#4
_______________
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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.
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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-
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efitsyouhaveorinvestmentsyou'vemade.Althoughtheseusuallycan'tbeseizedinalegaljudgment,theirbenefitscanbeattachedovertime.
Thetotalvalueofallthesethingsevenifyoucouldn'traiseitbysellingeverythingtomorrowiswhatyouneedtoprotect.Youshouldhaveliabilitycoverageequaltoatleastthisamount.
AssetsInventoryYoumaynotevenrealizehowmuchyouhavetoprotect.Here'saquickchecklisttojogyourmemory.AssetCategory Description ValueHome
Secondhome
Incomeproperty
Savings
Stocksorbonds
Mutualfunds
Alimonyincome
Pensionbenefits
Cars
Boats
Airplanes
RVs
Art
Collections(e.g.,stamps,dolls)
Computerequipment
Jewelry
Stereoequipment
Other
Totalvalue
Ifyouhaveassetsworthmorethan$300,000,youshouldconsiderbuyinga$1millionumbrellaliabilitypolicy,inadditiontoyourautoinsurance.Anumbrellapolicywillpayoffifdamagesexceedthelimitsofeitheryourautoorhomeownerspolicies.
A$1millionumbrellapolicygenerallycosts$200to$300ayear.Thisislessthanincreasingtheliabilitylimitsonyourautopolicy,plusyougetbroadercoverageforyourmoney.
Thebiggestmistakemostpeoplemakeontheirautoinsuranceisthattheyareunderinsuredonliabilitycoverageandoverinsuredoncollisionandcomprehensivecoverage.
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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
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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.
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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.
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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
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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-
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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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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
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alsoshouldbuythiscoverageifyourareaisnotedforthenumberofuninsureddriversontheroad.)
Somestatesallowbenefitstackingasanoptionalcoverage.Thiscoveragemeansthatyoucanaddtheuninsuredmotoristslimitsfrominsuranceonseveraldifferentcarstoapplytoasingleclaim.Butbecarefulaboutstackingyouobviouslyshouldn'tbuyitifyouonlyhaveonecar,andsomestateshavebeenaccusedofallowingstackingchargestobeappliedtoallinsurancepolicies.
Towingandlaborcostcoverageisaminorphysicaldamagecoverage.Itcoverschargesfortowingandlaborwhenacoveredautoisdisabledduetoabreakdownoraccident.Coveredlabormustbeperformedattheplaceofdisablementlaborperformedafteranautomobileistowedtoagarageisnotcovered.
Conclusion
Armedwiththisbook,youshouldbeabletoshaveasignificantchunkoffthepriceofyourautoinsurance.Justbesuretocomparequotesfromatleastthreecompanies,anddon'tforgettochecktheirrecordswithyourstate'sinsurancedepartment.Abargainisn'tagooddealifthecompanyisnotoriousfordelayingpaymentonclaimssometimespermanently.
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KeyQuestions
1)Beforeyoucontactanagentorinsurancecompany,you'llwanttodecidehowmuchcoverageyouneed,aswellaswhatdeductiblesyouwouldconsider.Thefollowingchartwillhelpyoukeepallthisinformationstraight.
CoverageLimitdesired
Deductible
Bodilyinjuryliability
Propertydamageliability
Medicalbenefits
Uninsuredmotorist
Underinsuredmotorist
Collision
Comprehensive
______
______
______
______
______
______
______
NA
NA
NA
NA
NA
______
______
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)
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(Tablecontinuedfrompreviouspage)
Discount Howmuch?
CompanyACompany
B
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.
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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?______
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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:
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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,"
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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
Total50hporless
Nolimit
Sailboats 26feetorless 26feetorless Nolimit
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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);
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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.
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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.
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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
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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
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$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
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toprotectyoubycoveringinjuriesordamagessufferedbyotherpeople.So,ifanotherfamilymemberorafriendisoperatingyourboatwithyourpermissionandinjuresyou,youwillnotbecoveredifyousuethatotherperson(whowouldotherwisebea"coveredperson"underthepolicy).Ifyouareoperatingtheboatandinjureafamilymember,thatinjuredfamilymemberalsowillnotbecovered.
Somepoliciesalsowillincludeanexclusionforliabilitythatariseswhiletheboatisbeingtowed,exceptwhentheboatishauledoutorbeinglaunchedbutmostdocovertowingaspartofthe"ownership,maintenanceoruse"exposure.
Becausefinesorpenaltiesimposedbygovernmentalagenciesandpunitivedamagesareaformofpunishmentforyourintentionalactions,theyarenotcovered.
Finally,youalsomaywanttoconsiderpurchasinganumbrellaliabilitypolicy(coveredlaterinthisbook).Unlessboatsarespecificallyexcludedfromtheumbrellapolicy,itwillcoveranyliabilityinexcessofthatprovidedbythehomeownerspolicyorboatpolicy.However,anunderlyingboatpolicystillisrequiredinmostcases.
MedicalPaymentsCoverage
Astandardboatownerspolicywillpaynecessarymedical,ambulance,hospital,nursingandfuneralexpensesresultingfromaccidentalbodilyinjury.Thiscoverageappliesonlytopersonsinjuredwhilein,upon,boardingorleavingtheinsuredboat(whichisvirtuallyidenticaltohowthecoverageappliesunderaPersonalAutoPolicy).
Likeanautopolicy,thereisalsoatimelimitonmedicalpaymentscoverage.Theinsurancecompanyonlywillpaycostsincurredwithinoneyearoftheaccidentdate.
Thiscoveragealsocomeswithexclusions.Coverageusuallyisnotprovidedfor:
injuriestoyouremployee(s)whileinthecourseofemployment,orwhileusing,maintainingorrepairingyourboatoritsequipment,sincethisshouldbecoveredbyworkers'compensationinsurance;
anyresponsibilityforpaymentassumedundercontractoragreement,sincethispolicydoesnotcoverbusinesuse.
Youcanselectyourlimitformedicalpaymentscoverage.Thisisthemosttheinsurancecompanyisobligatedtopayperpersonforeachaccident
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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.
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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
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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
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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).
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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.
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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.
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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)
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(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.)
_________________________________________________
4)Doyouwantcomprehensivecoverage? Yes No
5)Doyouwantcollisioncoverage? Yes No
6)Doyouwantmedicalpaymentscoverage? Yes No
7)Doyouwanttoaddcoverageforatrailer? Yes No
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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.
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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);
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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,
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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.
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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-
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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.
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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-
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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
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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.
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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-
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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).
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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-
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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
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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.
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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.
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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
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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
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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.
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KeyQuestions
Formotorhomecoverage,hereareafewkeyquestions.
1)Whatisthemake,modelandyearofthemotorhometobeinsured?_______________________________________
2)Whatequipmentisonthisparticularvehicle?_________________________________________________
3)Howmuchliabilitycoveragedoyouneed? _________
4)Howmuchpersonaleffectscoveragedoyouneed?
_________
5)Doyouwantcollisioncoverage? Yes No
6)Doyouwantcomprehensivecoverage? Yes No
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
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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? _________
7)Doyouwantcollisioncoverage? Yes No
8)Doyouwantcomprehensivecoverage? Yes No
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
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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?_____________________________________________________
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PROTECTINGYOURHOME
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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)
HO-2
thebroadform
coversallofthestandardandoptionalperilsavailableonthebasicformandexpandsseveralofthose
HO-3
thespecialform
insuresagainstanyrisksthatarenotspecifi-ortheall-riskformcallyexcluded
(Continuedonnextpage)
(Continuedonnextpage)
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(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,
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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
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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.
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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
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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
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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;
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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-
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hicle.(However,homeownerspoliciesdocovervehiclesthatarenotsubjecttomotorvehicleregistrationandareusedtoserviceyourresidenceorassistthehandicapped.)
Ifyou'rehopingtoinsureanyoftheseitemswithhomeownerscoverage,you'llbeoutofluck.Theoperatingassumptionhereisthattheinsurancecompanywillprovidecoverageagainstlossesthatarelikelytooccurinaperson'sordinaryexperience.
Inmanycases,youwillbeabletouseendorsementsorriderstoadaptstandardpoliciestoyourspecificneeds.Endorsementsandridersserveasaddendaaddingcoverageorconditionstostandardinsurancecontracts.
Certainperils,orrisks,areexcludedfromstandardpoliciesbecausetheycanbecoveredbetterunderdifferentinsurance(forexample,aseparateearthquakeinsurancepolicy),becausetheyareanaturalchangethatoccursovertimeorbecausepayingforthemmighttemptpeopletocommitfraud.Amongtheexclusionsthatfallintothiscategoryaredamagecausedby:
wearandtear;
deterioration;
depreciation;
rust;
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
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waterdamageresultedfromsomethingotherthansewerback-up.Theyusuallylosetheirargument.
PerilsCoveredUndertheBasicForm
Whileeveryhomeownerspolicyprovidesliabilityandpropertycoverage,HO-1isaverylimitedpolicy.That'sbecausethisbasicformonlyinsuresthedwelling,otherstructuresandpersonalpropertyagainstdirectlossbyspecificnamedperils.Theseperilsare:
fireorlightning;
wind;
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.
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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.
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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).
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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
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(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);
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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
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''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
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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-
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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-
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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.)
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Medicalexpensesincludereasonablechargesformedical,surgicalanddentalcare,X-rays,ambulanceservice,hospitalbills,professionalnursing,prostheticdevicesandfuneralservices.
Intheexampleabove,afterMack'sdogbitesEthelbert,Mackalsowillbeliableforthestitches,shotsandothermedicaltreatmentEthelbertmightneed.
Medicalpaymentscoverageappliesonlytopeoplewhoareonthepremiseswiththepermissionofaninsuredperson.Someonewhocomesontoyourpropertytorobyourhouseandisattackedbyyourdogcannotcollectdamagesunderyourhomeownerspolicy.Thiscoveragedoesnotapplytomedicalexpensesrelatedtoyourinjuriesorthoseofanyonewholiveswithyou,exceptresidenceemployees.
Awayfromyourhome,coverageappliesonlytopeoplewhosufferbodilyinjurycausedby:
you;
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
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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.
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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
in.
Yourdutiesintheeventofanoccurrenceincludeprovidingwrittennoticetotheinsurancecompanythatidentifiestheinsuredpersoninvolved,theinsurancepolicynumber,thenamesandaddressesofclaimantsandwitnesses,andinformationaboutthetime,placeandcircumstancesoftheoccurrence.
Youarerequiredtopromptlyforwardeverynotice,demandorsummonsrelatedtotheclaimand,whenrequested,toassistintheprocessofcollectingevidence,obtainingtheattendanceofwitnessesandreachingsettlement.
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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.
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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.
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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.
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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
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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.)
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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-
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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.
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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.
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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
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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.
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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
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canbeheldliable.
Propertycoverageisthemostcommoncoveragepeoplethinkofwhentheyshopforhomeownersinsurance.Thisisinsuranceforfiresanddamagesthatcandestroyyourhouse.Theamountsofcoverageofferedbythissectionofthepolicycanvarywidelyonlocationandinsurancecompany.
Itisimportanttoknowthedifferentdefinitionsofcoverageandhowtheyapplytoyoulegally.Itisalsoimportanttoknowwhenlimitsofcoverageoccurinyourinsurancepolicy,andwhentheinsurancecompanystopspaying.
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KeyQuestions
Thisistheinformationyou'llneedtodecidewhetheryouwanttogethomeownersordwellingcoverage.You'llalsoneedthisinformationbeforeyoucallaninsuranceagentorothersalespersontopurchasedwellingcoverage.
1)Isthiscoverageforyourprimaryresidence?No YesNo
Ifyouansweredyes,you'llprobablywanttopurchasehomeownersratherthanstand-alonedwellinginsurance.However,
answeringafewmorequestionswillhelpyoudecide.
2)Isyourhomeineligibleforhomeownerscoveragebecauseofitsage,locationorvalue?
YesNo
3)Isyourhomeineligibleforhomeownerscoveragebecauseitisnotasingleortwo-familyresidentialproperty?
YesNo
4)IfyouansweredyestoQuestion3,isthishomeatriplexorafour-familydwelling?
YesNo
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:
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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
YesNo
e)Inflationguard YesNo
f)Broadtheftcoverage YesNo
g)Off-premisestheftcoveragE YesNo
h)Watercraftcoverage YesNo
7)Doyouwanttoaddpersonalliabilitycoverage? YesNo
8)Howmuchliabilitycoveragedoyouneed?__________________________________________________Doyouwanttopurchaseadditionalmedicalpayments YesNo
9)coverage?
Ifyes,howmuch?____________
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Catastropheinsurancequestions.
1)Doyouliveinafloodzone? YesNo
2)Hasthereeverbeenaflashfloodinyourarea? YesNo
3)Doesyourhousequalifyforfloodinsurance? YesNo
4)Doyouneedsurplusfloodcoverage,ontopofthe$185,000maximumforyourhomeand$60,000foritscontents?
YesNo
5)Doyouneedadditionalfloodcoverageforart,jewlery,furs,silver,etc.?
YesNo
6)Doyouliveinanearthquake-pronearea? YesNo
7)IfyouliveinCalifornia,canyougetcoverageunderwrittenbyaninsurancecompany,orareyoulimitedtoaCEApolicy?(Youmayhavetocallafewagentstofindout.)
YesNo
8)DoyouneedwraparoundcoveragetosupplementaCEApolicy?
YesNo
9)Doyouneedwindstormcoverage? YesNo
10)Doesyourhousemeetthelatestbuildingcodes?(Thismaysaveyoumoneyonyourpremiums.)
YesNo
11)Canyoutolerateahigherdeductible?(Thisalsoshouldsaveyoumoneyonpremiums.)
YesNo
12)Canyouaffordtogowithoutcatastrophecoverage? YesNo
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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.
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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.
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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-
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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
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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.
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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
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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)
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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.
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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.
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MedicalPaymentsCoverage
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
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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
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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
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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,
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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
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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-
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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.
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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
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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-
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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.
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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
(Continuedonnextpage)
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(Continuedfrompreviouspage)
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?
________________
(Continuedonnextpage)
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(Continuedfrompreviouspage)
h)Notfilingaclaimforthreeyears? ________________
i)Beinganonsmoker? ________________
j)Buyinghomeownersandautoinsurancefromthesamecompany?
________________
k)Beingasenior? ________________
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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.
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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).
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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-
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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
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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:
fire;
lightning;
internalexplosion
windstormorhail;
explosion;
riotorcivilcommotion;
aircraft;
vehicles;
smoke;
volcaniceruption;and
vandalismormaliciousmischief.
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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-
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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.
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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
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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.
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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.
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Ifyourpropertyisfoundtobeineligibleforcoveragebecauseofseveredeficiencies,anycoverageineffectwillbecancelledandyouwillbeinformedofwhatrepairsarenecessaryorwhatdeficienciesmustbecorrectedinordertomakethepropertyinsurable.
IfanyinsuranceisrefusedorcancelledbytheFAIRplan,youmaysubmitanewapplicationforcoverageatanytimeafternecessaryrepairshavebeenmadeordeficiencieshavebeencorrected.
YouusuallyhavetherighttoappealanyactordecisionoftheFAIRplanwhichaffectsyouadversely.AppealsofanydecisionincludingrejectionofapropertyforcoverageshouldbemadetotheAppealsBoardorGoverningCommitteeoftheFAIRplan.
Conclusion
Assignedriskinsuranceisanimportanttoolformanypeoplewholiveinhigh-crimeorhigh-riskareasandotherwisecouldnotpurchasehomeownersinsurance.However,FAIRplancoverageusuallyismorelimitedthanastandardhomeownersinsurancepackageandthelevelofcustomerserviceisoftennotashigh.
Whenatallpossible,youarealwaysbetteroffstayingoutofyourstate'sFAIRplanorgettingoutassoonasyoucan.
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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.)
_________________________________________________
_________________________________________________
_________________________________________________
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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.
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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:
fire;
lightning;
volcaniceruption;
windstormorhail;
explosion;
riotorcivilcommotion;
aircraft;
vehicles;
smoke;
vandalism;
theft;
burstingofasteamorhotwaterheatingsystem;
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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.)
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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.
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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.
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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).
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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.
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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
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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.
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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.
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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.
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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.
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Conclusion
Overlookinginsurancecanbeabigmistake.Evenifyouarenotahomeowner,youprobablyhavebelongingsofvalue.Fortunately,therearepoliciesavailableforrenterstoinsureprotectioninthecaseoftheftorotherloss.
Andtherearepoliciesdesignedwithcondominium,townhouseandco-opownersinmind,too.
Unfortunately,thereisnopolicydesignedjustforpeoplewhorentoutahomeortradehomesoccasionally.Youwillhavetobeabitmorecreativeaddingtoyourhomeowners,dwellingortheftcoveragepolicytobesureyoudon'twindupunderinsured.
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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
(Continuedonnextpage)
(Continuedfrompreviouspage)
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)
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(Continuedfrompreviouspage)
4)Howmuchpersonalpropertycoveragedoyouneed(foryourownpropertythatison-site,includingfurniture,carpetanddrapes,dishes,etc.)?(RefertotheHouseholdPropertyInventory.)_______________________________________
5)Doyouneedbroadtheftcoverage? YesNo
6)Willthepolicyinquestioncovertheftifthepropertyisrentedout?
YesNo
7)Doyouneedliabilitycoverageforthisproperty? YesNo
8)Ifyouexchangehomes,willthispolicyprovidesufficientcoverage?
YesNo
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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
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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).
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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.
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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
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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.
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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-
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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
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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.
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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
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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);
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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.
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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.
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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:_______________________________________________
_________________________________________________________________
_________________________________________________________________
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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-
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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.
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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
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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.
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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.
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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
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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
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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
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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.
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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
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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.
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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
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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.
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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
(Tablecontinuedonnextpage)
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(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
Unlimitedifmedicallynecessary
Laboratorytestsincludingbloodandurine
Afteryour$100,20%ofhospitalcharges
Approvedchargesforhospitalcosts
Unlimitedifmedciallynecesary
Outpatientservicesfordiagnosisandtreatmentofillnessorinjury
(Tablecontinuedonnextpage)
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(Tablecontinuedfrompreviouspage)MEDICAREPARTB(MEDICALEXPENSE)
YOURCOST MEDICARE'SCOST
TIMEPERIOD BENEFIT
SameasMedicarePartA,onlyifyoudonotyoudonotcarryPartA
SameasMedicarePartA,onlyifyoudonotyoudonotcarryPartA
SameasMedicarePartA,onlyifyoudonotyoudonotcarryPartA
HomeHealthcare:sameasMedicareifyoudonotyoudonotcarryPartAandpaidonlyifyoudoPartAcarryPartA
After$100deductible,firstthreepintsplus20%foradditionalpints
80%ofapprovedamountbeginningwithfourthpint
Unlimitedifmedicallynecessary
Blood
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
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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
Yesat
100%
Yesat80%
NoYesat
100%
Yesat
100%Prescription Yes Yes Yes
What'sIncluded?
BasicBenefits(PlanA)supplementMedicarebenefitsbyprovidingcoverageforyourhospitalizationco-insurancepaymentfromday61-90and91-150.Thismeansthatthe$190and$380perdayyouwouldberequiredtopayunderMedicare,willbe
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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.
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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
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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.
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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.
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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.
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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),
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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.
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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.
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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.
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KeyQuestions
1)Doesyouremployerofferyouhealthinsurance? YesNo
2)DoyouhaveachoicebetweenanHMOandareimbursement-stylepolicy?
YesNo
3)IsyourregularphysicianaproviderfortheHMOyou'reconsidering?
YesNo
4)Ifyouchooseamedicalexpensepolicy,howmuchofadeductibleareyouconsidering?(It'sworthwhiletocomparepremiumsforapolicywithseveraldifferentdeductibles.)_________________________________________________
5)Wouldyouconsiderpurchasingcatastrophiccoveragebyincreasingyourdeductiblesubstantially?
YesNo
6)Doyoubelongtoagroupthatoffersdiscountsonhealthinsurance(e.g.,atradeassociation,analumniassociation,achurch)?
YesNo
7)Haveyouaskedyourdoctororpharmacisttorecommendahealthinsuranceplan?
YesNo
Whatdidheorsherecommend?_____________________
8)Ifyouhavebeenunabletoobtaininsuranceonyourown,doyouqualifyforastate-sponsoredhealthinsurancepool?
YesNo
9)DoyouqualifyforMedicaid? YesNo
10)DoyouqualifyforMedicare? YesNo
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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
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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
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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.
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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
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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
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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
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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.
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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;
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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.
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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.
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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
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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
$$$$$$$$$
Premium $$$$$
$
15 30 60 90 180EliminationPeriod(indays)
Itisalsoimportanttonotethatalllong-termcarepolicieswillcontainsomeexclusionsand/orlimitations.Thesetypicallydescribethekindsofclaimsforwhichtheinsurancecompanywillnotpay.Commonexclusionsinclude:
lossesduetowarandactofwar;
lossesduetointentionallyself-inflictedinjuries;
careforstaysingovernmentfacilities,suchasaveteran'shospital;
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lossesthatarecoveredbyworkers'compensationorsimilarstatutorybenefits;and
lossesduetomental,psychoneuroticorpersonalitydisorders,whenthereisnophysicalororganicdiseaseinvolved.
Mentalorpersonalitydisordersresultingfromanaccident,Alzheimer'sdiseaseorotherorganicdiseasesarecovered.
HowLongWillthePolicyPay?
AnotherkeyconsiderationwhenshoppingforLTCinsuranceishowlongthepolicywillcontinuetopayyoubenefits.Thisisthebenefitperiod(BP).AnLTCpolicywillnotsimplypayyoubenefitsforlife.Youhavetochoosethelengthofthebenefitperiodandpaypremiumsaccordingly.
Mostinsurancecompanieswillofferbenefitperiodsofonetofiveyears,andsomeofferlifetimebenefitsbuttheseareexpensivepolicies.
SomepoliciesmaycontainbothaBPperstayandalifetimemaximumbenefitperiod.Forinstance,apolicymayofferathree-yearbenefitperiodpernursinghomestay,butamaximumlifetimebenefitperiodoffiveyears.So,ifSamwereconfinedtoanursinghomeonthreedifferentoccasionsforperiodsofsixmonths,oneyearandtwoyears,hewouldreceivethebenefitshewasentitledtoforeachstay,sinceeachofthesestayswasnolongerthanthreeyears.Inaddition,hewouldhaveusedupthree-and-one-halfyearsofhisfive-yearmaximumlifetimebenefit,leavinghimwithone-and-a-halfyearsofadditionalcoverage.
Asyoumightexpect,thelongeryouwillreceivebenefits,thehigherthepremium.TheEffectoftheBenefitPeriodonPremiums
$$$$$$$$$
Premium $$$$$
$1 2 3 4 5BenefitPeriod(inyears)
CommonPolicyProvisions
Differentinsurancecompaniesusedifferentformsfortheirlong-termcarepoliciesunlikehomeownersinsurance,whichiswrittenonstandard
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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
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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
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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
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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).
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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
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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.
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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.
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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.
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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-
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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-
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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
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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.
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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;
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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-
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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;
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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-
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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
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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-
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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
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forproductdesigntomeettheLTCneedsoftheseniorcitizen.
Conclusion
Thechanceofanexpensivestayinanursinghomeisaveryrealriskfortheseniorcitizen.Duetoincreasinglifeexpectancy,theaveragelengthofanursinghomestaywillgraduallyincrease,aswilltheaverageexpense.
Thebasicproblemishowtopayfornursinghomecare.Medicareactuallyoffersveryfewbenefitsforcareinanursingfacility,especiallyforcustodialcare.Medicaidwillcovernursinghomeexpensesonlyforthefinanciallyneedy.
Anotheralternativeistorelyonfriendsandrelativesfornecessarycare.Oryoucanpayfornursinghomecostsfrompresentfinancialassets.Dependingonthelengthandcostofsuchastay,thebillcouldbeconsiderableandyoumayexhaustavailablefinancialresources.WhilethiswouldmakeyoueligibleforMedicaid,it'scoldcomfortforpeoplewhohadplannedtoleavesomethingtotheirheirs.
ThenaturalsolutiontotheproblemisLTCinsurance.Thistypeofpolicycanprotectyourassets.Italsogivesyouflexibilityandfreedomofchoiceintheselectionofanursinghome.Anditallowsyoutomaintainadegreeofindependence.
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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?
YesNo
Doesthepolicycontainanyofthefollowingoptionalpolicybenefits?Adultdaycare Yes NoHospicecare Yes NoInflationprotection Yes NoHomehealthcare Yes NoAMOUNTOFBENEFITSArepolicybenefitspaidonareimbursementbasis?
YesNo
Ifso,whatisthepercentage?__________%Howlongwillbenefitsbeprovided?_________________________
Howlongwillbenefitsbeprovided?_________________________Arepolicybenefitspaidonanindemnitybasis?YesNoIfso,whatisthedailybenefitforeachlevelofcare?_______________________________________________________Howlongwillbenefitsbeprovided?_______________________________Doesthepolicyhaveamaximumlifetimebenefit?
YesNo
Ifso,howmuchisit?_________________
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POLICYPROVISIONSHowlongistheeliminationperiod?_________________________Howlongisthebenefitperiodforeachlevelofcare?_______________________________________________________Doesthepolicyrequirepriorhospitalization? YesIfso,forhowlong?_______________________________Doesthepolicybasebenefitsontheabilitytoperformtheactivitiesofdailyliving?
Yes
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
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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.
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ComparedtoDeathatSpecificAges
Age
Numberper1,000
DisabledNumberper1,000Dying
ProbabilityofDisabilityComparedto
Death
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.
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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
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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
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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
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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
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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.
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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)
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(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
__________________
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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.
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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-
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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.
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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
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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.
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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
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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-
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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.
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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.
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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,
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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-
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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
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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.
(Continuedonnextpage)
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(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
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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
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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.
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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
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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-
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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
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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.
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Conclusion
Adisabilityincomeinsurancepolicyispricedaccordingtoyourage,sex,occupationandhealthfactorsyoucan'ttypicallychange.
Butaswithothertypesofinsurancesthereareotherfactorsthatyoucanchangethatwillaffectthepolicy'spremiumandhelpyoucustomizethebenefitstosuityourneeds.Thesefactorsarethelengthoftheeliminationperiod,thelengthofthebenefitperiodandthebenefitamount.
Thefollowingchartillustratesthesepoints.PremiumConsiderations
Objective Actions
Lowerthepremium
ReducethebenefitperiodIncreasetheeliminationperiodReducethebenefitamountEliminateoptionalbenefits
Raisethepremium IncreasethebenefitperiodDecreasetheeliminationperiodIncreasethebenefitamountAddoptionalbenefits
Otherfactorsthatwillaffectthepriceofyourpolicyincludeanyoptionalcoveragesyoumaybuy.Thepurposeoftheseoptionalbenefitsistoenhanceoverallprotectionandtohelpmeetyourspecificneeds.ThemorecommonoptionalbenefitsincludetheFutureIncreaseOptions,CostofLivingRider,SocialSecurityRiderandtheAdditionalMonthlyIncomeRider.
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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)?____________________________________________________
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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.
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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
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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
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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.
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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
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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
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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
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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.
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Thefollowingquestionnairewillhelpyoudecidewhichcategoryofinsurancewouldbebestforyou.
AreYouaTermoraWholeLifeBuyer?AvailableCashDoesyourcurrentcashflowallowyoutosavemoney? YesNoIfyouranswertothisquestionis"no,"thenterminsuranceisyouronlyoption.AvailableSavingsAreyouconsistentlysavingeverymonth? YesNoAreyousavingasmuchasyouthinkyoucouldifyouhadasystematicplan?
YesNo
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
TroublesWithTerm
Themostimportantrightyouhaveinalifeinsurancepolicyistherighttokeepthepolicyinforcewithoutrestrictionsordramaticpremiumincreases.Sometermpoliciesareguaranteedrenewableandsomearenot.Somerequireaphysicalattheendofthetermandsomedon't.
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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.
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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.
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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.
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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-
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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.
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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?
YesNo
7)Wouldyouprefertopaymoremoneynowandlessinthefuture,suchasforadepositterminsurancepolicy?
YesNo
8)Areyouinterestedinapolicythatcombineslifeinsuranceandanannuity?
YesNo
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9) Wouldyoulikeanyofthefollowingriders:
Accidentaldeath? Yes NoWaiverofpremium? Yes NoGuaranteedinsurability? Yes NoReturnofpremium? Yes NoReturnofcashvalue? Yes NoCostoflivingadjustment? Yes NoAdditionalinsureds? Yes NoLivingneed? Yes No
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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.
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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
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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:
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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:
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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.
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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
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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
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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.
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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
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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:
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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.
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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:
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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.
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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.
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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
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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?
Yes
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
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9)Doyouparticipateinanyhigh-riskhobbies? YesNo
Whatarethey?_____________________________________
_________________________________________________
10)Areyoureplacinganexistingpolicy? YesNo
Ifso,you'llneedtocompareclosely,tobesureyouaren'tgivingupamorefavorableinterestrateorsacrificingcashvalueforterm
insurance.
11)Isthepolicyyou'reconsideringguaranteedrenewable?(Thisisanimportantconsiderationifyouarereplacingapolicy,aswell.) YesNo
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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;
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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
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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
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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-
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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
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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
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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
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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
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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.
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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
65).
Duringtheaccumulationperiod,theannuitycontractisflexible,inthatyoumayormaynotmakepayments.Inaddition,youhavewithdrawaloptions.Themoneyaccumulatedcanbewithdrawntotally,orinpart,duringtheaccumulationperiod.
Annuitiesmaybeusedtofundindividualretirementaccounts(IRAs),inwhichcasepremiumpaymentsmaybetax-deductible.But,inthisapplication,therearemorerestrictionsonwithdrawals(includingtaxpenaltiesforwithdrawalsbeforeage59).
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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.
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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
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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.
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KeyQuestions
1)Doesyouremployerprovideanannuityorotherinsurance-relatedretirementplanaspartofyourbenefitspackage?
Yes
2)Areyouconsideringpurchasingretirementincomelifeinsurancepolicy?
Yes
3)Areyouinterestedinpurchasinganannuity? Yes
4)Areyouinterestedinafixedannuity,avariableannuityoracombinationofthetwo?_____________________________
5)Doyouwanttomakeyourpaymentfortheannuityinalumpsum,orwouldyouratherpayovertime?________________
6)Doyouwanttoreceivethepaymentfromtheannuitymonthly,quarterly,semi-annuallyorannually?___________________
7)Doyouwantpaymentstogotoyouandyourspouse? Yes
8)Doyouwanttodefertheincomefromanannuity?(RefertotheToDeferorNottoDeferchart.)
Yes
9)Whataretheexpensesassociatedwitheachannuityyouareconsidering?______________________________________________________
______________________________________________________
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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;
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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.
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Thegoodnewsis:Afterreadingthisbook,youknowenoughaboutthecoveragesyouwantandneedtoasktherightquestionsandtobuyyourinsuranceanywayyouseefit.Thiswillbesomehtingthatyoufindyourselfdoingmoreandmoreastheinsuranceindustrycompletesitsmovetoaself-servicefocus.
Goodluck.
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APPENDIX1CONTACTSFORCONSUMERS
StateInsuranceDepartments
AlabamaCommissionerofInsurance135SouthUnionSt.Montgomery,AL36130(205)269-3591or(205)269-3595
AlaskaDivisionofInsuranceP.O.Box110805Juneau,AK99811(907)465-2515E-mail:[email protected]
ArizonaDepartmentofInsurance3030N.ThirdSt.,Suite1100Phoenix,AZ85012PhoenixArea:(602)912-8444TucsonArea:(520)628-6371Statewide:(800)325-2548
ArkansasInsuranceCommissioner1123SouthUniversity,Suite400UniversityTowerBuildingLittleRock,AR72204(501)686-2900
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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
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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:[email protected]
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
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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:[email protected](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
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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
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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
Page383
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
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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
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WisconsinOfficeoftheCommissionerofInsuranceP.O.Box7873Madison,WI53707(608)266-0103or(800)236-8517E-mail:[email protected]
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
Page387
INDEX
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
Page388
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
Page389
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
Page390
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
Page391
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