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Insurance is a contractual relationship between you and a company that stands behind you if certain events occur. For example, if you have life insurance and you die, then the company pays your beneficiary a death benefit. If you have health insurance and you get sick, then your medical bills are paid (up to the deductible). If you have long-term care insurance, then your long-term care bills are paid.
Because insurance is a matter of contract law, it is important to READ the terms of the policy you are considering. If the risk you are concerned about isn't covered, then you may not be entitled to compensation after the risk-event occurs.
Georgia Insurance Commissioner
Tennessee Department of Commerce & Insurance
Certain Life Insurance Definitions
Cash Value Life Insurance:
Cash Value Life Insurance is a type of insurance where premiums charged are higher at the beginning than they would be for the same amount of term insurance. The part of the premium that is not used for the cost of insurance is invested by the company and builds up a cash value that may be used in a variety of ways. You may borrow against a policy's cash value by taking a policy loan. If you don't pay back the loan and the interest on it, the amount you owe will be subtracted from the benefits when you die, or from the cash value if you stop paying premiums and take out the remaining cash value. You can also use your cash value to keep insurance protection for a limited time or to buy a reduced amount without having to pay more premiums . You also can use the cash value to increase your income in retirement or to help pay for needs such as a child's tuition without canceling the policy. However, to build up this cash value, you must pay higher premiums in the earlier years of the policy. Cash value life insurance may be one of several types; whole life, universal life and variable life are all types of cash value insurance.
Term Insurance:
Term Insurance covers you for a term of one or more years. It pays a death benefit only if you die in that term. Term life insurance generally offers the largest insurance protection for your premium dollar. It generally does not build up cash value. You can renew most term insurance policies for one or more terms even if your health has changed. Each time you renew the policy for a new term, premiums may be higher. Ask what the premiums will be if you continue to renew the policy. Also ask if you will lose the right to renew the policy at some age. For a higher premium, some companies will give you the right to keep the policy in force for a guaranteed period at the same price each year. At the end of that time you may need to pass a physical examination to continue coverage, and premiums may increase. You may be able to trade many term insurance policies for a cash value policy during a conversion period -- even if you are not in good health. Premiums for the new policy will be higher than you have been paying for the term life insurance.
Universal Life Insurance:
Universal Life Insurance is a kind of flexible policy that lets you vary your premium payments. You can also adjust the face amount of your coverage. Increases may require proof that you qualify for the new death benefit. The premiums you pay (less expense charges) go into a policy account that earns interest. Charges are deducted from the account. If your yearly premium payment plus the interest your acount earns is less than the charges, your account value will become lower. If it keeps dropping, eventually your coverage will end. To prevent that, you may need to start making premium payments, or increase your premium payments, or lower your death benefits. Even if there is enough in your account to pay the premiums, continuing to pay premiums yourself means that you build up more cash value.
Variable Life Insurance:
Variable Life Insurance is a kind of insurance where the death benefits and cash values depend on the investment performance of one or more separate accounts, which may be invested in mutual funds or other investments allowed under the policy. Be sure to get the prospectus from the company when buying this kind of policy and STUDY IT CAREFULLY. You will have higher death benefits and cash value if the underlying investments do well. Your benefits and cash value will be lower or may disappear if the investments you chose didn't do as well as you expected. You may pay an extra premium for a guaranteed death benefit.
Whole Life Insurance:
Whole Life Insurance covers you for as long as you live if your premiums are paid. You generally pay the same amount in premiums for as long as you live. When you first take out the policy, premiums can be several times higher than you would pay initially for the same amount of term insurance. But they are smaller than the premiums you would eventually pay if you were to keep renewing a term policy until your later years. Some whole life policies let you pay premiums for a shorter period such as 20 years, or until age 65. Premiums for these policies are higher since the premium payments are made during a shorter period.
Certain Health Insurance Definitions
Medical Expense Plans:
Pay expenses incurred for diagnosis and treatment of medical conditions. Payments may be made to YOU or your medical provider directly, if you "assign" your benefits to them. The policy or employer benefit booklet will detail the terms and conditions of what is covered and what is not covered. Read this contract BEFORE you need to use the plan and ask your agent or employer to explain anything which is unclear to you.
Reimbursement Insurance Plans:
Full freedom-of-choice plans allow you to choose any doctor and hospital. These policies call for a "deductible." This means that you must pay a stated amount first, before the insurance company begins paying benefits. The deductible commonly runs from $100 to several thousand dollars; and the rule here is the higher the deductible you are willing to accept, the lower the cost of your insurance. "Co-insurance"- the part of the medical costs you are obligated to pay with your insurer, is also involved.
For example, most freedom of choice plans will pay 75% to 85% of all eligible medical costs above the deductible, you pay the remainder. In other words, a medical care bill totaling $10,000 of eligible expenses would leave you paying $1,500 to $2,500 above the deductible. These policies that require you to pay a portion of the costs above the deductible, usually feature a "stop loss" provision. This is the point where you stop sharing the costs with the insurance company and the insurance company pays all the bills at 100% for the balance of the current calendar year.
Preferred Provider Organizations (PPO) Plans:
Allow the insured to choose a doctor or hospital from a list of "preferred" providers in order to receive maximum benefits. If you go to a doctor or hospital who is not a member of the preferred list, the plan will cover a lessor percentage of the costs. PPO plans have many of the same features of freedom-of-choice plans including coinsurance and stop loss provisions. Check with the insurance carrier BEFORE you use the plan to determine if your physician or hospital is a contracting provider with your plan. Also, it is your responsibility under these types of plans to make sure your doctor refers you to other "preferred" providers.
Prepaid Health Contracts:
Health Maintenance Organizations (HMOs) were formed with the idea of controlling health costs and providing preventive health care before members become ill. HMOs are comprised of hospitals, doctors and allied medical personnel who have contracted to provide health care to members in return for a pre-paid monthly charge.
When joining an HMO, members select a doctor, the "primary care physician," from a list provided by the HMO. Typically family practitioners, internists, and pediatricians; these doctors manage all medical care including referrals to specialists and whether further lab tests or x-rays are needed. The system is designed to eliminate any unnecessary care which would ultimately increase total health care costs.
HMO's provide incentives for individuals to seek medical care. Office visits are provided for small copays- usually $10 or $15. Prescriptions are available for small copays also. Hospital expenses are usually covered at 100% for little or no copays. With an HMO, you do not have the option of going to a medical provider who is NOT part of the HMO network. HMO's are available on both a group and individual basis.
Medicare:
A federal program which provides medical coverage for people over the age of 65 and for those who are permanently disabled. Contact your local Social Security office for more information and enrollment instructions.
Long-Term Care Insurance
Long-term care insurance is regulated like health insurance, but it is fundamentally different in what it covers. While health insurance provides coverage if you have an accute health care needs (such as a broken bone), long-term care insurance pays for assistance you may need resulting from functional limitations. Typically, covers is triggered when you need assistance with "activities of daily living" (e.g., feeding yourself, grooming, moving from a bed or a chair, bathing and the like). Depnding upon the policy terms, LTC insurance may provide assistance at home, in an assited living facility or in a nursing home. A common misperception is that Medicare covers long-term care. It does not. Medicare will pay for a limited nursing home stay (up to 100 days when combined with a Medi-gap policy) following a qualifying hospital stay if you need "skilled" care. It will also pay for certain "skilled" home health care, but often this is limited to situations where the patient is home-bound.
© 2004, Law Office of David L. McGuffey, LLC
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