Everyone faces risks that involve both uncertainty and the possibility of financial loss. These events can devastate a family’s financial security. Insurance allows you to transfer the consequences of the financial loss to a large risk pool managed by an insurer.
A risk management plan helps families and individuals manage their exposure to uncertainty and financial loss by identifying major risks and determining suitable protection through various insurance products.
Here are some risks and options to consider:
- Ongoing and major medical expenses (health insurance). Health insurance is available through various channels.
- Under the Health Maintenance Organization (HMO) plan, a physician, known as the “gatekeeper,” oversees the patient’s treatment by authorizing and coordinating all medical services, including lab work, specialty referrals, and hospitalizations.
- While the HMO plan is the most affordable, it limits the patient to using medical providers employed by the HMO. For this reason, many individuals prefer the Preferred Provider Organization (PPO) plan that allows patients to choose their primary physician and to see specialists when they deem necessary. Larger costs are incurred when the individual receives treatment outside of the PPO network of physicians and hospitals. PPO plans are more expensive than HMOs.
- A Point-of-Service (POS) plan functions as an HMO/PPO hybrid. The plan encourages members to choose an in-network physician as their “point of service.” The primary physician may make referrals outside of the network at which time the patient pays a fee-for-service. Reimbursement by the insurance company occurs later. While this plan provides a great deal of flexibility, the out-of-network expenses may be more costly, and the plan is administratively more complex than the others.
- Individuals may utilize a Health Savings Account (HSA) with a High Deductible Health Insurance policy. HSAs provide a way for consumers to set aside pretax funds earmarked for qualifying medical expenses. To be eligible for an HSA, a health insurance policy with a minimum deductible of $1,300 for an individual or $2,600 for a family must be obtained. For 2016, individuals may make pre-tax contributions up to $3,350 ($6,750 for family) to the Health Savings Account. Those 55 years or older can contribute an additional $1,000. Withdrawals from the HSA can pay qualified medical expenses tax-free. Individuals age 65 and older may use the HSA to pay for long-term care premiums, health care continuation coverage (such as COBRA), and Medicare and other health care coverage (but not Medigap).
- Medigap policies pay for additional expenses not covered by Medicare, such as copayments, coinsurance, deductibles, and medical care when you travel outside the U.S. Costs and coverage vary from policy to policy.
- Premature death (life insurance). Life insurance is either term or permanent. While term life insurance is less expensive, it does not guarantee lifetime coverage. For example, a 20-year term life insurance policy would only provide a death benefit for twenty years. Nevertheless, term life insurance still provides some coverage at an affordable price for those with a limited budget. The death benefit should equal 12 to 18 times gross earnings. However, each person’s financial position is different, and other assets may reduce the amount of life insurance needed. The cost of life insurance increases as you get older, since your probability of dying increases with your age.
- Becoming incapacitated to work (disability insurance). Disability coverage replaces approximately 60 to 70 percent of gross earnings during the working years. Coverage is determined by the way in which the policy defines disability. For example, an own occupation policy pays the benefit when a person cannot perform the specific duties of her profession, while an any occupation policy would only pay the benefit if a person could not fulfill the duties of any job commensurate with her experience and education. If not purchased through a group plan, the policy may be expensive. Reducing the benefit period may lessen the cost. As long as the insured pays the premium, the benefit is tax-free.
- Becoming unable to perform basic tasks of daily living (long-term care insurance). Individuals 65 years and older have a 68 percent chance of becoming cognitively impaired or losing the ability to perform at least two of the activities of daily living, such as eating, bathing, and dressing. A policy with a three-year benefit is reasonable based upon the average number of years that those with either physical or cognitive impairment will require custodial care.
- The possibility of outliving your resources (annuities). Intended to mitigate the risk of outliving your money, an annuity is an insurance product or investment that pays a series of guaranteed payments during your lifetime. An annuity may either guarantee income as a living benefit or a death benefit to the beneficiary.
Whatever products you select, evaluate their costs and determine their suitability in light of your financial plan.
As always, consider working with a CERTIFIED FINANCIAL PLANNER® professional to assist you in developing an appropriate insurance plan.