Illinois Health Insurance Frequently Asked Questions
What is the difference between individual and group health insurance coverage's?
You purchase an individual policy directly from the insurance company.
With a group health insurance policy, the group is the insured and the insurance company contracts with the group. Insurance certificates, issued to a participating member, will act as your policy. Often group health insurance will cost less than would have been charged had the insurance company sold individual policies to each member separately. In addition, group health insurance often contains special coverage's that would not available or are very expensive on an individual basis. The purchasing power of the group makes this economically competitive.
What types of individual health insurance policies are available?
There are a wide variety of policies which insurance companies offer on an individual basis. Some of the more common types of policies include:
1. Major Medical - this provides coverage for doctor visits, surgery and hospitalization or ongoing illnesses.
2. Hospital and Surgery - will provides coverage solely related to hospital stays and surgical services, such as room and board, laboratory tests, X-rays, plus doctor's charges.
3. Hospital Confinement Indemnity - a basic policy designed to pay a set amount (an indemnity) for each day you are an "in-patient" at a hospital.
4. HMO's (Health Maintenance Organizations) - centralized service provider or area, commonly with a general practitioner (limited selection of participating doctors) coupled with coverage by specialists upon referral. Doctor visits, surgery, hospitalization and often reduced-rate prescription medicine are provided. May also cover preventive care, which are often not included in major medical policies.
5. Specified Disease - covers costs associated with a single specific disease, such as cancer, AIDS, heart attack, etc.
6. Short-Term policy - typically a major medical policy but with coverage lasting only for a specified length of time (from 30 to 180 days). Might be purchased to cover the time you are between jobs.
7. Accident Only - will provide coverage for doctor visits, surgery and hospitalization resulting from an accident (no coverage for disease or illness).
8. Dental - helps provide coverage for costs associated with dentists and orthodontists.
9. Vision - provides coverage for vision exams and typically hardware.
10. Home-Health Care Services - care provided to help enable you to remain in your home while receiving services which can range from assisted living (help around the house) to around-the clock nursing with other health care providers on call.
11. Long -Term Care - daily coverage provided to individuals who otherwise would not be able to take care of themselves. A wide range of services from delivery of prepared meals, assistance with managing the residence, to stays in residential facilities. This is often associated with long-term illness and the elderly.
12. Limited Benefit - while not very common, it is a bare-bones type of coverage intended to cover specific situations.
What kind of exclusions or limitations might be in my health plan?
There are a variety of exclusions and limitations with respect to health insurance so there is not a once answer fits all solution here. Common exclusions may include pre-existing conditions (subject to portability of insurance as discussed below), substance abuse, attempted suicide, mental illness, reimbursement through a Workers Compensation insurance program, cosmetic or elective surgery and procedures, optical and dental coverage, prescription medicine, and procedures determined to be preventive care.
Many individual health insurance policies exclude or limit coverage for medical conditions that exist prior to the inception of the coverage for a specified period of time. This is commonly referred to as a "pre-existing condition" exclusion. Common pre-existing condition periods range from six to 18 months prior to the inception of the insurance coverage. Other common exclusions include: psychiatric care, alcohol and drug related problems, prescription medicines, and elective or cosmetic surgery and services.
Other common limitations of coverage are listed below under Health Insurance Purchase Considerations.
What is the coinsurance clause in medical insurance plans and how does it work?
Coinsurance requires the insured to share in the cost of medical care. Under an 80/20 coinsurance clause, the medical expense plan pays 80 percent of eligible medical charges above any deductible. The insured is required to pay the remaining 20 percent. Other coinsurance arrangements, e.g., 70/30 or 90/10, are sometimes used to help control premiums. In the event of catastrophic medical expenses, an insured could suffer severe financial hardship due to the operation of the coinsurance clause. However, to compensate for this possibility, many major medical expense plans contain a coinsurance maximum out of pocket, or stop-loss limit. This provision places a dollar limit on the insured's out-of-pocket costs in a given year arising from the operation of the coinsurance clause. The size of the coinsurance cap varies greatly but typically ranges from $2,000 to $3,000, depending on the plan, although limits as low as $1,000 are sometimes used. Once the coinsurance cap has been reached, all eligible expenses above this amount are paid in full, up to the plan's overall lifetime limit of coverage.
What is the difference between coinsurance and a copayment?
On occasion, these terms have been used interchangeably hence the confusion surrounding these terms. However, it is preferable to define the two terms differently, despite their similarity of their purposes. Under a copayment or copay clause, the insured usually is required to pay a set or fixed dollar amount (e.g., $10, $20, or $30) each time a particular medical service is used. Copay provisions are frequently found in medical plans offered by HMO's and PPO's where a nominal copayment is applied to each office visit and to each prescription that is filled.
What, or who, will determine my insurance premium?
The actuaries employed by insurance companies determine insurance premiums. The cost of advertising, paying for services rendered by health care practitioners, the administration of the insurance program as well as the investment of premium payments and a profit margin are factored into the premium amount. The carrier actuaries determine the exposure to risk according to the provisions of the insurance policy and then set a premium rate. There are additional underwriting factors, such as adverse selection for individual policies and special industry exposures for employer-sponsored group health insurance plans, are also factors of the premium charged.
At times, the premium charged on an individual plan is higher than the premium charged for similar coverage's offered through a group plan due to "adverse selection." Under group plans, an insurance company attempts to determine what percentage of participants will generally be in good health. Adverse selection is the result of the basic premise that those people in good health do not have as much need for insurance as people who are in poor health and thus the "sick" are left on the plan thereby increasing the premiums.
What variables will affect my insurance premiums?
Buyers of insurance often can control several factors used to determine the insurance premium. Some of these factors, which act as limitations of the insurance coverage, include:
My employer has a self-insured, or self-funded, health insurance plan. What does this mean?
Larger employers operate their own health insurance plan vs. purchasing coverage from an insurance company. Your employer will pay a third party, often referred to as a TPA, to administer their claims. Your employer is responsible for paying your claims in accordance with the insurance benefit or policy. Your employer also purchased insurance to protect them from any one large claimant (called specific insurance) as well as insurance to protect them from the entire group incurring more claims then was budgeted (called aggregate insurance). Typically, self-funded employers offer better insurance programs at a more competitive price.
My employer gives us a medical savings account to pay for health insurance. What can I do with this fund?
While not a health insurance plan, some employers provide their employees with an annual amount placed into an account earmarked to help the employee take care of his or her health care expenses. For example, an employer may place $2,500 into an account for the employee to use for their health care needs. The employee may draw on the account to buy health care insurance or pay policy deductibles, co-payments or medical expenses not covered by his or her health insurance policy. In addition, the employee may periodically withdraw money from the MSA, but there may be tax implications if used for non-eligible health care expenses.
The main advantage of an MSA is that you will not pay income taxes on any money put in the account so long as it's used for qualified expenses (as determined by the IRS rules). This is a wonderful benefit that, if available, you should take advantage of. Make sure you are dealing with an agent who truly understands the benefits and limitations of this style of plan.
I have health insurance through my employer but I am leaving my job soon. Even though I like my current coverage, I cannot carry it from job to job. What are my options?
Terminated or retiring employees, or those losing coverage because of reduced work hours, a provision called COBRA (the Consolidated Omnibus Budget Reconciliation Act) obligates your employer to let you buy group coverage for up to 18 months after leaving. COBRA applies to all employers with 20 or more workers.
Your employer will provide you (or your spouse) a booklet that explains all the twists and turns under COBRA as well as a summary plan description that contains information about COBRA. In addition, when a plan receives notice of a qualifying event, the plan must notify the covered person of their right to choose continuation of coverage.
My employer does not offer health benefits to its employees. What kinds of individual personal policies are out there?
If you are not able to obtain health insurance through employment or as a member of an association, you should consider the purchase of individual health insurance. Although such coverage is typically more expensive than health insurance provided under a group plan, it is important for people to maintain good health insurance coverage since an accident, disease or illness could result in financial ruin.
A benefit of having your own individual health insurance coverage is the wide selection of plans. Often as an employee, you are forced to take the plan that is being offered. You may find that if you purchase health insurance on your own, you are able to obtain particular benefits more suited to your needs and situation. With a variety of individual health insurance policies available in the open market, it is a good idea to shop around and see which plan is best for you.
If you have the financial strength to cover your typical doctors visits and medicines out of your own pocket then you may consider a two-part approach to health insurance coverage. Ask us about High Deductible Insurance plans. These plans require you to cover some level of medical expenses first ($5,000) out of pocket before they start to provide coverage. In exchange for the high deductible, you pay less in monthly premiums. Once, you have the High Deductible Plan, you can set up a Health Savings Account (HSA) to pay your out of pocket medical expenses with tax deferred income. You have to honestly assess your predicted annual medical expenses and ability to pay out of pocket before taking this approach and should consult with us for a thorough review before opting for this type of coverage.
There are so many health plans out there. What do all those letters - HMO, PPO, POS, Etc.-mean?
HMO: An HMO (Health Maintenance Organization) is an insurance carrier that provides for coverage of certain health care services required by members of the organization. Typical HMO coverage's include access to a primary care physician, emergency care, and specialists/hospitalization when needed.
Many HMOs operate with preventative medicine and treatments in mind by addressing your health care needs while you are healthy so as to prevent disease or illness.
There are critics of HMOs who address concerns as to a lack of selection of primary care physicians, "assembly line" style medicine, and denial of adequate referrals in the event of disease or illness. Critics often claim that an HMO may deny certain claims and may make health care decisions based upon a profitability standpoint as opposed to decisions driven by providing the best level of care for its patients.
PPO: PPO (Preferred Provider Organization) is a form of managed care under which health care providers contract to provide medical services at pre-negotiated rates. Members who subscribe to a PPO are required to use the health care providers who participate in the PPO network - utilization of a health care provider outside the PPO network may result in the member paying more out-of-pocket for services, which could have been provided within the network.
POS: POS (Point of Service) is basically a hybrid of the HMO and PPO programs. Its plans allow the individual policyholder to visit out-of-network, non-participating doctors for a fee. If the services of a non-participating health care provider are utilized, the individual often obtains restrictions of benefits or incurs more out-of-pocket costs.
Illinois Auto Insurance Frequently Asked Questions
Must I have auto insurance?
Most states have laws in the books that require basic auto insurance coverage for every driver. A few states ask only that you demonstrate "financial responsibility."
What is assigned risk?
If your state requires you to have auto insurance in order to drive, you may be faced with a dilemma if insurance companies won't accept you. Most states, therefore, have some sort of assigned risk plan to assure that you can get coverage. The cost of insurance under the assigned risk plan may be high, but the plan must accept you.
Who is covered by my personal auto policy?
You and the family members, friends and associates that you let borrow your car are all covered by your personal auto policy. Explicit permission is not required each time they borrow your car. They are covered as long as they have a reasonable belief that you would have permitted the loan.
Some states have a financial responsibility law ( SR22 ). What do these laws require?
States that do not require you to have insurance require a demonstration of financial responsibility, which could include demonstration that you have sufficient assets to settle any judgments against you that may arise out of an accident. After an accident, you may be required to post a bond if you do not have insurance.
In general, What affects insurance company premiums?
The key factor in setting car insurance rates is the expense of paying for accidents and the costs associated with settling them. Other expenses relate to marketing the insurance (agent and broker salaries, commissions, expenses, and advertising), and general overhead (management and staff salaries and offices expenses). Expenses are partially offset by investment earnings on the premium dollars that have been received from customers but not yet spent.
Car insurance underwriting results usually follow a cycle that lasts several years. They tend to have a number of good years followed by a few bad years and then back to some good years. If investment earnings are good, they may offset expenses and losses in underwriting. Companies prefer to have surpluses beyond underwriting and expenses so that investment earnings can build profits. Many states also require insurance companies to have minimum cash reserves, which can effect premiums.
What are the typical rating factors?
In addition to your driving history, the following factors apply:
1. type of vehicle (model, year, and value): Statistics show that the accident rates are different for different cars. Some kinds of cars are also more expensive to repair.
2. how you use the vehicle (i.e., pleasure, work): Using your vehicle for work will probably increase your premium.
3. age, sex and marital status: Older drivers, female drivers and married drivers statistically tend to have better driving records. Therefore, they tend to have lower premiums.
4. where you live: Some states have higher accident rates than others. In particular, states with high population density tend to have more accidents. Other local factors, such as the type of insurance system in the state, also affect insurance rates.
5. prior insurance coverage: Being a new driver, or a driver with no previous history of insurance coverage, will probably mean higher rates.
Will my premiums go up if I have an accident?
It depends on the type and severity of the accident, on your previous driving record, and on your history with your insurance company. In many cases there will be an increase.
What is a deductible?
The deductible is the amount you must pay toward a claim before your insurance begins to pay. For example, if you have a $500 claim and your policy has a $100 deductible, you will pay $100 and your insurance will pay $400. Selecting higher deductibles is one way to reduce your premiums. Of course, you must decide whether the monthly savings are worth the risk of paying more in the event of an accident.
My daughter just got her driver's license. How can I keep my costs low?
To begin with, in many states young female drivers get lower rates than young males. You may be able to further reduce your cost by taking advantage of available discounts. Check with your company about what discounts she may be eligible for, based upon:
1. Driver's education
2. Good marks in school
3. Low mileage driver
I have not had any accidents or violations, So why do my auto insurance premiums continue to increase?
The costs of buying and repairing cars continue to climb. Insurance companies need to cover those costs. Even if your driving record is unblemished, your rates and those of other drivers will climb to compensate for more and costlier accidents involving others in your state or insured by your carrier.
I'm getting ready to purchase a new car. How does the make and model help determine the insurance premium?
Some cars are more expensive to repair than others or are statistically more likely to be involved in accidents. As you know, premiums are based directly on these kinds of risk factors.
What are the basic types of auto insurance coverage?
The basic types of auto insurance coverages are:
1. bodily injury liability, which provides coverage for bodily injury claims from the people you might injure in an accident
2. property damage liability, which covers any property damages to third parties -- such as another person's car you damage -- which you cause or are responsible for
3. medical payments to the policy owner and other passengers in the policy owner's car
4. uninsured and underinsured motorist coverage, which protects you when the negligent driver has no insurance or insufficient insurance (in most states, this covers only bodily injury losses -- though some states also include property damage losses)
5. physical damage covers damage to your car
a. collision, which covers losses to your car when you are involved in a collision
b. comprehensive, which covers most non-collision physical damage to your car (if your car is damaged in a storm, or a windshield breaks, for example).
We've created the following video that will help to explain the different components of your typical auto insurance policy.
What is the difference between uninsured and underinsured motorist coverages?
Uninsured motorist coverage will usually reimburse you and anyone in your vehicle for any bodily injury and medical expense or death from an auto accident caused by:
1. a driver with no insurance
2. a hit-and-run driver
3. a driver of a stolen car
It does not cover property damage.
Underinsured coverage provides bodily injury coverage when the negligent driver has some insurance, but it is insufficient to cover your bills. Underinsured motorist coverage pays the balance -- up to the limit on your policy.
I financed my car through a bank and at that time could not afford comprehensive and collison coverage. The bank secured coverage on my vehicle. Can they do this?
Yes. If you finance or lease a vehicle, the bank or leasing company will expect you to have enough comprehensive and collision insurance coverage to protect their interests. If you did not have such insurance and the vehicle was severely damaged or stolen, the bank or leasing company could look to you for the value of the remaining financing of the car. Since the car has been destroyed or stolen, you might, understandably, feel reluctant to pay for a vehicle you can no longer use. For these reasons, the insurance company will get secure coverages for you if you do not - and expect you to pay the premiums.
Illinois Life Insurance Frequently Asked Questions
What is life insurance?
Life insurance is a contract, often called a "policy", between you and an insurance company to provide money to a person you designate, in the event that you die during the time the contract is in force. In essence, during your lifetime you pay money, known as the insurance "premium", to the insurance company. It promises to pay money to the persons you name, the "beneficiaries", at your death. Some types of life insurance also give the policy owner the right to "borrow" a portion of the "cash value" within a policy, or to receive an "accelerated death benefit" if you become terminally ill or require confinement in a long term care facility.
What is the connection between risk and life insurance?
Life insurance, like other types of insurance, is based on the concept of sharing risk. For example, everyone understands that people who are 95 years old are far more likely to die in the coming year than those who are 35.
In the 17th century, Edmund Halley, the English astronomer for whom Halley's Comet is named, created the first scientific table to reflect how long people would be expected to live - a mortality table. Insurance companies use mortality tables to help them calculate the risk that members of various age groups will die. This permits life insurance companies to accurately calculate how much they should charge people who want to purchase life insurance coverage.
Do I need life insurance?
If you can afford it, there are several reasons why you may need life insurance. The most important reason is to have enough money to provide for dependents such as young children, non-working spouses or elderly parents, should you die and be no longer able to provide for them.
Also, your survivors may need funds to pay for extra expenses that may arise due to your death, such as funeral expenses, or other expenses to pay off bills and debts.
If you have no dependents or have adequate financial resources, you may not have an actual need to purchase life insurance. However, some people who do not "need" life insurance still purchase it anyway. This can be a means to leave money to a beneficiary or beneficiaries while minimizing tax consequences.
Another category of people who might want life insurance are business owners or people with substantial estates. Since these people have needs that require more planning, they should usually consult with professionals or specialists in insurance-related law, accounting or estate planning because legal business agreements or trust documents may need to be dran-up.
If you are someone in this last category, you should contact the appropriate professionals if you need their advice.
Why buy life insurance?
Some reasons to buy life insurance are:
1. Income Replacement
2. Funeral Expenses
3. Pay Off Debts
4. Pay Off Medical Bills
5. Mortgage life insurance
What does it mean to be the owner of a life insurance policy? Who is the owner of my policy?
Usually, the insured is also the owner unless the policy has been specifically set-up to have a different owner. The owner is the person who has the authority to change the beneficiary and make other policy changes.
Is there a certain amount of life insurance I am required to buy?
Although there are "rules of thumb" such as your life insurance should be 10 times or 20 times or some other multiple of your annual income, the best approach is to consider your own personal needs so that your survivors have adequate life insurance proceeds to meet their financial needs in the event of your death.
To estimate how much money may be needed, you should make a list and estimate the expenses that need to be covered. This could include the cost of paying funeral expenses and the amounts that your spouse and young children need for mortgage payments, household expenses, education, etc.
If you have difficulty drawing up this list, you can seek the advice of a financial planner - preferably one who charges a fee but does not sell products. Or, you can use the "calculators" that are available on many financial and insurance company websites.
The end result of this process is to estimate the amount of life insurance you should have in order to provide adequately for your dependents and survivors.
Of course, this amount will usually change over time due to life changes. Therefore, it is good idea to periodically review your numbers to make sure that they are up-to-date.
I have a hard time saving money. Should I buy life insurance as a form of forced savings?
You would probably be better off by using your investment money to buy mutual funds or some other investment vehicle, and use your insurance money to get the most coverage for your insurance dollar. If you need forced savings to provide discipline, you can use payroll deduction savings plans or a plan that uses bank drafts to regularly deduct the amount you want to save from your checking account.
What should I do if I have problems in getting coverage?
Life insurance companies do not issue life insurance to all people who want it, in any amount they want to buy. If they did, people who are very sick -- and thus have a very short life expectancy -- would buy lots as they'd only pay premiums for a very short time, then die, and their beneficiaries would collect the face amount.
Life insurance companies generally "underwrite" individual applicants for life insurance policies. The underwriting process can be very simple -- it sometimes consists of just a few questions about gender, age, weight, smoking history, and health history (such as "Have you been diagnosed with or treated for any of the following conditions......") and if the answer is "no", the policy is issued. (If the answer is "yes", then additional underwriting is necessary.) However, as the amount of insurance a person is buying increases, and as his or her age increases, the amount of information the company asks for, and the extent of underwriting the companies must undertake to profitably write business increases. For example, a 25 year old may be able to get $100,000 of life coverage with just a few questions, but a 75 year old might have to have a physical exam by a doctor or para-medical, and give more information, including all . At $1 million it is likely everyone would be required to undergo at least an examination.
The underwriting process is designed to screen out people who are wholly "uninsurable" (such as someone in the intensive care ward after a heart attack, or in a hospice dying of ALS or cancer) and classify the remaining risks so the company can charge the right price for all persons who are insurable. For example, a healthy 35 year old who weighs 150 pounds can expect to pay significantly less than a 35 year old who has diabetes and weighs 300 pounds.
Some companies only write the healthiest risks, and do so at preferred rates. Other companies are comfortable taking in people who are less than perfectly healthy, and take in a range of risks, charging the very healthy less than the health impaired. Also, some companies evaluate risks differently and different companies may view the very same person differently. For example a person with diabetes that is under control may be accepted at a slight increase in premium by company A and rejected at any price by company B. At the same time, his twin, with a mild heart condition, may be offered coverage from company be and rejected by company A.
If you have any health impairments, before you apply for any insurance, be cautious. Just applying to a company that claims to have the lowest price is usually NOT the answer. If that company does not accept you or "rates" your policy as "non-standard" it may harm you when you apply to another company. (Most companies ask if you have ever been denied or rated, and a false statement makes any policy that is issued contestable for at least 2 years; also a company typically files a report with the Medical Information Bureau and that rating or rejection may come back to haunt you.) Speak with a good insurance agent or broker that specializes in dealing with people who have health impairments as he or she should be able to recommend a company that has a favorable view of people with your health condition.
If you can't get individual insurance, consider these approaches:
(1) See if you are automatically eligible for group life coverage, through your employer or any organization you belong to. This type of coverage is sometimes issued without any individual underwriting; the insurance company relies on the general experience of the whole group. Very often, group plans permit people to buy up to a fixed amount, without any evidence of insurability. If so, buy as much as you need but still can afford.
(2) Consider "cash value life insurance, " such as Whole Life or Universal Life. Life companies often are more liberal in terms of underwriting on cash value life insurance than on pure term life insurance.
(3) See if you are eligible for any other form of life insurance that does not require underwriting. Such policies generally are awful, the amounts available are usually small, the premiums usually are very high, but as there may be a 2 year waiting period before your beneficiaries would be able to collect anything more than the premium you paid in, it may make sense for those who can't get anything else.
(4) Consider buying Accidental Death and Dismemberment Insurance (AD&D). AD&D covers only deaths that result from accidents, but that may be better than nothing.
(5) Consider certain types of credit card insurance -- the cost is normally outrageously high, but it may be the only alternative.
(6) Consider going without life insurance. Save the money you would have paid as premium, and build a nest egg for your survivors.
(7) Do whatever you possibly can do to address the health concerns that caused you not to be able to get insurance. That may involve weight loss, exercise, diet, smoking cessation, etc.
(8) Consider reapplying after you have addressed the health concerns or time has passed. Someone who may not have been insurable at age 40, perhaps because of a recent cancer diagnosis, may become insurable at 45 if there is no recurrence.
What is a "needs analysis"? Do I need one to determine how much life insurance I should have?
A "needs analysis" (sometimes called "programming your life insurance") is a systematic procedure that looks at your overall life insurance and other assets (investments, social security, pension, etc.) as a portfolio and relates those assets to needs that would have to be covered. Some versions of "needs analysis" would also include a review of other types of insurance (car, homeowners, etc.) you have or might need.
How is cost determined?
The cost of life insurance is determined by the insurance company's actuaries who take the following into consideration:
1. Mortality cost, or the cost of paying claims to the beneficiaries of insured people. Mortality costs for most insurance companies have declined in recent years because people in the United States have been living longer. This means there is a longer period to collect premiums and death claims are being paid out later than originally anticipated. Still companies must be careful to select new policyholders who are basically healthy, and they should charge rates which reflect the actual mortality risks of those people who have serious health problems or who engage in potentially dangerous activities. Otherwise, they might have higher than expected costs for death claims, which could cause financial difficulties for them.
2. Operations cost, the cost of operating the insurance company and selling its products. These costs includes marketing costs (commissions; costs of operating sales offices; advertising expenses; etc.), and non-marketing costs (the cost of constructing and maintaining company buildings; salaries of officers and staff; etc.).
3. The return on investments. Insurance companies invest money until they need it to pay claims or expenses. If they can earn good investment returns, this will help to pay some of their expenses and reduce the cost of insurance. They will then be able to sell policies at lower premiums and compete more effectively against other companies.
The overall effect of all these factors determines how much the company needs to charge in order to provide life coverage while making a profit and paying dividends to its policyholders, if it is a mutual insurance company. Several large mutual insurance companies have recently changed to stockholder owned companies through a process called demutualization. In stockholder owned companies, dividends are paid to the stockholders.
A company that feels it needs to become competitive, can
1. cut marketing costs by reducing marketing staffs; trimming commissions; selling directly to customers by phone, mail, or over the Internet;
2. cut non-marketing costs by having fewer workers and managers; moving to a smaller building; lowering pay scales for new workers; cutting raises and bonuses for existing employees;
3. increase return on investment by making different investments.
Customers could benefit if the costs are cut and the cuts are then passed on to them.
Will I have to be examined by a doctor to buy life insurance?
Rules vary from company to company and for different types and amounts of insurance. For very small amounts of insurance or association or group plans, no exam usually would be needed, but company underwriters need to examine and collect medical information on most new customers in order to properly classify the level of risk and set the appropriate premium charge. Answers to questions about the applicant's health will usually be the first requirement, and may determine if a physical examination is required. If an exam is needed, the company should arrange a convenient time and place for you to meet the doctor or paramedic at no charge to you. Usually, the exam will involve only basic medical tests and medical history unless large amounts of insurance are applied for.
Do I need to give personal information about my medical condition and finances to get insurance?
Often, yes. In addition to medical tests, which help to classify the risk the company is taking in insuring you, the company will likely ask for some basic medical history on you, your parents and siblings. Sometimes, financial information is also required in connection with certain insurance applications to verify that there really is a need for the insurance. (Companies have learned that an inappropriately large amount of life insurance is sometimes associated with an increased risk of suicide, hidden health history, or the possibility that the applicant may be murdered.)
What about companies that advertise no physical exam?
Life insurance is sometimes sold with the promise that no physical exam will be necessary. Such policies are often offered through newspaper or magazine ads or made available to members of professional or fraternal associations. The amount of coverage may be limited to small sums. As with other life insurance policies, there will be a period of a year or two (called the "contestable period") when the company can modify or cancel the policy if it finds that the application did not fully reveal any relevant medical problems. Because the rates are sometimes rather high and the available coverage low, these plans are often used to supplement existing coverage, rather than provide the basic insurance.
What happens to the medical information from my application?
It is properly used only for underwriting insurance. Certain excerpts may be shared with an insurance industry organization known as the Medical Information Bureau (MIB) located in Boston which helps provide a check on the accuracy of some information provided on application forms. The insurance company must get your written approval before submitting any data from you or your application to the MIB or getting any information about you from the MIB. You can get more information about the MIB by asking the insurance company, or by checking their website at mib.com.
I am concerned about my medical information being available in a report. How do I get a copy of my mib report?
Ask your insurance company contact or go to the MIB web page at mib.com. Or you can contact the MIB at:
MIB, Inc.
P.O. Box 105
Essex Station
Boston, MA 02112
Phone number 617-426-3660
They give details of how they use information, show a sample report, and tell you how to get a copy of your own report (if one exists).
Will I need life insurance when I retire?
In general, the need for life insurance tends to decline with age because some of the reasons for buying it (college for children, income for dependents) either become non-existent or are needed for fewer years. In addition, other assets, from savings and investments, that could pay for these expenses tend to increase. So the need for life insurance will be small or non existent for many people after retirement. Exceptions include those with large estates or those who have business needs for life insurance. You might still have dependents that require income or financial resources after your death. Also, there may be a need to have money to pay off "final expenses", which could include funeral expenses, car loans, mortgages and other bills. Circumstances like these often present special needs for life insurance that should be analyzed on an individual basis.
Should I buy life insurance for other members of my family such as my spouse or children?
The members of the family who provide the family income are the ones who may need life insurance coverage the most. The first priority is to have adequate coverage on them because the loss of income due to their deaths would have an adverse affect on the surviving members of the family. After this is taken care of, then consideration can be given to whether there is any reason to provide coverage on other family members.
It is sometimes prudent to have life insurance when a family budget is very tight or there is only one member of the family who provides all of the family income. The proceeds from life insurance in the event of the death of this person may help to pay for expenses that might not be covered otherwise.
Buying life insurance for children with an option to buy more insurance at a later age sometimes makes sense. This could provide protection should a child require additional insurance later on, or become uninsurable due to some unforeseen event. These needs would be best served by buying low-cost term insurance for the appropriate number of years.
Will a life insurance policy affect my eligibility for medicaid benefits?
Life insurance is considered to be an asset under federal guidelines for Medicaid eligibility. Therefore, having a life insurance policy could affect eligibility and the policy may have to be relinquished before Medicaid is granted. However, Medicaid is administered by the states, so the details of eligibility requirements may vary from state to state.
Do I need a financial planner?
You can do a basic "needs analysis" on your own using the resources provided here or with a simple computer program or do-it-yourself book. But, if your needs are complex, or you want guidance from a professional, there are numerous trained financial planners who will provide an analysis. Some "fee only" planners charge for an objective analysis and do not sell anything. Still others charge a fee and credit you back with any commission they earn from any insurance or other financial products you purchase based on their recommendations.
Do I need a lawyer to help me buy insurance?
Generally, no. But a review of your insurance may make you realize that you need to look at http://FreeAdvice.com or obtain the professional assistance of a lawyer. You may find, for example, that you require a new or revised Will, or legal documents to establish a Trust, or a thorough estate tax evaluation and plan. Drawing up business related insurance arrangements would also call for the advice and professional services of a lawyer.
An insurance agent has offered to review my policies and check the beneficiaries and policy provisions. Should I agree to this, Or is this just another attempt to sell me more insurance?
Insurance representatives do such reviews as a service for the policyholders in order to verify and update beneficiary designations and to identify other changes that might be needed.
These reviews may reveal that you have gaps in your insurance or financial needs that you may be unaware of. Your agent may then suggest ways to fill these gaps. If you are satisfied with your insurance company and your agent, it is usually a good idea to have periodic reviews of your insurance coverage.
You could also hire an independent financial planner to do such a review if you prefer to get unbiased advice from someone who will have no incentive to try to sell you anything.
Regardless of who does this review, you should make it clear that you will be under no obligation to make any further purchases should you agree to have a review.
How do I get the "best deal" on life insurance to cover my insurance needs?
Since your age is a key variable in determining the price you will have to pay, you should purchase life insurance as soon as possible once you determine that you need it.
Selecting term life insurance will enable you to get more for your premium dollars. Also consider any optional group life insurance available through your employer as this usually offers the benefit of buying at a lower cost since it is associated with a group, not just one individual.
If you need additional coverage, then you should obtain and consider a number of quotes. These can be obtained from this site or from agents of insurance companies that you select.
You should decide how long the coverage will be needed and then check prices for that length of time. If the amount of coverage needed will decline over time, as when it is intended to provide income for young children or money to pay off a mortgage or other obligations, then consider reducing your premium by purchasing a declining term insurance policy.
Who can take out a policy on my life?
If someone else wants to take out a life insurance on your life, your agreement and an explanation of the reason for the insurance (such as a business relationship) would be required. Also, parents would be allowed to take out policies on young children.
Naming beneficiary(ies)in life insurance. Should I name that person as the beneficiary of my life insurance or make it payable to my estate and have it distributed according to my will? Does the beneficiary have to be a relative?
When you apply to take out a new life insurance policy, the insurance company requires that the beneficiary (or beneficiaries) have an insurable interest in the insured. Frequently they would be dependents, such as a spouse or children, who would suffer a loss if the insured were to die.
It is usually better to name a person or persons as your beneficiary unless there is a specific reason to designate the estate as your beneficiary - as when you have papers drawn up by a legal professional to control the disposition of the proceeds.
You can name anyone you choose to be the beneficiary. You can also have multiple beneficiaries. Your beneficiary or beneficiaries do not have to be related to you.
Changing beneficiary
Once a life insurance policy has been issued and is in force, the owner of the policy (who would often also be the insured) is free to change the beneficiary to anyone he or she chooses, unless the beneficiary has been designated as irrevocable. Changing the beneficiary is easily done by filling out a form available from the insurance company and having it properly witnessed.
Number of beneficiaries
Generally, a policy has a beneficiary and a contingent beneficiary. The money would go to the beneficiary in the event of the death of the insured. But, if the first beneficiary had already died, the contingent beneficiary would receive the proceeds.
But more complicated arrangements are possible. Either the first beneficiary or the contingent beneficiary could, in fact, be more than one person. For example, the first beneficiary could be several siblings and the contingent beneficiary could be a number of nieces and nephews. Also, it is possible to assign percentages to each of the beneficiaries or contingent beneficiaries (for example, 25% to Peter, 50% to Joan and 25% to Sam) as long as the percentages total 100%.
You could also make your estate the beneficiary, although this is not usually desirable because of possible adverse tax consequences.
Type of policy
The policy could be a term policy, whole life (or a variation of whole life such as 20 year payment life, or life paid up at 65), endowment, universal life, variable life or some other type. The type of policy will determine many other aspects of the policy, such as whether it has cash or loan values, the length of time you are scheduled to pay premiums, etc.
Face value
Face value is the amount printed on the face of your policy. It is the basic amount that the policy is worth, though it may be increased by term riders or dividend accumulations or reduced by a policy loan.
Length of coverage
If it is a term policy, the length of coverage is expressed in the name such as 1 year term, or 10 year term, or term to 65. Permanent (or cash value policies) are intended to provide coverage for the length of your life, unless you decide to cancel the insurance or cash it in.
Cash value
Cash value plans charge more in the early years than would be required to buy a term policy for a comparable amount of life insurance. The extra money is invested and used to establish a cash value that helps to keep the premiums level in the later years of the policy when the cost of term would increase dramatically because of the policyholder's increasing age.
Policy loan
The policyholder can use the cash value while continuing the insurance protection of the policy by taking a policy loan. The interest rate is specified in the insurance policy. The policyholder may pay the yearly interest and make payments in any desired amount to reduce the loan principal. The policyholder is not required to repay the loan, but if he or she fails to pay the interest, it will be subtracted from the remaining cash value as long as enough cash value remains in the policy.
Nonforfeiture options
When you stop paying premiums and allow a cash value policy to lapse, one of the nonforfeiture options comes into play. Three of the most common options are:
1. extended term insurance. Often this is the automatic option. The cash value (minus any outstanding loans) is used to pay for insurance equal to the face amount of the policy for. The coverage will continue for whatever length of time the available cash can buy. Once the cash value is depleted, the policy has no further value.
2. reduced paid up insurance. The cash value can be used to pay for a reduced amount of insurance. The cash value purchases a single premium, fully paid up policy of the same type as the original plan.
3. cash surrender value. The policy is surrendered to the insurance company which then pays the policyholder the current cash value.
Dividends
Policies issued by mutual life insurers generally pay dividends. The theory behind this is that mutual companies are owned by their policyholders and are entitled to the "profits" that result from the company's business. The amount of dividend applied to each type of policy is determined each year by the company based on the financial results of the preceding year. The dividends can also be considered as a return of part the premium paid for the life insurance. The policyholder can elect to receive the dividends in cash or have them applied to reduce the policy premium, or added to the policy as paid up additional life insurance.
Incontestablity provision
Normally, contracts can be voided or canceled at any time if they have been fraudulently enacted. Life insurance contracts are somewhat different because of a clause in the policy called the "incontestability provision." Here, the company gives up its right to challenge the contract after a specified period (usually one or two years), and agrees that after this period, it will not deny claims even if serious misstatements were made in obtaining the insurance. The period during which claims are contestable provides the company a reasonable opportunity to protect itself against people getting insurance that they would not qualify for if they gave truthful information on their applications. It also provides the vast majority of honest policyholders the assurance that their policies will be honored.
What is term insurance?
Term life insurance is insurance that lasts for a specific time, such as 5 years or 10 years. The policy pays a death benefit in the event the insured dies during the specified period. Since term insurance is for a limited period and accumulates no cash value, the rates tend to be low for a given amount of insurance.
What are the common policy variations of term life insurance?
Term policies can be
1. level, (the amount of coverage is fixed during the period of coverage) or declining, (the coverage drops according to a specified schedule).
2. renewable, (the policyholder can continue the coverage at the end of the term by paying further - higher - premiums) or non-renewable, (the policyholder cannot continue the coverage at the end of the term).
3. convertible, (to whole life or other cash value insurance) or non-covertible, (no convertibility to whole life or other cash value insurance is available).
Term policies with options to continue or convert coverage would generally cost more than those that do not have such options.
My insurance agent recommended a term policy. What are some considerations?
You need to ask yourself some questions. What is the purpose of the coverage? Is it to cover a temporary need such as a mortgage or income for dependent children? Or are you trying to get the most coverage you can get for the amount of money you have to spend? Do you expect to have much higher income or greatly increased assets in a few years, which would render this coverage no longer necessary? These would be reasons to consider term insurance.
What is cash value life insurance?
In addition to providing a death benefit, cash value life insurance also accumulates a fund that can be used to pay future premiums or serve as a form of savings.
How does cash value differ from term?
In addition to providing a death benefit, cash value life insurance also accumulates a fund that can be used to pay future premiums or serve as a form of savings.
What is whole life insurance?
It is a popular type of cash value insurance that builds up cash value and continues coverage until age 90 or 100.
What are the traditional types of whole life policies?
In addition to regular whole life which is typically designed to continue until age 90 or 100, plans are available which become fully paid up in a certain number of years (for example, 20-year payment) or at a certain age (for example, life paid up at 65). There are also variations on the whole life concept that allow more than one person to be insured (joint life, family plans) or that have different premium paying structures (single payment life, graded premium life).
What is universal life insurance?
Introduced a couple of decades ago, it is a type of cash value insurance that allows greater flexibility than a traditional whole life plan.
What are other life insurance coverages?
Insurance Variable Life: The policy values are not fixed, but determined by the performance of investments in the stock market.
Group Life Insurance: Group life insurance is a form of term life that is sold to companies to cover their employees. Since many people are covered under one policy the cost per covered person is low and the diversity of ages and health situations can often lead to low underwriting costs. For the covered employee, group insurance is usually free or inexpensive, but since it is only in effect while working at that firm, there are risks to making it your only or main insurance. Group life insurance normally includes a provision for conversion to an individual insurance plan when the employee leaves the covered group.
Credit Life: Through a connection with a life insurance firm, many lending institutions provide credit life insurance which can be purchased to pay off a debt in the event the debtor dies before the debt has been paid back. While this may be a convenient way to buy life insurance for that specific need, it is generally better to do a "total needs" analysis and buy adequate insurance to cover all your needs. Credit life is generally a high cost form of life insurance
Home Service Life: For many years, home service life insurance was a popular form of insurance in many parts of the United States, especially major cities and their surrounding areas. The agents were known as "debit agents" and they made regular calls at homes to collect insurance payments and add new insurance policies - mostly for small amounts. Many policies were designed to have premiums payable frequently (often weekly) in small amounts (25 cents or 50 cents). With changes in the economy and people's lifestyles, home service has been abandoned by most companies although it still survives in a few areas. Because of the small size of the policies and the labor intensive nature of the service provided, home service life insurance is generally very expensive.
What are endowment policies?
Endowment policies are modifications of whole life. Like whole life, part of the premium goes to build up a cash value fund. An endowment policy generally has a higher premium than a whole life policy for the same amount of insurance because more of the premium is devoted to building cash value. The endowment is designed to terminate and pay out the cash amount at a designated time, such as after a prescribed number of years (for example, 20 year endowment, 30 year endowment) or at a specific age (for example, endowment at 60, endowment at 65).
Which policy should I buy? How can I hope to get the right plan for my needs?
Today's consumers of insurance and financial products have considerable knowledge and sophistication about available choices and need less direction. They also have many more choices and many more sources of advice (the Internet, books, magazines, television, cable, radio, etc). Informed insurance and financial consumers tend to buy low-cost term insurance for their life insurance needs and use any money saved to add to their investment programs.
How do I protect my family from losing our house if I die while still having a mortgage to pay?
The preferred way to cover this need is to purchase what may be described as a "decreasing term insurance policy". Most insurance companies offer a variety of such policies including ones that are specifically tailored to match the declining principal balance of your particular mortgage. Mortgage companies also frequently have agreements with insurers to provide mortgage insurance.
What is the importance of age/sex/health?
Increasing age increases the cost of life insurance, because the older you get, the greater your chances of dying.
Being male costs more, because females live longer on average.
Poor health raises the rates for life because it decreases the number of years you are likely to pay premiums and reduces the time before the company may have to pay a claim.
Health is often the most important factor, followed by age and sex. Someone in poor health will have to pay a very high premium, or even be uninsurable.
How might my smoking affect my ability to buy life insurance?
If you are a smoker, you should expect to pay a little more for your life insurance than a non-smoker of a similar age and health.
Of course, if you also have a smoking-related medical condition, then the life insurance company would take that into consideration when deciding whether to sell you life insurance and what rate you should be charged.
I am healthy but like to participate in some potentially risky activities such as auto racing, Parachute jumping, Piloting experimental aircraft. Will this become an issue when I buy life insurance?
The insurance company will probably want to know some details about these activities and how frequently you engage in them. This may result in a higher premium or even in difficulty getting insurance.
Certain insurance companies maintain a specialized capability to underwrite activities such as these. You might want to look for one of these companies.
I sometimes travel to areas of the world where sanitation, Health and medical standards are not always up to american standards. Will this affect my ability to buy life insurance?
It could. Also, people who are residents of the United States, but who travel abroad a lot, or who move back and forth between different parts of the world, may be asked to provide information about their future plans. For example, a student from another country might be asked if they plan to stay in the United States after graduation.
Illinois Homeowner Insurance Frequently Asked Questions
Why buy Illinois homeowner's insurance?
There are two major reasons for homeowners to buy insurance:
1. as one of -- if not the -- most important assets that a person has, you need to protect your home from damage and destruction.
2. mortgage lenders require homeowners to carry insurance to protect the lender's investment from damage or loss.
Why buy renter's insurance?
Just like homeowner's insurance, renters face risks of loss. Sure, since a renter does not own the dwelling unit, she does not risk the residence itself. As a renter, the greatest risk is damage to or loss of personal property. Renters can also be liable to third parties that are injured while at the residence.
If you rent, insurance acts as a risk transfer device to protect you against a catastrophic loss. In exchange for payment of a premium, you transfer the risk of property loss and liability to third parties to an insurance company.
What is the connection between risk and the insurance company?
Insurance is a contract between the insured (you) and an insurance company that protects against the risk of large catastrophic loss. If a light bulb burns out in your hallway, that's a small loss. If an electrical fire destroys a room, that's a large catastrophic loss.
Insurance companies gather groups of people that share homogeneous risks. The probability of loss is determined across the group as a whole. By spreading the risk of loss across the entire group, each member contributes a small known loss (in the form of a premium payment) in exchange for protection against a catastrophic loss. Should a covered loss occur, the insurance company pays money.
In its essence, insurance is a risk transfer device -- moving risk of loss from individuals to the insurance companies. Insurance companies determine the probability of loss across the entire homogenous group, add the cost of administration, and spread the estimated expected losses across the group by collecting a premium from each member of the group.
Homeowners are one such homogeneous group. All homeowners face similar risks, such as loss or damage to the home, loss or damage to its contents, and liability for injury or harm to third parties who come to the home. It is insurance company actuaries who determine what it will cost to pay all the losses the group is expected to incur, factor in administrative expenses and profit, and decide how much each member of the group must pay for the insurance.
What kinds of risks does homeowner's/renter's insurance protect you against?
The major risks covered by homeowner's insurance are:
1. damage or loss to the home itself, as well as other structures on the land;
2. damage or loss to the items of personal property in the home and other structures; and
3. injury or harm to third parties (typically guests and others who come to your home).
The major risks covered by renter's insurance are damage or loss to items of personal property contained in the residence and liability to third parties who are injured while in the residence.
The particular risks covered depend upon the type of policy purchased, as discussed below.
What is the difference between a dwelling policy and a homeowner's policy?
A homeowner's policy is a package which covers loss not only to the dwelling structure, but other structures on the land, personal property contained in the dwelling, and liability to third parties who come onto the dwelling and surrounding land. In its purest form, a dwelling policy covers only the dwelling structure itself -- providing a much smaller amount of coverage. Though not very common, dwelling policies are used in some areas of the country to insure seasonal homes that are unoccupied for part of the year.
Who is covered by my policy?
As the insured, you and the members of your home are covered for the loss of the home and its contents. Third parties -- other people who come to your home -- are covered through the liability portion of the insurance policy for injuries caused by your negligence. In addition, you and the members of your household have some liability protection to others even while you are away from the premises.
With renter's insurance, it is important to note that coverage is only provided to the person named in the policy. Even if you share the premises with someone else -- if it is your insurance, the property of your "roommate" is not covered.
What does property damage cover?
The property damage portion of a homeowner's policy covers loss or damage to the home and other structures on the property. In the event of a total loss, the amount paid depends upon the dwelling policy limit of the insurance contract as well as the type of coverage provided under the contract.
On some policies, other structures (such as detached garages, tool sheds, fences, guesthouses, and gazebos) are typically covered at the rate of 10% of the limit set for the dwelling itself. For example, an insurance contract that provides $100,000 coverage for a dwelling typically will provide up to $10,000 coverage for other structures. Trees, shrubbery and other landscape are typically covered for 5% of the dwelling limit.
What does personal property (contents) damage cover?
Contents (personal property) coverage is a typical component of all homeowner's and renter's insurance policies. Personal property refers to all tangible goods commonly found inside your residence and owned by you or family members who live with you. Examples of personal property include your clothes, furniture, furnishings, and appliances. Coverage for automobiles, aircraft, and other vehicles is typically excluded.
Your policy will have an overall limit on how much it will pay for all personal property involved in a single claim. The typical limit is at least 50% of the home's insured value. The policy, however, will have separate limits on such items as computers, antiques, silverware, cash, firearms, works of art, furs, and so forth.
Additional property coverage
Some insurance policies also provide additional property damage coverage when a loss occurs as the result of a covered peril. Covered items include:
1. reasonable temporary repairs
2. necessary to protect the property against further damage
3. reasonable cost of removing damaged property and debris
4. expenses of removing property and storing it for up to thirty days
5.reimbursement for fire department service charges
6. reimbursement of up to $500 for loss of credit cards, check forgeries or acceptance in good faith of counterfeit money.
Most renters' insurance policies do not have a property damage component. Some renter's insurance policies, however, do provide for loss or damage to the premises caused by the renter.
My coin collection, Jewelry, Furs, Guns, Monet painting and other expensive stuff... aren't they covered under my regular home policy?
Yes, but most home policies place specific dollar limits on coverages for cash, securities, coin collections, jewelry, furs, guns, silverware, antiques, and art. Make certain you check your policy to determine if there are special limitations for certain kinds of personal property. Check what the categories are, and the special limit for each category. If your personal property falls into a listed, limited coverage category and is worth more, you can increase coverage by adding a "rider" to the policy. Insurance policy riders are available at nominal cost.
Some of my personal items were stolen from my hotel room. Would they be covered under my policy?
Maybe. Most folks don't know that their contents coverage usually includes loss or damage to personal property, regardless of where it was at the time of the loss. You may then be covered under your homeowner's or renter's insurance in the event of theft of personal property while staying at a hotel. Such coverage is typically as much as 10% of the dwelling policy limit.
Why would I want personal liability coverage? What does it cover?
Accidents happen...and there are plenty of attorneys who specialize in recovering for victims whenever they do. Litigation has become a fact of life. Anyone with assets must take steps to protect what has taken so long to acquire. For most people, the front line in the war to protect assets is home or rent insurance.
Liability coverage pays when you are legally obligated for damages that occurred as the result of something that happened on your property (your neighbor slipped and fell on your entryway rug, for instance). It also covers damages caused by your personal activities (hit a baseball through your neighbor's double-paned window). This coverage would pay the claims as well as a lawyer to defend you in the event of a lawsuit. In addition to protection for claims and lawsuits arising out of non-auto incidents that occur at your premises, these policies often provide protection for incidents that occur off the premises.
Keep in mind that unlike other coverage in your policy, liability insurance does not have a deductible. There is no amount that you must first pay before your insurer picks up the tab.
Are intentional injuries covered by my personal liability coverage?
No. Your personal liability coverage is not applicable if you intentionally injure someone or intentionally damage someone else's property.
"Additional living expense" coverage (also called "loss-of-use") is one of the most important features in a standard policy. This coverage picks up the tab for your hotel costs, restaurant bills, and other additional living expenses when your home is too damaged to live in during repairs. Don't plan on checking into the Ritz and dining at The Four Seasons, though; chances are that your policy will only pay the difference between your normal living expenses and any additional costs. The limit of coverage varies by company. It may be based on a percentage of total coverage or limited by a specified length of time.
I can't live in my home because of a fire. Will my policy cover the cost of room and board at a hotel or motel?
"Additional living expense" coverage (also called "loss-of-use") is one of the most important features in a standard policy. This coverage picks up the tab for your hotel costs, restaurant bills, and other additional living expenses when your home is too damaged to live in during repairs. Don't plan on checking into the Ritz and dining at The Four Seasons, though; chances are that your policy will only pay the difference between your normal living expenses and any additional costs. The limit of coverage varies by company. It may be based on a percentage of total coverage or limited by a specified length of time.
What do medical payments cover?
Medical payments -- often up to $1,000 -- pay the medical bills for people accidentally hurt in your home. It also pays for people hurt away from your home by you, your household members, or by your pets. Often, this coverage is provided no matter who is at fault for the injury. It is intended to cover the costs of minor injuries without the need for a third party to sue for reimbursement.
Unlike the medical payments coverage in a personal auto insurance policy, a home medical payments coverage does not apply to injuries to you or to those who live with you. Nor does it cover injuries related to at-home business activities.
What is a personal "umbrella" insurance policy?
While sometimes offered as a rider, an umbrella insurance policy is often sold as a stand-alone policy. Most insurers who offer this coverage require increased liability limits under existing homeowner's or renter's and automobile insurance policies before offering this coverage.
An umbrella policy provides liability coverage over-and-above the coverage provided under your homeowner's, renter's or automobile insurance. This is commonly referred to as "second-tier" or "second layer" insurance since coverage kicks in only after you exhaust other coverage (provided by the first-tier -- your homeowner's or renter's or automobile insurance). Second-tier policies save money in the long run. They have a lower premium because a large majority of incidents will be covered by your first-tier coverage.
It is not uncommon today for someone to purchase one million dollars of coverage under an umbrella insurance policy.
Does my coverage protect me from claims when I am on vacation?
Your homeowner's or renter's insurance protects you against loss of personal property as a result of theft as well as third-party liability insurance whether at home or on the road.
Also, if you are on vacation, your home and its contents remain covered (although it is a good idea to have someone periodically check in on your home while you are away).
A tree fell on my roof during a major storm. Am I covered? Is the tree's removal covered?
Under most insurance policies, the loss of the tree, the damage caused as a result of the felled tree, and the cost of removal of the tree are covered under your homeowner's insurance. You should check to see if your particular insurance policy limits losses for trees and shrubbery. If you have large trees or extensive shrubbery around your house, consider the purchase of a rider to extend coverage for these additional exposures.
During a recent storm, My neighbor's tree fell and destroyed my fence. Whose home policy pays for the damage?
Homeowners are responsible for injury or damage to third parties that is caused by their ownership of property. In this example, your neighbor is responsible for the loss that you suffered as a result of his tree falling on and damaging your property. The same would be true your uphill neighbor's land ended up in your backyard as a result of a mudslide.
As a practical matter, your insurance company may provide coverage to you as a homeowner and then take the subrogation rights to this loss. Then they'd seek reimbursement from your neighbor or his homeowner's insurance company.
Are the personal belongings that we take when traveling covered?
Yes, your home and renter's insurance policy will provide you protection. If you are traveling with costly jewelry, valuable photographic equipment, pricey art, or other items of high value, you should consider the purchase of extra insurance in the form of a rider to extend coverage for these items.
Our pipes froze and burst while we were vacationing. Am I covered?
Coverage for those frozen pipes is provided under broad form (HO-2) and special form (HO-3) policies. (Still, you may need to prove that you properly drained all plumbing lines and that maintained a proper level of heat to the dwelling.) There is no coverage, however, under the basic form (HO-1). (These types of policy forms are discussed later.)
Several items that I used for my business were stolen from my home. Why did my insurance company only pay part of my claim for my loss?
Your insurance policy contained a provision that limits the amount of loss for items of personal property that were used in your business. If you operate a home-based business, find out what limitations your insurance company puts on insuring property used in for business. Also find out if a business operation rider is available as optional coverage for your homeowner's or renter's policy.
How much dwelling coverage is needed?
The amount of coverage that you need depends on what it would cost to replace your home and land in the event of a total loss. While you may be able to get by with only 80% coverage, will you be able to take the other 20% out of your pocket in the event of a total loss? The incremental cost to insure a property to full "replacement cost value" is so low it would be fool-hearty not to fully insure your property at full value.
How much financial liability coverage is reasonable?
The amount of financial liability coverage you should consider depends upon the nature and extent of your assets. In addition to the value of your home, consider how much your business, personal property and other investments are worth. While there are exemptions as to the amount and type of property subject to a levy in the event of a judgment against you, it is better to have sufficient insurance to protect yourself and all your assets against any potential judgment. Liability limits of $300,000 are common, increased amounts of $1 million are also becoming commonplace.
My lender is requiring insurance. How much do I have to carry?
Lenders will ask you to carry insurance as security for their investment, just as they may require fire insurance and other types of coverage as investor protection. If you're financing, lenders will require you to carry at least 80% of the value of your home or up to 100% of the amount of the mortgage. It is not a good idea to try and save a few dollars by carrying the dwelling policy limit bare minimum amount of insurance. The value of your home may increase or a total loss may occur. The insurance company may apply the "coinsurance" principal and not fully cover a loss.
Policy requirements - how much insurance am I required to have?
Most insurance companies require homeowners to have at least 80% of the actual value of your home (excluding the value of the land) in order to pay a claim in the event of a total loss. This is often referred to as "coinsurance." The results can come as a real surprise to a homeowner in the event of a loss. For example, consider a homeowner who has an older home that is insured for $60,000. Due to appreciation of home values, the home is now actually worth $100,000 -- which means the insurance company would today require the homeowner to carry at least $80,000 of coverage. Since the homeowner carried only $60,000 (60% of the home value), the insurance company may only provide 60% of the loss - a claim for $20,000 may result in payment of only $12,000.
How much insurance is enough?
Most of us find that "enough" means enough to replace or rebuild your home. Though the insurance industry standard is to write home policies for at least 80% of the home's value, you don't want to be underinsured. It's often a better idea to increase the policy limits to 100% and offset the increase in cost by raising your deductible amount. For example, instead of insuring a $100,000 home for $80,000 worth of dwelling unit coverage with a $200 deductible, consider insuring the home for $100,000 with a $1,000 deductible. You may be able to afford a $1,000 loss as opposed to a $20,000 out-of-pocket loss.
How do I know if I have enough insurance on my personal property?
It is a good idea to inventory the contents of your home. In the event of a complete loss, it is difficult to reconstruct by memory the contents of your home. Some people videotape the contents of their home or apartment as a record of what it contains. If you have items of high value, get certified appraisals of them. Check to see if there is a limitation of coverage with respect to certain categories of personal property. As said earlier, if your insurance policy does not provide enough coverage to replace all of your personal property in the event of a total loss, purchase a rider to increase the coverage.
Will my property have to be inspected?
Most insurance companies have sufficient data accumulated to avoid the need for an inspection. Unusual situations (such as historic sites), however, may require a visual, on-site inspection before coverage will be provided ("bound") by the insurance company.
With respect to personal property or other special riders, the insurance company may require either an inspection or copies of certified appraisals before coverage will be provided. A diamond, for example, will not be covered for $10,000 unless there is an appraisal done for that amount.
Do I need to give personal information to get insurance?
Yes. Insurance companies require information about you and your property. The insurance company needs to know that you have an "insurable interest" in the property; that is, that you have an ownership interest in the property that is worth protecting. To determine the insurance interest in property, lots of personal information is necessary.
Will my home policy cover the costs of bringing my home "up to code"?
A few policies include a building code endorsement that pays the costs of an upgrade. In most cases, though, home insurance policies simply cover the amount of the loss. The big difference in policies is between an "actual cash value" policy and one that covers the "replacement cost" of the lost or damaged property. In this context, the additional cost for a "replacement cost" policy is well worth it.
Does the insurer protect my interests in the event of a lawsuit?
The insurance company's "duty to defend" is included as part of your coverage. Should a lawsuit result from an incident covered by your policy, the insurance company will appoint a lawyer to represent you. Often, the attorney hired by the insurance company must be independent from the insurer; in other words, the attorney must act on your behalf and not be an employee of the insurer (so called "Cummis counsel").
What is a peril and why is it important?
A "peril" is the exposure to the risk of being injured, destroyed, or lost. Most insurance companies refer to "perils" as the particular risks that can cause loss or damage. In some insurance policies, these are referred to as "named perils" - the types of occurrences that can cause loss or damage for which the insurance company will provide coverage.
Many new policies are written on an "all-risk" basis, meaning that all perils are covered unless specifically excluded. One of the major differences between standard packaged insurance policies are which perils that cause a loss are covered. The more perils covered, the more you wind up paying.
Why does a business owner need to consider risks?
Running a business is inherently risky. Many factors outside the control of the business owner can influence the success or failure of the enterprise and a high percentage of new businesses fail within a few months of inception. Even large and successful businesses can succumb to changing conditions. Consider what has happened to some of the largest companies in industries such as automobiles, telecommunications, computers, and railroads. To improve the probability of success, the management of a business should think about potential risks and how to offset them.
The losses to a business caused by increased expenses or decreased revenues could threaten the livelihood of the owner or owners. A realistic analysis of the risks inherent in the business and a plan for dealing with them will protect the business from unanticipated losses and disruptions to its flow of income.
What is risk analysis?
Risk analysis is a process by which you consider all possible risks and determine which are the most significant for your particular business. It may make sense to mitigate some risks by purchasing insurance. Other risks can be eliminated without purchasing insurance. After considering how likely various losses are to occur, how expensive they are to mitigate and how much money you have to spend, you decide the optimum strategy for dealing with the various risks.
What types of risks need to be considered?
The size of the company, type of industry, type of organizational structure, capitalization, geographical area, management team, degree of experience and expertise in the targeted business, capitalization, competitive environment and many other factors can have a bearing on the risk environment for the company. The business owners should address such issues in their business and strategic analyses of the company's situation. A few of the potential operational risks are as follows:
1. Risk of Property Damage
2. Risk of Inventory Loss or Damage (through spoilage, etc.)
3. Risk of Loss from Employee Theft
4. Risk from Various Liabilities (including injuries to customers or to others)
5.Risk from Errors and Omissions Liabilities
6.Business interruption Risks
Other risks involve the business's employees and may call for optional or mandatory insurance coverage:
1. Worker's compensation
2. Unemployment
3. Employee benefits
Some additional risks relate to the owners and their ability to continue the business in the event of serious losses
1. Risk of death of an owner or key employee
2. Risk of disability of an owner or key employee.
What are some key risk management techniques?
The primary ways of dealing with risk include:
1. Find ways to avoid risks such as eliminating potentially hazardous products or procedures
2. Reduce the frequency or severity of risks that cannot be eliminated
3. Transfer the risk to an insurance company (or perhaps to another party by means of legal agreements that your business will be ("held harmless").
How often should I review my risk analysis?
A review should be done periodically. Once a year might be appropriate for many businesses. Many insurance premiums come due or up for reevaluation annually.
That would be a good time to consider any changes in your risk analysis. You should also consider a review whenever you business:
1. gets larger or smaller
2. changes its nature as when it diversifies into new businesses or markets or products
3. relocates
4. anytime your business evolves in any way that could change your risk profile.
How does the structure of the organization relate to the business risk?
The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.
Unincorporated Businesses:
Unincorporated businesses are by far the most common type of business.
The three basic forms of unincorporated business enterprises are:
1. Proprietorships (easiest to form and terminate). This is the most common form of business enterprise. Most proprietorships are small. The proprietor faces the greatest risk exposure of any business owner since the business and personal assets of the proprietor are legally indistinguishable - as are business and personal debts. Business misfortune can cause personal financial distress.
2. Partnerships. State laws lay out the legal principles that govern these. Allows for additional input of expertise or capital or time. General partners of businesses also have essentially unlimited exposure.
3. Limited-liability companies. These are the fastest growing form of company. They allow limited liability, flexibility of partnership taxation, and are attractive to people who desire to be limited partners (with limited liability) and supply investment capital, but not become involved in the active management of the company. A variation of this is the registered limited liability partnership which operates as a normal general partnership and offers liability protection for all partners.
Incorporated Businesses:
The corporation is another form of business organization. A corporation exists as a legal entity separate and apart from its owners. It is created under the laws of the various states. Advantages of the corporate form include limited liability, continuity of life, and various tax advantages. Corporations range from small scale to very large. Very large corporations usually have a department that manages the various aspects of risk planning and business and insurance planning. Corporations are taxed as separate taxpayers with rates different from those applicable to individuals. These tax considerations affect some aspects of insurance planning for corporations.
Corporations can be one of two general types (C corporation - the ordinary type, or S Corporation - which has a different type of taxation)
What is a closely held corporation?
A closely held corporation has a small number of shareholders, no public market for the corporate stock and the ownership and management overlap. Many small closely held corporations are functionally not greatly different from small unincorporated businesses in such matters as how they operate, make decisions and raise capital. Despite the difference in liability exposure, some lenders have been known to require managements of small corporations to pledge personal assets to secure business loans.
What is business insurance?
The term "Business Insurance" refers to a wide variety of insurance coverage's that can reduce or mitigate or compensate for exposure to risk for the business or its employees. It also includes coverage's mandated by law such as unemployment insurance, worker's compensation social security, and (in some states) state disability.
What should I do about computer and data risks? Do I require insurance?
In today's business world, your computer data constitutes a key asset - perhaps more valuable than many of your tangible items such as buildings or vehicles. So safeguarding data and data processing assets are crucial success factors.
Many data related risks can be greatly reduced by non-insurance steps. For example a carefully designed program of backing up data frequently and dispersing data processing and records in widely separated locations can avoid many of disruptions caused by natural disasters (hurricanes, tornadoes, floods, earthquakes, etc.) or by area-wide disruptions of communication or electric power and even terrorist attacks. If such events do occur, the redundancy and dispersion should make it possible to recover your operations quickly in most situations.
Archived data should also be maintained in secure locations. If you do not have the capability of securing such records, you might want to consider using the services of outside companies that store your valuable records in secure, carefully controlled, remote locations such as special warehouses or underground mines.
And security of customers' private information is increasingly important to give customers the confidence to use your products and/or services. So you need to consider what information security risks you have and how to eliminate them.
These are areas where you might find preventive actions to be preferable to insurance and remediation.
What kinds of insurance does my new business need?
The risk assessment process is the basis for determining what insurance you need. Many insurance companies provide a wide variety of business property and casualty coverage's. These can be underwritten individually and tailored to your specific business.
How much is it going to cost?
The cost is dependent on the specifics of your business situation. You can probably reduce the cost by shopping around. There are many companies providing business coverage's and competing for your business.
Many small to medium size businesses may be able to save money by considering packaged coverage instead of purchasing a lot of individual policies for the different risks.
How does insurance relate to business risks?
Property and casualty insurance provides a tool for reducing the individual business's risk by spreading the risks faced by many businesses. Many business owners contribute their premiums to the insurance company that provides the policy, but not all of the insured businesses experience losses so the insurance company is able to use some of the premium dollars to compensate those who actually sustain losses. In effect, the relatively small amount of money contributed by the many companies that are insured is used to reduce the losses suffered by the companies that actually have losses.
How are rates determined for business property and casualty coverage's?
The insurance company has to pay for the cost of the coverage's provided to the insured businesses. The predictability of these costs will vary based on the type of coverage. Some losses are immediately apparent (e.g. fires) while others take years to become final (e.g. court judgments for liability coverage's). Various expenses, such as getting customers and administrative costs of running the business must also be paid. Investment returns on premium dollars not yet spent add to the available funds to pay these expenses. Insurance companies judge all these and other factors including competitive forces, the legal environment, the investment returns likely to be earned for some years in the future. Then they set rates that make for a profitable operation, subject to regulation by the insurance departments.
Some types of package coverage's such as business owner's policies are underwritten by class of policies rather than as individual companies. If your business fits in a certain classification the whole group of businesses in that class is underwritten together so that rates are set for all of them rather than considering each individual company. This leads to more efficient underwriting and helps to keep the rates low if your business meets the requirements to be accepted in one of the classifications. It also means that such policies have less flexibility than you would have if you purchased individual policies for each type of coverage.
Why consider buying insurance for business risks?
As with other potentially risky aspects of life, insurance can help by taking risks faced by many policy owners and pooling them so as to compensate the ones who sustain substantial losses. Pooling of risks works because what is unpredictable for an individual business is much more predictable for a large group of businesses. If your building burns down or is burglarized, the money the insurance company collects from its policy holders plus what it earns from its investments is used to offset your losses. People who do not suffer losses but have paid their premiums have the assurance that if they suffer insured losses the company will do the same for them.
Are there some risks that cannot be insured against?
Yes. For example, you cannot insure against many business eventualities such as loss of business to competitors or rising prices of supplies.
Which risks need to be insured against?
Once you have analyzed the risks, you need to consider the cost of the various coverage's and what your most significant exposures to risk are. Then you should consider your available insurance budget and decide which risks you should insure against.
What are some examples of risks that may not require you to buy insurance?
Buying insurance is one way to deal with risk. However, some risks can be countered with measures such as:
1. Installation of better locks or security devices or by moving to a location less susceptible to crime or flooding etc.
2. Loss of merchandise can be reduced by security devices on the items to be sold.
3. Liability losses resulting from customers slipping and falling can be reduced by clearing away snow or water on walkways, using signs to warn of large steps or redesigning products to reduce the possibility of injury to customers.
A knowledgeable insurance representative may also be able to suggest additional steps to reduce exposure to risks.
What factors will control the cost of business insurance?
Many factors influence the cost of business insurance, but some important ones include the type of business, the location, and the size (both physically and in terms of volume of business). Competition for the business is also a factor. If there are many companies wishing to provide insurance for your type of business, you will be in a better position to shop around for a good price.
What can dramatically add to the cost of my business insurance?
Some types of businesses including restaurants (except fast food), financial companies, some types of medical offices and others may be considered high risk for some types of insurance and so may have higher than average cost for those types of insurance. Also, they may not be eligible for lower cost packages of business insurance.
A history of large or frequent claims can also increase the cost.
What is the best buy for many small businesses?
A business owner's policy (BOP) is the best choice for many small to medium size businesses if they can qualify and if the limitations and types of coverage's fit their needs. Some specific additional policies may be purchased to supplement the BOP coverage's if needed.
Does it help to have been a long term customer with the same company?
You have had your personal coverage with the same company for many years. Will it help you to get a better price on your business insurance? Usually, it will only be a "tie breaker." When you are comparing prices you may get a slight break on price if everything else is about even. But don't expect a lot of points for loyalty to your insurer.
What is property related risks?
Property damage includes a number of direct risks as well as some indirect ones. Direct damage would include fire or flooding damage to the building where you do business while indirect damage would include being out of business temporarily because of damage caused by a fire or flood. Whether you lease or rent or own the building where you conduct your business, you will probably need some type of property insurance.
You need to be certain that any property insurance coverage is adequate. Decide whether to base the coverage on replacement value, actual value (replacement less any depreciation), or some other amount you stipulate and deem sufficient.
What are casualty risks?
Many forms of business insurance (other than property coverage, life insurance or disability insurance) fall under the general category of Casualty Insurance. This includes such risks as workers' compensation, automobile coverage (for business vehicles) and liability coverage's. Since there are various types of potential liability for a business (involving actions of employees, product defects, etc.), it is important to consider all the liability exposures and make sure that you have adequate insurance against any that may be significant for your business. Your insurance advisor or insurance company should be able to advise you whether individual liability policies or a package of liability coverage's will be needed.
What about crime, Employee theft, and related risks for a business?
Some industries have an especially high risk of losses to various types of crime. These can include such acts as burglary, armed robbery and theft by customers or employees. It is reported that some retail organizations employ under cover shoppers to check on the practices of employees as one of the tools to try to try to minimize employee theft. Many stores also employ a variety of security personnel, alarms, tags and other devices intended to thwart theft.
Do I need directors and officers (D&O) coverage?
Despite some highly publicized cases of accusations of misdeeds against officers and directors of major companies, for many small businesses it may not be necessary to have Directors and Officers DNO coverage. Each business needs to assess the need for DNO in its particular situation. For many companies the answer may be no, however.
Do I need liability insurance?
Basic liability coverage's such as provided in business owners' policies may be adequate in many cases, But if you are in a business or profession where there is an especially high risk of lawsuits (some branches of medicine for example) you may need extra protection.
What is a buy and sell agreement? Should I have one?
A business can be crippled by the death of a partner, because the partnership is effectively ended by the death and needs to be reconstituted with the remaining partners and any new participants. But the interests of the deceased partner need to be bought out, just at a time when the business may be badly damaged by the loss of a critical member of the team and funds may not be available to pay for the deceased's ownership interests.
A buy/sell agreement is a legal document that binds business partners to buy out the interest of a deceased partner at terms that are predetermined so as to allow the business to continue to be run by the remaining partners. The agreement is funded by life insurance policies on each of the partners with proceeds to be paid to the business for disposition according to the terms of the agreement. It is important that the agreement be carefully drafted by attorneys experienced in how to meet the exact requirements of the organization in question.
Similar arrangements may protect against long term disabilities that can sideline one of the main players in the business. A disability policy can provide needed funds in the event of such an incident and buy out interests of someone who will not be able to return to the business for a long period of time.
Disability income protection can also contribute to paying overhead expenses when an owner is incapacitated.
What about business continuation in a closely held business?
The basic problem is that the business may have to be liquidated shortly after the owner's death if there is no plan for business continuation. The problems are somewhat different for incorporated or unincorporated businesses, but both are likely to need a buy-sell agreement. Life insurance is commonly used as a way to fund such agreements.
What about buy-sell agreements for unincorporated businesses?
A properly prepared buy-sell agreement will require the estate of the deceased owner to sell the business and the purchaser to buy it for a prearranged price. This guarantees a market for the business, liquidity for taxes and administrative costs and improves the probability of the business being able to continue and carry on normal functions such as borrowing money.
What about buy-sell agreements for corporations?
The death of a shareholder of a closely held corporation does not terminate the corporate, but it may have serious consequences concerning the continuation of the business, the disposition of the deceased shareholder's stock (including the possibility of unwanted heirs or outsiders acquiring the stock and becoming involved in the business).
Again, the solution is a properly designed and executed buy-sell agreement. The agreement should reflect the goals of the people making the agreement clearly and in great detail. Some agreements require the other shareholders to purchase the stock of the deceased shareholder at the time of death. Another type of agreement has the corporation buying and "redeeming" (holding as treasury shares) the shares of the deceased shareholder.
How do you create a plan for stock redemptions?
A shareholder may wish to receive cash for his or her stock in a closely held corporation in order to retire or for other reasons. Also, an extended period of disability could trigger an agreement to redeem the stock of the affected stockholder. Plans for contingencies such as this can be established with funding coming from disability insurance or life insurance policies.
How does a business owner create a plan to dispose of the business during the owner's lifetime?
Many business owners have no intention of disposing of their business as long as they are alive. But some others become ill, or wish to retire, or decide for some other reason that they wish to withdraw their assets through some sort of disposition of the business. Several disposition methods are possible including outright sale, installment sale, exchange of stock or assets, liquidation. These could have complicated business and tax consequences that need careful analysis with the appropriate professional advisors.
How do you set a value on the business for purposes of a buy-sell agreement or other reasons?
Since execution of a buy sell agreement or other possible transactions require an estimation of the value of the business. It is essential that a valid method for determining an accurate value be available. The agreement may have been draw up long before the time that the value needs to be determined. An accurate method that can be used when needed is essential. The calculation techniques aim at determining the "fair market value" of the business. The two primary techniques focus on the earning power or the assets of the business. Adjustments and judgments can also come into play as well as IRS advisory rulings relating to the valuation techniques.
Are business insurance issues extremely complicated?
Planning for business owners generally impinges as well on personal financial issues. For most business owners, the business constitutes a significant part of the owner's personal assets. Furthermore, personal financial problems can jeopardize the healthy continuance of the business through creating difficulties in raising capital, getting loans, etc. The analysis and planning issues often involve concepts that relate to business organization, laws, taxes, compensation for the owners and employees and insurance planning.
Do I need an advisor?
Since few business owners are likely to have competence in entrepreneurial skills as well as the wide variety of specialized disciplines required, it is almost inevitable that some resort to advisors will be required unless the company has grown to the point of having many employees and departments staffed by the professional specialists that handle these many areas.
What are business interruption risks?
Suppose you are trying to meet an important deadline for a key customer when a disastrous, unforeseen event takes place putting your ability to complete the job in jeopardy. An example would be when the indispensable person who heads up the project becomes ill or is hospitalized.
Much publicized events such as this have happened in the entertainment industry when a hurricane destroys a set for a movie or a film or stage star becomes sick or dies suddenly. It is obvious that the unexpected can have severe financial consequences. Some businesses use business interruption insurance to offset this.
What about workers compensation?
Most businesses with employees will need to purchase worker's compensation coverage. While details vary from state to state, there are generally requirements mandated by state law and the coverage is purchased through an insurance broker.
What do I need to know about unemployment insurance and social security (FICA)?
The person or vendor who provides your payroll services will make the proper payments to the state and federal unemployment organizations as part of the payroll services function.
What is business owner's policy (bop)?
A business owner's policy (BOP) has been compared to a homeowner's policy for business. BOPs were first developed in the 1970s and have become a very popular form of insurance for small to medium sized businesses. BOPs combine some of the basic coverage's needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these coverage's separately. Business owners also like the simplified nature of the package as opposed to buying a collection of small policies. The efficiency also appeals to insurance companies and allows them to offer a lower premium for the package.
A similar packaged product is also available for farmers.
Most of the coverage's that are needed by small and medium sized businesses, with the exception of auto and worker's compensation, are generally included. This not only simplifies the process of buying the basic insurance coverage's, but often gives a lower premium for businesses that qualify for a BOP. Business owner's policies basically consist of property coverage, liability coverage and some additional types of coverage that most businesses require. Optional coverage's can also be added to meet specific needs of the business.
Typically a BOP policy includes:
1. Property insurance (covering buildings, equipment and inventory).
2. Business interruption insurance (covering losses that cause you to shut operations or reduce production for a time). Business interruption insurance can provide money to offset lost profits or to pay continuing expenses (typically for up to a year for insured losses).
3. Casualty or liability protection (covering harm done by the employees or products to other people or their property).
4. Crime insurance (covering loss of money or securities resulting from burglaries or robberies or destruction) as well as losses from employee theft or embezzlement.
5. Liability insurance covering lawsuits arising from accidents (as when someone trips and falls on your business's property) or when you sell a product that damages the customer's property or you are accused of offenses such as slander, copyright or invasion of privacy.
6. Vehicle coverage for rented or borrowed vehicles.
A number of other coverage's such as flood insurance or earthquake insurance or owned vehicle coverage and specialized liabilities are generally not included in POBs. Some of these may be available separately for extra premiums.
One of the distinguishing features of BOPs is that most automatically include business income and extra expense coverage (subject to some limitations).
Who is eligible for a business owner's policy (bop)?
Small businesses with up to 100 employees and revenues of up to $1 million are candidates for a BOP. Some types of businesses, such as restaurants, may be ineligible for BOPs. If so, they should look at the individual coverage's they need and purchase them separately. Of course, underwriting standards will vary from company to company. Therefore, the buyer should check with several companies to find out what is available.
Typically, businesses such as traditional retailers (furniture stores, clothing stores, hardware stores, offices, etc.) are candidates for BOP. Restrictions usually limit the size and types of occupancies in the eligible building.
Apartment buildings, office buildings some small contractors are often eligible (subject to various limitations on size and other characteristics).
Restaurants are generally not eligible, but many fast food or limited cooking restaurants may be.
Eligibility requirements vary from one insurance company to another. The following are generally not eligible:
1. Automotive businesses
2. Bars, grills restaurants
3. Manufacturing firms
4.Single or double family dwellings
5. Places of entertainment
6. Financial institutions
Again, the details of eligibility vary from insurance company to insurance company.
For business owners who operate the business out of their home there is a possibility of adding an endorsement to the homeowner's policy to cover the business risks or separate policy such as a BOP or commercial package.
Why buy a business owner's policy (bop)?
Low premiums and a minimum of hassle, since the coverage's are prepackaged. But the lack of flexibility may be a problem for business owners who want different options or higher maximum coverage.
But a BOP does not cover every type of risk you might need to insure, so you may need additional types of coverage such as fleet insurance for the automobiles you own, additional coverage's for the specific risks faced by businesses in your industry and workers compensation or employee benefits, etc.
How would a life insurance or disability policy be used in business?
There are many uses, but two of the most common are to assure continuation of the business in the event of death or disability of an owner or key individual. This is done by having the appropriate legal documents executed that will pass ownership to designated individuals in the event of incapacity or death of a person who is key to the ownership or success of the enterprise.
What basics do I need to understand about life insurance?
The basic types of life insurance policies are term insurance policies and cash value policies, also known as permanent insurance. Term insurance is for a limited time and tends to have lower premiums. Term policies can be renewable or non-renewable. Shorter terms (1 year or 5 years) tend to have lower premiums than those policies with longer terms (10 years or 25 years). As with your personal life insurance, term policies are often used to cover a loan or mortgage. Cash value plans are often used for business agreements where the death of the insured person would trigger a need for cash and where the need is likely to be ongoing during the life of the insured person. The cash value of the policy can also be borrowed against for business needs at the loan rate specified in the policy.
In a personal policy, the owner (the one who controls such aspects as the beneficiary designation and the disposition of the policy) is usually the person who is insured. For business life insurance policies the ownership could be other individuals or the business itself depending on how the policy is being used in the business and what legal documents have been executed.
What are the basic facts about why life insurance may be used by business owners?
For sole proprietorships, partnerships and closely held corporations the death of a general partner can result in dissolution of the firm. If this occurs, the surviving partners and the estate of the deceased may need to reach agreement about the disposition of the business.
This can result in forced sale, liquidation of assets, and depletion of value. Buying out the interests of the deceased partner and continuing the business may not be easy to arrange at such a time and the financing may not be available.
The solution is to have a previously arranged buy and sell agreement.
What happens when a business owner dies unexpectedly?
The business interests will pass to the designated person as specified in the will (or intestate laws) and have to be reorganized or liquidated. Everyone has probably observed situations where the owner of a small thriving business dies and the business then struggles to continue or is forced to close. The best way to avoid such a situation is to plan ahead and prepare the appropriate legal documents and funding mechanisms to assure that you wishes are carried out.
What about key person life insurance?
If a key person dies the company is likely to experience a loss of income and/or an increase in expenses. The company could purchase a term policy on the employee to provide compensating cash in the event of the key employee's death. Since the dollar value of the employee's work for the company diminishes as retirement approaches a decreasing term policy could be used.
Many companies, however, use cash value insurance to fund such a plan. If the employee survives to retirement, the cash value would then be used to fund a deferred compensation retirement benefit. Alternatively, the policy can be transferred to the employee at retirement. The policy should be owned by the business and the business should be the beneficiary.
How do you determine the financial value of a key employee to determine how much insurance to purchase?
Several possible techniques are available. Four common methods that are often used:
1. Apply a multiple of the key employee's salary
2. Capitalize (at some discount rate) the company's earnings traceable to that employee
3.Estimate the reduction in the going concern value of the firm due to the loss of that employee
4. Base the estimate on judgments including such things as how much insurance the insurance company is willing to issue on the key employee.
What about key person disability?
Just as with the death of a key employee, there are potentially severe consequences of such a person becoming permanently disabled. The business could purchase and be the beneficiary of a disability income policy to help offset the extra expense of replacing the disabled employee and paying continuing compensation during the disability period.
What about disability insurance?
Because the risk of disability is higher than the risk of death at many ages it is important to consider how a severe disability would affect your business. Disability insurance proceeds can be used in such situations to hire someone to replace a disabled employee or manager or to fund disability buyout agreements.
What basics do I need to know about disability insurance?
The key facts about a disability policy include the amount the policy will pay and the length of time the payments will continue as well as what constitutes a disability under the terms of the policy. For example, if you cannot work at your normal occupation but can do some other type of work are you considered disabled?
It is also important to check the financial strength of the company to be confident that it will be able to pay any claims.
Now that I have a successful business, how do I protect my assets for myself and my family?
You know how hard you had to work to achieve business success. You should consider also what plans you have for your own financial future (retirement, etc.) and for the future of your family members. Besides preparing updated business insurance and other business plans you should review, with qualified professionals, your personal assets, investments and insurance. This should include reviewing and updating your personal insurance and investment strategies, will, and estate plans.
I have been successful enough that my business is no longer a "small business." what should my concerns be about my risk and insurance planning now?
Although you have become a successful business person with all the advantages (and responsibilities that entails) there are potential problems that you need to consider. In particular, what would happen if you became disabled or died? Or what if something happened to one of your key employees or business partners? Could your business continue? Would there be funds to pay for continuing expenses? Would the business be badly damaged perhaps to the point where forced sales of assets might be required? Would money be available to pay estate and other taxes that might become payable?
What is a professional service agreement?
Professional groups (doctors, lawyers, engineers, etc.) often use an income continuation agreement that gives the heirs of the deceased a share of the earnings or a specified sum for a stipulated time period. This can be used together with a buy sell agreement for the assets. Life insurance can be used to fund both agreements.
How can buy/sell agreements and insurance help with the transition to retirement?
Cash value life insurance can be used to fund a buy/sell agreement to be carried out at the time of retirement of an owner.
What are some uses of life insurance in compensation planning?
Non-qualified deferred compensation plans: These pay future payments to certain selected employees for work performed now. The idea is to attract and retain employees considered important to the business's success. These are typically funded with life insurance. The payments would typically begin following the employee's retirement and would be taxable to the recipient at that time.
Bonus plans for key employees: These can provide life insurance to the employee as an extra for of compensation. The employee is paid a bonus and uses the money (after paying taxes) to pay for a life insurance policy. The employee has ownership of the policy and can access the cash value or change the beneficiary and the employer receives a tax deduction for the disbursements to the employee.
Supplemental retirement plans for executives: Since tax qualified defined contribution plans restrict the contributions by highly compensated individuals, supplemental plans can augment retirement for the key executives using cash value life insurance.
How does the business owner set up these various business agreements?
These plans require experience with complex business, tax and legal issues. Anyone contemplating the establishment of such plans should consult the appropriate advisors.
Should I have key person insurance?
Apart from the business owners, the loss of a key employee (someone with expertise in production, sales or other key areas crucial to your success) may need to be insured against death or disability in case you need to replace these capabilities by finding someone else to replace this skill or provide funds that can help compensate for the loss.
As a business owner, what should my personal insurance plan consist of?
Many successful business owners have substantial personal assets in addition to the business. A complete review of both personal and business finances should be made periodically with regard to business plans, personal investments, business and personal insurance and eventual business succession or termination plans and eventual personal retirement goals. Any personal legal documents such as wills or trusts should also be reviewed and updated.
Do I need to consider an estate tax plan?
The estate tax law has been revised in recent years to raise the portion of estates exempt from the tax ($675,000 in 2001 raised to $1.5 million in 2004) so that the number of estates subject to the tax has dropped (to 2.3% in 2001) and the value of the average estate that was taxed was about $2.7 million in 2001. Some proposed legislation calls for the eventual elimination of the tax over the next decade. Business owners and farmers (who may be cash poor, but rich in property or land) are among the groups that sometimes unexpectedly leave estate tax bills for their heirs. A thorough review of your insurance and financial plans should include a consideration of possible estate taxes with a knowledgeable advisor.
For those with estate tax problems, life insurance is usually the suggested funding vehicle to provide cash to pay for settling taxes and related expenses.
How do I find a broker or advisor I can depend on?
Consider getting referrals from people you trust. Also, look for advisors who have industry designations beyond a license to sell insurance. For example, CLU, ChFC and other recognized professional insurance or planning designations may be helpful barometers of professionalism.
Your agent or broker that handles your other types of insurance (life, homeowners, disability, etc.) may be a candidate.
There may be an industry association for your business that has special insurance programs for your business or can refer you to agents or companies that are experienced with businesses such as yours.
Illinois Employee Benefits Frequently Asked Questions
What is the basic difference between individual and group health insurance coverage?
An individual policy is purchased by you directly with the insurance company.
With a group health insurance policy, the group is the master insured and the insurance company contracts with the group. Insurance certificates, issued to a participating member, act as your policy. At times, group health insurance costs less than would have been charged had the insurance company sold individual policies to each member separately. In addition, group health insurance often contains special coverage that is not available or is very expensive on an individual basis. The purchasing power of the group makes this economically feasible.
What types of group health insurance coverage are available?
Group health insurance makes individual coverage available on a group basis. A primary advantage is the purchasing power of the group that achieves reduced acquisition costs for the insurance company. The insurance company is then able to reduce the rate it charges to provide insurance for each individual member of the group. The Group is in a better position to bargain with the insurance company for additional benefits for its members. There are a variety of types of group health insurance plans, the major distinctions being the mechanism used for purchasing the insurance. Common varieties of group health insurance plans include:
1. Fully Insured Employer Group - The employer contracts directly with the insurance company to provide certificates to covered employees. Typical arrangement is either for major medical or health maintenance organization (HMO) coverage.
2. Small Employer Group - Insurance companies group certain industries together and then gather small employers together to form a larger group. These groupings enable the insurance company to better predict the cost of providing the insurance. The small employers can then get coverage otherwise not available unless charged a much higher rate. All the small employers get the same policy without deviation.
3. Large Employer Group - same as a fully insured employer group with direct contract between the insurance company and the employer to provide individual certificates to covered employees.
4. Health Maintenance Organization (HMO) - a group program under which the organization provides a full range of medical services to participants. Participants are either assigned or select from a group of general practitioners, who then refer their patients to specialists when the need arises. Good generalized system of providing medical care which is marked by curtailment in selection by the individual participant of the health care provider who renders services. Individual participants insured by an HMO are called "enrollees".
5. Self-Funded - available to large groups. The group contracts with an insurance company or third-party administrator to handle the paperwork. The group pays for all costs associated with the operation of the insurance plan itself, along with the added cost for administration.
6. Association Group - similar to a fully insured employer group, the distinction being that instead of an employer, it is a different type of group, such as a credit card company offering insurance as a benefit to its cardholders or a church group offering insurance to its parishioners.
7. Group Managed Care - a long-term health insurance plan offered through the group or association.
8. Preferred Provider Organization - another kind of health care network (doctors, hospitals, and other health care providers) that contracts with health insurance companies.
How can I get health coverage?
Employer-sponsored group insurance
Millions of people obtain their insurance through their employment. Upon reaching the eligibility requirement (such as a full-time employee working more than 40 hours per week for a six month continuous basis), the employee becomes covered under the employer's group insurance policy and the employee is issued an insurance certificate or health insurance card. Medical insurance is a very common fringe benefit of employment. Some employers will provide coverage solely for the employee, some employers pass along the cost of dependent coverage to the employee, while other employers pay the entire cost of medical insurance for the employee and his/her family.
Individual insurance
Health insurance which is purchased by the individual. Some major health insurance companies offer a broad range of coverage and options to individuals, who pay directly out-of-pocket for the cost of the insurance. Many insurance companies require completion of an exhaustive application and may require a medical examination before coverage will be offered to the individual.
Government-sponsored insurance
Some states offer health insurance benefits to their residents, often with certain income requirements for eligibility. These plans are designed for the "working poor" - individuals who are employed but no health care coverage is available where they work. This enables the state to protect its residents from catastrophic loss due to illness, disease or accident without placing an additional burden upon its program for the truly indigent.
Association-sponsored insurance
You may belong to a group or organization that offers health insurance as a benefit of membership. Check membership benefit statements, brochures, or ask organizations leaders to determine availability of health insurance through your group or organization.
What's the difference between primary and secondary coverage?
Since many people have available medical insurance from more than one plan (such as two employed spouses covered under group health insurance plans), insurance companies do not want insured's to profit through their health insurance. To prevent double recovery, most health insurance plans have provisions which determine how primary versus secondary coverage will be determined.
Primary coverage is provided through the plan of which they are a member (such as the spouses both covered through their respective employment - the primary coverage is provided under the plan provided by the employer of each spouse) or the plan under which the member has been a participant for the longest time period.
Secondary coverage, usually as a result of being covered as a dependent under someone else's health insurance plan, provides reimbursement for medical expenses after exhaustion of coverage available through the primary plan.
Will it cost me anything?
Some employers
1. Pay all of the premium
2. charge a small amount for the coverage,
3. Require the employee to contribute to the cost of coverage for their spouse, children and dependents
4. Make the program available for their employees to purchase if they choose.
My employer has a self-insured health insurance plan. What does this mean and is this a good deal for me?
Some large employers operate their own health insurance plan as opposed to purchasing coverage from an insurance company. Typically the large employer pays a third party (such as an insurance company or other administrator of health care claims) to administer the plan which they have designed for their employees - the large employer pays the costs (claims plus administration) directly out of the company's coffer. While the large employer saves the profit margin that an insurance company builds into its premium, it raises the exposure of the large company to greater risk in the event that more claims than anticipated must be paid. Due to the nature of these plans (and tight regulation of such plans), most self-insured employer-sponsored plans are very efficient and provide good health insurance benefits to employees.
My employer gives its employees each a medical savings account to pay for health insurance. What can I do with this fund?
While technically not health insurance (unless used in conjunction with a health plan), some employers provide their employees with an annual amount placed into an account earmarked to help the employee take care of his or her health care expenses. For example, an employer may place $2,500 into an account for the employee to use for their health care needs. The employee may draw on the account to buy health care insurance or pay policy deductibles, co-payments or medical expenses not covered by his or her health insurance policy. In addition, the employee may periodically withdraw money from the MSA, but there may be tax implications if used for non-eligible health care expenses.
The main advantage of an MSA is that you will not pay income taxes on any money put in the account.
Can you help me understand the cafeteria plan my employer offers?
A Cafeteria Plan gives the employee a range of options about the types and levels of benefits, as opposed to having these decided by the employer and the insurer. Under a cafeteria plan, the employee may choose among 2 or more benefits consisting of cash and qualified benefits (such as health insurance, optical plan, dental plan, short-term disability coverage, life insurance, or additional sick days or vacation time). The employee decides which benefits fit his/her needs and utilizes the benefits selected.
Doesn't my employer have to cover my spouse and children under my health plan?
No. Most health insurance plans have available riders to extend coverage under the policy to spouses and other family members. The cost for the additional insured's can be less than if purchased on an individual basis. Some employers pass the cost on to their employees, while others pay a percentage (up to 100%) of the additional family coverage.
I have health coverage through my employer but I'm leaving my job soon. Though I like my current coverage, I cannot carry it from job to job. What are my options?
For terminated or retiring employees or those losing coverage because of reduced work hours, a provision called COBRA (the Consolidated Omnibus Budget Reconciliation Act) obligates your employer to let you buy group coverage for up to 18 months after leaving. COBRA applies to all employers with 20 or more workers.
Your employer (or health plan )will furnish you (or your spouse) a booklet that explains all the twists and turns under COBRA as well as a summary plan description that contains information about COBRA. In addition, when a plan receives notice of a qualifying event, the plan must notify the covered person of their right to choose continuation of coverage.
How does COBRA work with a spouse or child?
COBRA also applies to a spouse or dependent child of the covered employee who lose coverage because of the death or divorce of the covered employee, or loss of dependent status under the provisions of the health plan. You may be able to retain the coverage for up to 36 months. If you decide to take coverage, the cost is the full premium, plus an administrative fee.
When does coverage end?
Eligibility under COBRA stops when you become eligible for new group insurance (with special provisions covering pre-existing conditions) or when your designated time period expires.
Since I work for a company that has less than 20 employees, Cobra is not available. But we do have group coverage. What are my options?
Try converting your group coverage to an individual plan. Conversion policies will cost more than your group policies, but the good news is that you don't need to pass a medical examination. Any pre-existing condition, however, may apply. You also have the option of State Continuation (much like COBRA here in Illinois).
I'm also leaving my job where I have health coverage, but I have a pre-existing condition. What are my options?
Probably the largest single worry that many have is coverage for pre-existing conditions, especially when you switch jobs. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) helps assure continued health insurance coverage for employees and their dependents.
That law imposes limitations on exclusion of coverage for pre-existing conditions, provides credit for prior health insurance coverage and a method to provide certificates regarding such prior health coverage to a new group health plan, prohibits discrimination in enrollment and the premiums paid by employees and their dependents based on health factors, and other protections for obtaining health insurance - both as to employees and to employers sponsoring a health insurance plan.
The major benefit of this legislation for most employees is that when they have been covered by a group health insurance plan for more than 12 months (or an individual policy, by Medicaid, Medicare, or a public health plan), there usually will be no pre-existing conditions exclusion of new group health insurance when the employee enrolls as a participant in a new group health insurance plan.
Click http://www.georgetown.edu/research/ihcrp/hipaa/ for a terrific website that snapshots the laws of the states and HIPAA.
There are so many different health plans out there. What does all those letters - HMO, PPO, POS, Etc.-mean?
HMO: An HMO (Health Maintenance Organization) is an organization that provides or arranges for coverage of certain health care services required by members of the organization. Typical HMO coverage includes access to a primary care physician, emergency care, and specialists/hospitalization when needed.
Many HMOs operate with preventative medicine in mind by addressing your health care needs while you are healthy so as to prevent disease or illness.
Critics of HMOs address concerns as to a lack of selection of primary care physicians, "assembly line" medicine, and denial of adequate referrals in the event of disease or illness. Critics often claim that a HMO may deny certain claims and may make health care decisions based upon a pure profitability standpoint as opposed to decisions driven by providing the best level of care for its patients.
HMOs are valuable in providing good care for many members - many HMOs organizations take very good care of their members' health care needs while managing costs.
IPO: IPO (Independent Provider Organization) operates by having an HMO contract directly with independent physicians to provide services to HMO members.
PPO: PPO (Preferred Provider Organization) is a form of managed care under which health care providers contract to provide medical services at pre-negotiated rates. Members who subscribe to a PPO are required to use the health care providers who participate in the PPO network - utilization of a health care provider outside the PPO network may result in the member paying more out-of-pocket for services which could have been provided within the network.
HMOs often use a PRO (Peer Review Organization) to assure that members receive appropriate services that meet professional standards of care. Complaints regarding levels of service are often referred to the PRO for resolution.
POS: POS (Point of Service) plans allow the individual policy holder or certificate holder to visit out-of-network, non-participating doctors for a fee. If the services of a non-participating health care provider are utilized, the individual often obtains restrictions of benefits or incurs more out-of-pocket costs.
Illini Community Insurance is a full service, multi-state and multi-lined insurance agency. In other words, we have carriers across all lines of insurance that help us help you to insure your risks. With licenses in 26 states, we have the ability to insure risks from your basic home/auto to more complex commerical insurance risks. Our services also include a Coldwell Banker Realty group and a full benefits department for individual health, group health and even self-funded TPA arrangements.