BUSN380 Week 6 Threaded Discussion â€“ Insurance Trade-Offs & Lowering Insurance Costs &am
BUSN380 Week 6 Threaded Discussion â€“ Insurance Trade-Offs & Lowering Insurance Costs &am
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BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks What insurance coverages do you currently carry and pay for As a percentage of your estimated monthly disposable income which you identi ed in Week 2 what proportion do these coverages represent Are there areas where you feel you are underinsured Over insured My first experience with Life insurance was a USD46155 policy I bought from my father in 2001 when he was a Guardian Life Agent back in Trinidad I did it only because he needed the business and I felt guilty that I was liVing abroad with no spouse or offspring to take care of the funeral and shipping of my remains back home expenses ifI should expire before my parents did Yes That is exactly how dear old Dad sold me on Life Insurance The suggestion came inside of a nice postcard there is nothing like an insurance agent I tell you The policy was linked to an asset fund where the Company invested my premiums supposedly to provide retirement savings However for me the real selling point of the policy were the possible loans and the cash surrender value I made quarterly payments of USD 234 against the yearly premium of USD 935 most months my agent covered until I could pay him back My monthly income back then was approximately 3750 so at 58 it cost me less than 2 of my income Eventually after being laid off in 2006 I ran out of discretionary funds and cashed in During the five years I held it I was able to borrow 628 and cashed the policy in 2008 for the value of one year s premium I decided to get renters insurance in 2000 after I was the Victim of a burglary that cost me about 8000 in losses Currently I am maintaining the Balboa policy that promises 30000 worth of protection for my valuables for less than a dollar a day Sold The annual premium is 308 which is 76 of my yearly income 2566 is deducted from my checking account and while I can barely afford the payment these days I will continue to find a way to pay it for as long as I am renting I learned the valuable just in case lesson and no matter what I was not going to be without coverage for my property or my personal safety while I was renting As chance would have it in 2008 after paying eight years of premiums 2156 I lost some valuable items in a fire while away at a camping retreat Upon my return home it occurred to me that I had seen something in my policy about loss coverage away from home Lo and behold in Section I Coverages of my policy there it was stated quite clearly Balboa covered personal property owned or used by any insured while it is ANYWHERE IN THE WORLD Ah Joy After a relatively swift and painless claims process I collected a check for 3000 with no increase in my premiums an actual 39 gain BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks What tradeoffs are involved in determining the amount of insurance coverage you currently carry Why Do You Need Life Insurance The reason why you need life insurance will determine the type of life insurance you need For example if you only need life insurance for a few years to cover a mortgage a term life insurance policy may provide the coverage you need at the lowest possible cost If you are looking for a policy to last as long as you live a universal life insurance policy or a whole life insurance policy may be your best option If you are looking for convenience maybe a guaranteed issue life insurance policy with little underwriting and no medical exam is what you need There39s a tradeoff for convenience however You can use Term Life Insurance if you just need some life insurance for a short period of time to cover some debt or a mortgage Universal Life Insurance also has a cash value which make them more popular in the marketplace Some may offer nolapse guaranteed death benefits and some may have riders available for things such as nursing care or long term care coverage The appeal of some universal life policies compared to whole life policies is that the cost for coverage may be less expensive Whole Life Insurance has been around for a long time and will be there for a long time to come Many smaller face life insurance policies available to seniors are whole life insurance policies This type of policy builds cash values over time and may offer dividends to you over time Sometimes a whole life insurance policy will be the best deal for you other times there will be better options What strategies might you implement to lower your insurance costs while at the same time minimizing the risks involved in lowering such coverage In the area of health insurance here s a hint Are you a smoker Chew on this class Obesity is growing faster than any preVious public health issue America has faced If current trends continue 103 million American adults will be considered obese by 2018 and we can expect to spend 344 billion on health care costs attributable to overweight That will be more than 21 percent of the nation s direct health care spending in that year If Americans kept their weight at current levels for the next seven years we could save an estimated 820 per adult in health care costs a saVing of almost 200 billion dollars BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks Trying to manage healthcare premiums will not control costs what we need is to manage the underlying causes namely the unwarranted and unconscionable power that doctors now have to obtain higher rates from the insurance companies for less effort and time No one is looking at the role of the blossoming market power of providers which forces the private insurance companies to raise their rates In the state of Massachusetts for instance what causes healthcare costs to rise is not an increase in the volume of care to patients but quite simply a rise in the price of the care itself We have reached the point in this country where the same levels of service at a hospital in one city can cost a whole lot more in next Variations in price are no longer related to quality of care or the sickness or complexity of the population being served or even the extent to which a provider must caring large numbers of Medicare or Medicaid patients They are determined by market leverage by the relative market position of one hospital or provider group over another AOL News Who s the Bad Guy in Insurance Premium Hikes 022110 Source US Department of Health and Human Services Health United States 2009 published January 2010 Data for the decade to 2006 Kaiser Health News State Regulators Criticize Obama Plan To Create Federal Authority Over Health Insurance Rates 022210 USA Today Impact of Bipartisan Summit To Be Felt Beyond Health Care 022410 The health history probe in the insurance underwriting process is not a pleasant experience However much of the costs of life insurance can be traced to this important process Let39s illuminate some strategies you can think of for lowering any type of insurance cost you may have There are three simple strategies to save money on car insurance Each of these strategies can be quite effective and you can combine them to achieve the best results Discounts BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks Discounts are available with nearly all car insurance providers but they don t advertise them so you will have to go in prepared to negotiate The most common discounts available from car insurance providers are good student discount multiple car discount good driver discount senior driver discount multiple policy discount if the provider offers other types of insurance as well improved security discount and many others Coverage modi cation Since the only mandatory part of your car insurance policy is the third party liability coverage for property damage and bodily injury you don t always have to accept the optional coverages that add to the cost And while you don t want to risk being undercovered in certain situations you can use your discretion in choosing whether to modify their amounts or drop them altogether You can also modify your coverage deductible to get a cut in premiums but bear in mind you will pay the deductible up front in case of an accident Comparison shopping The best and most effective way to cut insurance costs is to shop around Use quote comparison websites to get as many quotes from local insurers as possible and you will definitely find what you need To conclude I would like to explore the concept of risk management as it relates to insurance costs What is risk management What are some risk management methods you have applied in your own life to address the insurance costs that you must contend with in your life Our textbook defines Risk Management as an organized strategy for protecting assets and people It helps reduce financial losses caused by destructive events and is a longrange planning process that changes with time Many people equate it with buying insurance but it is not the only method of dealing with risk in certain situations other methods may cost less There are four general risk management techniques 1 Risk Avoidance is where you mitigate risk by staying away from risky situations In some instances such avoidance can be costly like never getting into a vehicle in order not to have an accident or a manufacturer not producing any new lines to avoid product failure There are practical ways of avoiding risk e g not smoking not texting while driving not hanging out in unsafe neighborhoods BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks 2 Risk Reduction can be as simple as lessening the risk of injury in a car by wearing a seatbelt or installing smoke alarms and fire extinguishers to protect life and reduce potential fire damage Or even reducing the risk of illness thru good diet and exercise 3 Risk Assumption occurs when an individual or organization takes on the responsibility for the loss or injury that may result from a risk This works when the potential loss is small when risk management has already lessened the risk when insurance coverage is expensive and when there is no other way to find protection E g deciding not to buy insurance on an older car you bear the costs of fixing it should you have an accident 4 Risk Shifting is the transfer of risk to an insurance company by buying a policy that protects against loss Now let39s nish with a topic often discussed in the context of life and medical insurance coverage What is disability insurance What are some tradeoffs in the decision to purchase disability insurance Disability income insurance provides regular cash income lost by employees who can no longer work due to an accident or illness Many people fail to insure their earning power because they never think they will become disabled They forget that when they lose the ability to work they continue to incur normal family expenses as well as huge medical expenses The three main sources of disability income are Employer Social Security and Worker s Compensation If these benefits are not sufficient to support your family you may want to consider buying additional disability insurance to make up the difference Good disability plans pay when you cannot work at your regular job and will make partial disability payments when you return to work on a parttime basis poor ones pay when you are unable to work any job at all Some important tradeoffs in buying this kind of insurance include Waiting or elimination periods from 30 to 180 days longer if you pay low premiums and more costly if you choose the shorter wait Duration of benefits can extend up to age 65 or for life The wise choice would be disability for life since it would be financially disastrous if your benefits ended at age 55 or 65 Life coverage is of course costly You usually will not be able to insure yourself for your full salary because most insurers limit benefits from all income sources to no more than 70 or 80 percent of takehome pay So if you earn 400 a week you qualify for coverage of 280 to 320 a week This BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks is because while you are out of work your workrelated expenses disappear and your taxes lessen to as low as zero As we know through the news the cost of medical insurance is going up every year Many of us have been placed in highdeductible health plans that are designed to defer such costs by forcing us to be more discretionary in our medical spending Let39s apply some financial analysis to this issue In 2008 per capita spending on health care in the US was 800000 per year Let39s say this spending level increases 10 per year for 20 years Using the Future Value of a lump sum table how would we calculate the future cost of health care per capita Also what do you think contributes to these rising costs Correction if the annual spending level of 800000 increases 10 per year we would use the FV of a lump sum table The table factor needed is therefore 6727 8000006727 5381600 per year in the year 2028 for per capita medical costs By the way medical costs are not presently rising that quickly but may in the future Let39s say Jeff Jones has an automobile insurance policy with USAA insurance company that charges him an annual premium of 120000 His wife Cindy has an automobile policy with State Farm with an annual premium of 100000 State Farm offers them a combined policy of 200000 per year What is the Future Value of their savings over the next 10 years assume a 4 interest rate in the J ones39 savings account Let s make sure we are all clear that we need to use the future value of an annuity table to find the future value of the Jones savings in our example above If the J ones s consolidate their car insurance plans and switch to one company they save 20000 per year as their single annual premium is 200000 instead of the sum of their two previous policy s premiums which is 220000 120000 100000 We assume they add the extra 20000 per year into their savings plan which earns 4 for the BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks next ten years This is the same as 10 periodic payments earning 4 per period So we use the future value of an annuity table factor which is 12006 12006 20000 240120 Therefore the value to the Jones couple of consolidating their insurance policies into a single carrier is 240120 at the end of ten years assuming 4 interest earned in their savings account as Denise Tebebe Mary and Lina found Let s try another similar problem Let s say the annual premium for our car insurance is presently 100000 and we switch to GEICO and we really do end up saving 15 on our car insurance What is the future value of our savings assuming every year for the next 10 years we take the discount we receive from GEICO and invest it in a savings account earning 3 per year One great thing about this course is that it forces you to change your relationship with money I don t think I know anyone who would turn around and invest savings from any purchase they might make Needless to say I know a lot of broke folks I am ashamed to admit that normally I would simply spend any cash I saved from any discount or rebate It is indicative of the consumption cancer that is part of our psyche at least for uninformed people like me Now I am forced to look at the value of comparisonshopping and to use my new awareness to adopt a new financial behavior As far as our example above is concerned a switch to GEICO will save us 150 1000 15 Being astute savers and investors we would look for ways to make those savings work for us by consulting the annuity table for the 10 year index at 3 interest That turns out to be11464 so 11464150 171960 Sarah Smith has a medical insurance policy with a deductible of 100000 The policy covers 75 of medical costs above the deductible On a hiking trip she injures herself and must go to the hospital and stay a few days receiving an invoice in the amount of 750000 for her stay Her son informs her that a high deductible plan which covers 100 of costs above 275000 would have been a better value given her unfortunate injury BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks Is her son correct 162500 100000 275000 12500 The coverage at 75 Cost of the Bill 750000 Less Deductible 100000 X 75 Coverage 75 Cost of the bill Deductible 650000 650000 Coverage 487500 BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks 650000 487500 162500 Coverage at 100 Coverage 100 Cost of the Bill 750000 Cost of the bill Deductible 475000 Higher Deductible 275000 4750 Coverage 475000 475000 475000 000 Another scenario on this is if her bill would have been 10000 she still would be saving 500 using the 75 coverage plan she has In this case Sarah s son is incorrect When you break it down it will show that her current deductable of 1000 with coverage of 75 is actually better than paying a higher deductable of 2750 to obtain coverage of 100 7500 hospital bill deductable 1000 for 75 coverage 75001000 6500 75 4875 6500 4875 16251000 deductable 2625 is what is paid at 75 coverage 100 coverage breaks down as so 7500 Hospital Bill deductable 2750 you see that the deductable is already above what Sarah would have to pay at 75 coverage 75 total pay including deductable is 2625 100 deductable is 2750 There is a 125 savings if Sarah stays at 75 coverage Let s discuss Sarah Smith s insurance costs and her son s opinion about them in our problem above Sarah s present plan has a deductible of 100000 her plan pays 75 above the deductible and her medical bill for her hospital stay is for 750000 So 75 7500 1000 4875 is her present coverage Her son s recommended highdeductible plan would have paid all costs above 2750 So BUSN380 Week 6 Threaded Discussion Insurance TradeOffs amp Lowering Insurance Costs amp Risks 75002750 4750 would have been the coverage of the highdeductible plan Therefore Sarah is better off with her present plan by 48754750 12500 Let s work on another similar problem If we have a plan that pays 80 of all nonhospital related costs and the annual deductible that must be met is 75000 how much of our annual prescription costs of 225000 will be covered Nonhospital related costs Prescription 225000 Deductible 750 Plan Payment 80 So 2250 750 1500 80 X 1500 960 Ans 960 of our annual prescription costs will be covered 2250 750 1500 80 X 1500 960
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