Page 561 - Introduction to Business

CHAPTER 15 Personal Financial Planning 535

(premium) and in return, if you suffer a designated loss, the insurance company
compensates you. Most insurance policies include a deductible, which is the deductible The amount of a loss that an
amount of the loss that you must pay. The insurance company pays the amount of individual must pay before an insurance
arrangement compensates him or her
loss that exceeds the deductible. Your safety net of insurance should include health,
disability, life, property and casualty, and automobile coverage.
Insurance is the expense that many people dislike the most. However, you Insurance is a critical component
should protect yourself from loss before you begin to invest for gain. Insurance is of effective financial planning.
an indispensable component in managing your financial
affairs.

Health. Health insurance coverage is essential. If your
employer-provided health insurance offers insufficient cover-
age, you should obtain additional major medical coverage
independently. Group insurance may be available from an
affiliation other than your employer, for example, from profes-
sional societies, labor unions, religious groups, or college
alumni associations.
Health maintenance organizations (HMOs) are prepaid
health care plans that provide medical care, but you must use
HMO member doctors and not other doctors, as is possible
with a private carrier. A variation on the HMO concept is a Pre-
ferred Provider Organization (PPO). With a PPO, hospitals and
doctors agree to provide a company’s employees with health
services at a discounted rate.

Disability. Disability insurance provides income if you
become sick or injured and are unable to work. The younger
and more active you are, the more coverage needed. A 32-year-
old male has a six-and-one-half times greater risk of being dis-
abled for three months or longer than he does of dying during
his working years. Since social security disability insurance
does not protect all of your income, you should have enough
disability insurance to cover the difference between your monthly expenses and all
the income you will receive from other sources if you are disabled.
Avoid a disability insurance policy that contains an “any occupation” clause,
since benefits stop if you take another job to earn money. The policy should have
an “own occupation” clause that allows you to work part-time. Make sure the pol-
icy is also guaranteed renewable. You can save on your premiums by choosing a
policy with a longer waiting period, two or three months, for benefits.

Life. The amount and type of coverage you need depends on your obligations to
others and the amount of risk you are willing to assume. You need more life insur-
ance when you marry, have children, or incur debt. Your need for life insurance
diminishes as you fund your children’s education and your net worth increases. A
typical person needs from $200,000 to $2 million coverage, around 5 to 10 years’
worth of income. There are a variety of life insurance products.
• Term insurance provides no-frills insurance protection and does not include a
savings element. Term insurance is relatively inexpensive when you are young,
but premiums increase with age.
• Permanent insurance (or cash-value or ordinary life) has higher premiums
than term insurance in the early years of coverage. These extra premiums go
into a fund that builds cash value. Later, these earnings can offset insurance

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