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Problems: 2, 3, 4, 5 2. Calculating the Amount of Reimbursement from an Insurance Company. The Kelleher family has health insurance coverage that pays 80 percent of out-of-hospital expenses after a $500 deductible per person. If one family member has doctor and prescription medication expenses of $1,100, what amount would the insurance company pay? (Obj. 3) (.80)($600) = $480 3. Comparing the Costs of a Regular Health Insurance Policy and an HMO. A health insurance policy pays 65 percent of physical therapy costs after a $200 deductible. In contrast, an HMO charges $15 per visit for physical therapy. How much would a person save with the HMO if he or she had 10 physical therapy sessions costing $50 each? (Obj. 4) Health Insurance: $200 + (.35)($300) (next 6 sessions) = $305 Cost of HMO: (10)($15) = $150 Savings of $155 with HMO 4. Sarah's comprehensive major medical health insurance plan at work has a deductible of $750. The policy pays 85 percent of any amount above the deductible. While on a hiking trip, she contracted a rare bacterial disease. Her medical costs for treatment, including medicines, tests, and a six-day hospital stay, totaled $8,893. A friend told her that she would have paid less if she had a policy with a stop-loss feature that capped her out-ofpocket expenses at $3,000. Was her friend correct? Show your computations. Then determine which policy would have cost Sarah less and by how much. Total Sarah paid = $750+(.15)($8143) = $1,971.45. With stop-loss Sarah would have paid the first $3,000. $3,000-$1,971.45 = $1,028.55. She paid less with her current policy 5. Calculating the Amount of Disability Benefits. Georgia Braxton, a widow, has take-home pay of $600 a week. Her disability insurance coverage replaces 70 percent of her earnings after a four-week waiting period. What amount would she receive in disability benefits if an illness kept Georgia off work for 16 weeks? (Obj. 6) (16 - 4 weeks)($600)(.7) = $5,040 Continuing Case questions: 1, 2 1. In evaluating the various health insurance plans, what factors should the Lawrences look for in a good health insurance plan? They first need to locate, is the coverage. They have to make sure that the insurance they are going to have covered him and his wife as well as their family. They also need to look at the prices as well as co-payments, reimbursement, deductible, out of pocket limits, and benefits that are based on reasonable charges. . 2. When considering disability income insurance, what are the trade-offs of purchasing this type of insurance and how does this affect the Lawrences? Waiting or elimination period Duration of benefits Amount of benefits Accident and sickness coverage Guaranteed renewability Problems: 1, 3, 4, 5, 7, 9 1 Calculating Life Expectancy. Using Exhibit 12-1, determine the life expectancy of a 35year-old white male. (Obj. 1) 42 years old 3 Calculating Life Expectancy. Using Exhibit 12-1 determine the life expectancy of a 50year-old white female. (Obj. 1) 32 years old 4. Determining the Need for Life Insurance. Jake is a 27-year-old single man with no children. He has a younger sister who has a developmental disability. Both his parents are living, though neither parent is in good health. Jake has an auto loan, a $50,000 mortgage on his condominium, and no consumer debt. Is Jake a good candidate for life insurance? If so, what kind and how much life insurance should he buy? (Obj. 2) We need to determine whether Jake's sister needs help, though their parents or their insurance. Also determine how wealthy his parents are and how soon Jake can pay off the loans he has. What he probably would need is a short term policy, a decreasing term policy or none at all. 5. Calculating the Amount of Life Insurance Needed Using the Easy Method. You are the wage earner in a \"typical family,\" with $40,000 gross annual income. Use the easy method to determine how much life insurance you should carry. (Obj. 2) $ 40,000 x.70 = $ 28,000 $28,000 x 7 = $196,000 7 Estimating Life Insurance Needs Using the DINK Method. You and your spouse are in good health and have reasonably secure jobs. Each of you makes about $28,000 annually. You own a home with an $80,000 mortgage, and you owe $10,000 on car loans, $5,000 in personal debt, and $3,000 in credit card loans. You have no other debt. You have no plans to increase the size of your family in the near future. Estimate your total insurance needs using the DINK method. (Obj. 2) One half of mortgage = $40,000 One half of car loan = 5,000 One half of personal debts = 2,500 One half of credit card loans = 1,500 Funeral expenses = 5,000 Total insurance needs = $54,000 9. Using the \"Nonworking\" Spouse Method to Determine Life Insurance Needs. Tim and Allison are married and have two children, ages 4 and 7. Allison is a \"nonworking\" spouse who devotes all of her time to household activities. Estimate how much life insurance Tim and Allison should carry. 14 x $10,000 = $140,000 Financial Planning Case: 1, 2 1 .What type of policy would you suggest for Jeff and Ann? Why? For the majority of the families the main source of money is the wage earner's income. If anything would happen to Jeff, it can make it be very difficult for the rest of the family to get along without Jeff's income. This is one the reasons families depend on on life insurance. Life insurance can provide cash when it is needed for expenses directly associated with the death of an employee. Usually when children are still young, it is difficult for some parents to maintain a home and a full time job or two jobs. A monthly income until they finish school will help keep the family together. Since Jeff and Ann have a growing family, Jeff should have at least $50,000 of insurance--$25,000 in term and $25,000 in whole life insurance. 2 .In your opinion do Jeff and Ann need additional insurance? Why or why not? As I mentioned before, yes, I think Jeff and Ann need additional insurance, because the children are little and the family needs income in something happen to Jeff die. Continuing Case question: 1, and give specific numerical answers where possible 1 What are the four general methods for estimating the amount of life insurance that the Lawrences need? The four general methods that the Lawrences family needs are: 1. Easy method: This is a simple and useful method. This method is based on the insurance rule of thumb \"typical family. This, requires approximately 70% of the seven year's salary. For this method the amount of insurance is obtained by multiplying the current income with 7 years and 70% 2. DINK method: This method can be useful only if both the spouses are working and have no children. In this method the spouse should not have a lot of debts of the other dead spouse. 3. Nonworking spouse method: This method works only if the person has a dependent spouse with children. They get the amount of the insurance by multiplying with an additional required amount that is estimated to be $10,000 or above by the insurance expert with the number of years required for the youngest kid in the family to reach the age of 18 4. Family need method: This method we find a detailed worksheet that is prepared to determine the required amount of insurance. These needs and requirements of the family are listed down and then required amount is decided upon