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Frequently Asked Questions HOMEOWNERS INSURANCE What is homeowners insurance? Homeowners Insurance provides you with financial protection in the event your home or property is damaged or destroyed. It also provides you with personal liability coverage in case of lawsuits arising from incidents on and off your property. Who should buy homeowners insurance? If you own or rent property, you should have homeowners insurance. Typically, homeowners insurance is required by lenders as a requirement to obtain a mortgage. What is the difference between "actual cash value" and "replacement cost"? Covered losses under a homeowner's policy can be paid on either an actual cash value basis or on a replacement cost basis. When "actual cash value" is used, the policy owner is entitled to the depreciated value of the damaged property - so the older the item is, the less money you may receive for it. Under the "replacement cost" coverage, the policy owner is reimbursed the amount it costs to replace the property with something of a similar type and quality at current prices. What should I consider when buying homeowners insurance? First and foremost, buy the amount and type of insurance you need. Remember: if your policy limit is less than 80% of the replacement cost of your home, you will face a ''coinsurance penalty,'' that means that you will have out-of-pocket expenses to cover costs beyond your policy's deductible. Also, calculate the personal property insurance and personal liability coverage you need. Personal property, like a home, should be insured for its replacement value. Personal liability is a bit more subjective, but limits should not be less than those on other liability insurance such as auto. What is the difference between an "all risks" policy and a "named perils" policy? A named perils policy covers losses that are due to only those perils listed in the policy. Those typically include fire, windstorm, hail, and other physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. An all risks policy provides broader protection than a named perils policy. What can I do to lower the cost of my homeowners insurance? The best thing to do is to shop around. You could find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, but this is not always the case. Another way to cut costs is to look for discounts that apply to you. For example, many insurers will offer a discount when you buy both your automobile and homeowners insurance from them. Some insurers offer discounts if you have deadbolt exterior locks on all your doors, or if your home has a security system. Another easy way to save is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent. However, you should be sure you have enough cash on hand to cover the larger deductible in case of emergency. If I have an accident I think is covered under my homeowner's policy, what should I do? Insurance contracts are conditional contracts. That means policy owners have certain responsibilities to meet if a covered loss occurs. Not completing these can result in nonpayment by the insurance company for losses that otherwise would have been covered. These include:
HEALTH/ MEDICAL INSURANCE PLANS What are the principal types of medical expense insurance coverage? Major medical plans are available in 3 basic forms: HMO, Point of Service (POS) and Preferred Provider Organization (PPO). POS and PPO offer in-network coverage with low coinsurance costs. They also offer out-of-network coverage which applies a deductible to initial expenses, generally ranging from $250 to $1000 per calendar year. After the deductible is satisfied, major medical plans typically reimburse 70% or 80% of eligible expenses up to a relatively high maximum, e.g. unlimited in-network or $5,000,000 out-of-network. Major medical plans typically cover a broad list of medical expenditures, including hospital expense, surgical expense, physician (non-surgical) expense, private duty nursing, diagnostic x-ray and laboratory services, prescription drug expenses, artificial limbs and organs, ambulance services, and many other types of medical expenses when prescribed by a duly licensed physician. HMO plans offer the same generous in-network benefits, but do not include payments to providers outside of their network. ADP/Statewide Insurance Agency can quote all types so that you can choose the right plan for your company. Is medical expense coverage available for substance abuse and mental illness? Major medical expense plans also generally provide coverage for treatment of substance abuse (e.g., alcoholism and drug usage) and mental illness. A higher coinsurance percentage (e.g., 50 percent) and a lower lifetime benefit limit (e.g., $25,000 or $50,000) generally applies. In addition, the extent of coverage may depend on whether treatment is provided on an inpatient or outpatient basis. What types of expenditures are commonly excluded under major medical expense plans? Major medical plans typically include the following exclusions:
Other common exclusions relate to benefits provided by government agencies (e.g., VA hospitals) and expenses paid under other insurance programs, including Medicare and Personal Injury Protection Coverage under your Personal Automobile Policy. Even though major medical plans provide broad coverage, certain "out-of-pocket" costs can still be incurred. What are these costs? "Out-of-pocket" costs under major medical expense plans include the deductible, cost-sharing amounts arising from the operation of the coinsurance clause, and medical expenditures that are deemed by the plan to be in excess of "reasonable and customary" charges. Only charges that are "reasonable and customary" for a specific type of service, in a particular location or geographic area, are eligible for reimbursement under medical expense plans. The definition of "reasonable and customary" may vary somewhat from one medical expense plan to another. What is the coinsurance clause in medical expense plans and how does it work? Coinsurance, sometimes called "percentage participation," requires the insured to share in the cost of medical care. Under an 80/20 coinsurance provision, 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, are sometimes used. In the event of large or catastrophic medical expenses, an insured might suffer severe financial hardship due to the operation of the coinsurance clause. To compensate for this possibility, many major medical expense plans contain a coinsurance cap, or stop-loss limit. This provision places a 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 generally ranges from $2,000 to $3,000, depending on the plan. Once the coinsurance cap has been reached, all eligible expenses above this amount are paid in full, up to the plan's overall limit of coverage. What is the difference between coinsurance and co-payment? On occasion, these terms have been used interchangeably. However, it is preferable to define the two terms differently, despite their similarity of purpose. Under a CO-payment or co-pay provision, the insured usually is required to pay a set or fixed dollar amount (e.g., $10, $15, or $20) each time a particular medical service is used. Co-pay provisions are frequently found in medical plans offered by health maintenance organizations (HMOs) where a nominal CO-payment is applied to each office visit and to each prescription that is filled. What is a preexisting conditions clause and what is the effect of its inclusion in major medical expense plans? A preexisting condition is often defined as a medical condition (i.e., an injury or illness) that required treatment during a prescribed period of time, e.g., 3 or 6 months, prior to the insured's effective date of coverage under the major medical expense plan. Sometimes, a preexisting condition is defined to include medical conditions that were known to the insured, even though no treatment was provided during the prescribed period. A preexisting conditions clause excludes coverage for preexisting conditions for possibly as long as 12 months after the effective date of coverage. Because the definition of a preexisting condition, and the provisions of the clause itself, may differ considerably from one plan to another, it is recommended that newly insured individuals (and prospective insured Individuals) completely familiarize themselves with this policy provision. How does the medical expense coverage offered by Health Maintenance Organizations (HMOs) differ from the coverage provided under basic and major medical expense plans? Major medical expense plans are generally classified as indemnity contracts. These plans indemnify, or reimburse, the insured for medical expenses incurred and typically require the completion and filing of claim forms. In addition, these plans usually contain deductible and coinsurance cost sharing provisions and may restrict coverage for certain types of medical care expenditures. Indemnity plans, however, provide the insured with substantial freedom relative to the choice of physician, including whether a primary care physician or a specialist will be seen. In contrast, HMO coverage emphasizes comprehensive (including preventive) care and typically contains very few exclusions, no deductibles, and nominal co-payments. However, there is much less freedom of choice of physician under traditional HMO coverage since the patient is typically required to be under the care of a primary care physician who serves as a "gatekeeper." In this role the primary care physician determines whether the services of a specialist are needed, in addition to determining what other medical services are required for treatment. Some HMOs today offer a point-of-service option, whereby patients may opt for indemnity type coverage (with a deductible and coinsurance) when they desire medical treatment outside the HMO network. Back To The TopLIFE INSURANCE How much life insurance should you own? Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings. However, there are other things to consider when determining how much life insurance you need. Important factors include: income sources (and amounts) other than salary/earnings; whether or not you're married and, if so, your spouse's earning capacity; the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. What about buying life insurance for a spouse or children? Generally, that should not be done in lieu of buying appropriate amounts of life insurance on the family breadwinner(s). It is extremely important that you protect the earning capacity of the primary breadwinner, if possible, with the right amount of life insurance before considering life insurance on children or spouse. In a dual-income household, it is important to protect the earning capacity of both spouses. Life insurance for a non-wage earning spouse is often recommended for help in paying for household services lost if that spouse dies. Should I buy term insurance or cash value life insurance? Term life insurance pays out in the event of death. Cash value, which is more costly, has a cash amount you can withdraw before death. Which one is for you will depend on your circumstances. First answer an insurance question - how much life insurance should you buy? Then look at the financial aspect - what type of policy should you buy? The amount of life insurance you need may be so large that the only way you can afford it is by buying term insurance, which carries a lower premium than cash value policies. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, you can consider the financial decision - which type of policy to buy. If you view life insurance as an investment, you'll want to study rates of returns. If it's protection, then your purchase is a matter of what you can afford and want to spend. How does mortgage protection term insurance differ from other types of term life insurance? The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies generally cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit decreases, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage--for example, a 20-year mortgage protection policy might require that premiums be paid over the first 17 years. Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan? Yes. Lenders don't usually require that you buy a new mortgage protection term insurance policy. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of your death. Credit life insurance is frequently recommended in conjunction with taking out an installment loan when buying expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy? Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, buying credit life insurance is normally not advisable due to its relatively high cost. What are the tax issues with life insurance cash values, dividends, and death benefits? The "interest build-up" portion of the annual increase in the policy's cash value is not taxed. Dividends generally are considered to be a "return of premium" and are not taxable. Although life insurance death proceeds will not typically be subject to income taxation, they may be subject to federal estate taxation. If you own part or all of the policy when you die, those can be included in your gross estate for federal estate tax purposes. State inheritance taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances. Contact your tax adviser regarding questions about possible income, estate and gift tax consequences surrounding any life insurance you own or are contemplating buying. How is universal life insurance different from traditional whole life insurance? Both traditional whole life (WL) and universal life (UL) products are examples of cash-value life insurance. But there are several important differences between them. One relates to product transparency. In UL policies, it's easy to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other. Another difference is that unlike whole life policies, universal life policy returns were freed from long-term, fixed-rate contracts and replaced with policies whose returns were tied to short-term interest rates and periodically adjusted. After the initial payment, universal life allows you to pay premiums anytime, in virtually any amount, subject to certain minimums and maximums. You can also reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. Which type of cash value life insurance policy, universal life (UL) or participating whole life (WL), is a "better buy" financially? There's no simple answer to this. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one that reveals the most favorable interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value product being offered is UL or WL. You and your adviser should carefully examine the financial aspects of each product under consideration. What is variable life (VL) insurance, and how is it different from universal life (UL) and participating whole life (WL)? Variable life insurance is a type of fixed-premium whole life insurance policy where changes in the policy's cash values and death benefits are directly related to the investment performance of its underlying assets. Policy owners typically can choose among several investment options for the assets backing the policy's cash values. The various investment options offered in the contract generally possess different risk/return relationships and frequently include a money market fund, a bond fund, and one or more common stock funds. The policy prescribes that the death benefit will not fall below a minimum amount (usually the initial face amount) even if the invested assets depreciate in value by a substantial amount. Because the policy owner assumes all of the investment risk, there is no similar "floor" to protect the cash values. Variable universal life (VUL) insurance has recently become a more popular product than VL. VUL combines features of both UL and VL and, in essence, is the flexible premium version of VL. How much life insurance should you own? Rough rules of thumb suggest an amount equal to 6 to 8 times your annual earnings. However, there are other things to consider when determining how much life insurance you need. Important factors include: income sources (and amounts) other than salary/earnings; whether or not you're married and, if so, your spouse's earning capacity; the number of people who are financially dependent on you; the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. What about buying life insurance for a spouse or children? Generally, that should not be done in lieu of buying appropriate amounts of life insurance on the family breadwinner(s). It is extremely important that you protect the earning capacity of the primary breadwinner, if possible, with the right amount of life insurance before considering life insurance on children or spouse. In a dual-income household, it is important to protect the earning capacity of both spouses. Life insurance for a non-wage earning spouse is often recommended for help in paying for household services lost if that spouse dies. Should I buy term insurance or cash value life insurance? Term life insurance pays out in the event of death. Cash value, which is more costly, has a cash amount you can withdraw before death. Which one is for you will depend on your circumstances. First answer an insurance question - how much life insurance should you buy? Then look at the financial aspect - what type of policy should you buy? The amount of life insurance you need may be so large that the only way you can afford it is by buying term insurance, which carries a lower premium than cash value policies. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, you can consider the financial decision - which type of policy to buy. If you view life insurance as an investment, you'll want to study rates of returns. If it's protection, then your purchase is a matter of what you can afford and want to spend. How does mortgage protection term insurance differ from other types of term life insurance? The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies generally cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the death benefit decreases, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage--for example, a 20-year mortgage protection policy might require that premiums be paid over the first 17 years. Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan? Yes. Lenders don't usually require that you buy a new mortgage protection term insurance policy. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of your death. Credit life insurance is frequently recommended in conjunction with taking out an installment loan when buying expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy? Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, buying credit life insurance is normally not advisable due to its relatively high cost. What are the tax issues with life insurance cash values, dividends, and death benefits? The "interest build-up" portion of the annual increase in the policy's cash value is not taxed. Dividends generally are considered to be a "return of premium" and are not taxable. Although life insurance death proceeds will not typically be subject to income taxation, they may be subject to federal estate taxation. If you own part or all of the policy when you die, those can be included in your gross estate for federal estate tax purposes. State inheritance taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances. Contact your tax adviser regarding questions about possible income, estate and gift tax consequences surrounding any life insurance you own or are contemplating buying. How is universal life insurance different from traditional whole life insurance? Both traditional whole life (WL) and universal life (UL) products are examples of cash-value life insurance. But there are several important differences between them. One relates to product transparency. In UL policies, it's easy to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other. Another difference is that unlike whole life policies, universal life policy returns were freed from long-term, fixed-rate contracts and replaced with policies whose returns were tied to short-term interest rates and periodically adjusted. After the initial payment, universal life allows you to pay premiums anytime, in virtually any amount, subject to certain minimums and maximums. You can also reduce or increase the amount of the death benefit more easily than under a traditional whole life policy. Which type of cash value life insurance policy, universal life (UL) or participating whole life (WL), is a "better buy" financially? There's no simple answer to this. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one that reveals the most favorable interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value product being offered is UL or WL. You and your adviser should carefully examine the financial aspects of each product under consideration. What is variable life (VL) insurance, and how is it different from universal life (UL) and participating whole life (WL)? Variable life insurance is a type of fixed-premium whole life insurance policy where changes in the policy's cash values and death benefits are directly related to the investment performance of its underlying assets. Policy owners typically can choose among several investment options for the assets backing the policy's cash values. The various investment options offered in the contract generally possess different risk/return relationships and frequently include a money market fund, a bond fund, and one or more common stock funds. The policy prescribes that the death benefit will not fall below a minimum amount (usually the initial face amount) even if the invested assets depreciate in value by a substantial amount. Because the policy owner assumes all of the investment risk, there is no similar "floor" to protect the cash values. Variable universal life (VUL) insurance has recently become a more popular product than VL. VUL combines features of both UL and VL and, in essence, is the flexible premium version of VL. Back To The TopAUTO INSURANCE Why is auto insurance sometimes referred to as a packaged policy? What are the parts of the package? Before the 1950's, if you wanted to purchase all the coverage today's auto insurance policy provides, you would have had to purchase at least four separate policies. Changes in the laws that regulate the sale of insurance now allow the insurance industry to sell policies that combine the separate parts into one all-encompassing policy. The main advantages of combining the parts are lower expenses, and therefore a lower cost to consumers, and the convenience of being able to purchase property, auto liability and other types of coverage in a single policy. Part A of an auto policy is liability coverage that protects you from lawsuits arising from either negligent operation or ownership of a covered automobile. There are two types of coverage in Part A - bodily injury liability (BIL) and property damage liability (PDL).
Part B provides medical payments to you and any other passengers in the car in an accident. Part C provides uninsured motorist and underinsured motorist protection for the policy owner. Both B and C are designed to compensate you when the negligent driver doesn't have enough liability insurance under his/her policy. Typically, Part C covers only bodily injury losses, but property damage losses are included in some states. Part D covers damages to your car when it is involved in an accident. I have an older car whose current market value is very low - do I really need to purchase automobile insurance? Most states have enacted compulsory insurance laws that require drivers to have at least some auto liability insurance (Part A). These laws were enacted to ensure that victims of accidents are compensated when their losses are caused by someone else being negligent. Except for the minimum liability you may be required to buy, many people with older cars decide not to purchase physical damage coverage. Often, the cost of repairing an older car is greater than its value. In these cases, your insurer will usually just "total" the car and give you a check for the actual cash value less the deductible. Many people forgo the Part D coverage because of the relatively low value of their autos. Suppose I lend my car to a friend; is that covered under my auto insurance policy? Whenever you knowingly loan your car to a friend or an associate, he or she will be covered under your policy. In fact, even if you don't give explicit permission each time a person borrows your car, someone is still covered under your policy as long he or she had a reasonable belief that you would have given permission to borrow the car. What does my auto insurance policy cover when I rent a car? The answer to this question is not simple. In the not-too-distant past, most auto insurance policies would extend coverage to rental cars whenever you rented one. This is not quite true anymore. In most cases, your personal auto insurance policy will cover only vacation car rentals. Many insurance companies no longer extend personal auto insurance coverage for business travel. Find out what rental car coverage you have under your policy is by calling your insurance agent/company. What is the difference between collision physical damage coverage and comprehensive physical damage coverage? Both collision and comprehensive coverage are in Part D. Collision is defined as losses you incur when your auto collides with another car or object. For example, if you hit a car in a parking lot, damages to your car will be paid under your collision coverage. Comprehensive covers most other direct physical damage losses. For example, damage to your car from a hailstorm will be covered under comprehensive coverage. It's important to know the differences between collision and comprehensive coverage to make an informed buying decision. Also keep in mind that your deductibles in these two categories are often different. What should I do if I have an accident? Your responsibilities after you have an accident are prescribed both by state law and by your insurance contract.
Why does the premium for my auto insurance go up if I have an accident or get a ticket? Actuaries and statisticians who have studied the behavior of people involved in accidents have shown that people who have either had an accident or received a ticket recently are more likely to have another accident in the next couple of years than people whose recent driving record has been incident-free. Insurance companies use this information not to punish people, but to charge them a premium that reflects their likelihood of having an accident. People who are more likely to have accidents should expect to pay higher premiums. What factors affect the cost of my auto insurance? The type of car you drive, what you use it for, your driving record, where you live and even your marital status can all affect how much your policy will cost. It's all based on numbers; for example, statistics show that married people have fewer and less costly accidents than single people. What should I consider when buying auto insurance? Things you should consider when purchasing automobile insurance include:
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