Chapter 2

Personal Insurance Needs

I detest life-insurance agents; they always argue that I shall some day die, which is not so.

Stephen Leacock

The process of risk management involves identifying and managing a person’s risk exposures to protect assets and income. People can not live in a risk-free world. There is always the possibility of a loss. However, a person can protect assets against large, unexpected loses that could financially devastate others. A person needs to accept some risk. In analyzing risk, a person needs to separate those risks and determine which can be accepted and which need to be managed through some type of insurance. This chapter discusses forms of personal insurance. Professional insurance is discussed in a later chapter.

Understanding Insurance

Insurance is one of the most commonly used risk-management techniques. There is insurance available to cover almost any potential loss (Box 2.1). A person needs to decide if the loss is potentially large enough or common enough to insure against. (A person may purchase flood insurance, but if he or she lives on a mountain top, why bother?) As a rule, if the loss can be self-sustained, it is cheaper, over time, not to buy insurance and to self-insure and accept the loss. For example, a dentist probably should not buy dental insurance for his or her family because the dentist can afford most dental costs incurred by family members. Should a dentist buy medical and accident insurance? Probably, because the potential loss is so great. For example, an automobile accident involving a week in the hospital for one person can easily cost $50,000, not including liability should that person cause the accident.

Insurance is a commodity. That means that the actual insurance is the same from one company to another (assuming comparable policies). Therefore, a person can shop for insurance based solely on price. Agents work for the insurer, not for the consumer. A person may pay extra for the extended insurance product, which means that the consumer may pay extra for convenience, familiarity with the agent, or broad forms of coverage. However, the insurance itself is the same. Insurance agents are all different. The dentist should shop around at least for an insurance agent. Often he or she will get better rates and better service if he or she has all types of coverage with one carrier and may also get better rates if he or she stays with an insurer for several years without a claim.

The purpose of insurance is to guard against an unexpected, large financial loss. The basic theory of insurance is that many people each pay a small amount (the premium) into a pool of funds. If any of the payers are unfortunate enough to suffer a large loss, then part of the pool of funds goes to cover that loss. For example, many people pay a small premium to an insurance company in case their home is damaged or destroyed by a disaster, such as a fire. Most people do not have any damage and therefore do not collect from their insurance company. But if a fire damages a home, the owner will receive money from the pool (as a “payout”) to cover their damages. However, insurance only reimburses for a demonstrated loss.

Insurance companies set premium rates based on several factors that influence their expected payout from the pool of premiums. The insurer needs to cover all expected losses and make a reasonable profit along the way. Obviously, the frequency of occurrence and size of the typical award both influences the expected payout from the company. A person’s history of claims, age, and other personal factors help determine the company’s estimate of a particular risk as an insured party. Insurers use actuaries (similar to glorified accountants) to figure out risk tables and rates to charge their various clients. For example, the chance of an 85-year-old man dying is much greater than the chance of a 5-year old dying in a given year. The life insurance rates, based on the chance of a member of each population dying, for the 85-year-old man will obviously be higher than for the 5-year old.

Insurers face the risk that more people will die, have a house fire, or a car wreck in any given year than they anticipated. If that happens, they initially lose money, and then raise everyone’s rates the following year or cancel policies of the poorer risks. Most also carry insurance themselves, through Lloyd’s of London or other insurance underwriters. They call this the secondary insurance market, and it helps cover the insurers for large losses, such as natural (hurricane) or human (terrorist) disasters. Insurers use other techniques to control how much risk that they face. Copays, deductibles, limits of payment, exclusions, and other riders all help control their potential losses.

A person must decide when to use insurance. There are times when the law requires that people have insurance. (Workers’ compensation and unemployment insurance are examples of required insurance for employers.) Other than these required times, a person should use insurance to help cover an unexpected, unpredictable loss that he or she cannot afford to pay out of pocket. The owner of a new $30,000 car often chooses to insure the car in case an accident causes such damage to the automobile that he or she cannot afford to have it repaired. The owner of an old $1,000 junker car may choose to carry no insurance on the vehicle. If the car is wrecked, the owner simply has lost the cost of the car. (Insuring liability, in case the owner of the junker caused the accident, is required by law in many states.) Other large unpredictable losses that may be insured against include damage to the home, hospitalization, loss of income as a result of a disability, liability as a professional (malpractice), or as a private individual (personal liability)

A person signs a contract (policy) with the insurance company. The contract states that the insurer (the company) will indemnify (make good a loss to) the policy holder in case of proven loss (as specified in the policy) given the restrictions written into the policy. Insurance companies usually sell policies through insurance agents. Agents may work for one company, or they may represent many companies (an “independent” agent) shopping around for the best rates for a given situation. A person’s relationship with an insurance agent may be as close as that with an accountant, so a trustworthy agent should be found. The buyer should be sure that the agent explains all the options of the policies and integrates the various types of coverage for the various insurances that are purchased. The state in which a person resides, not the federal government, regulates both insurance companies and agents.

If a policy holder has a loss, the agent will be an initial contact with the company. The policy holder should understand that the agent does not decide whether the policy holder gets reimbursed for a loss. The insurance company does that. The agent is only acting as a go-between, often splitting allegiance between the policy holder and the company. An adjustor is a person hired by the insurer to decide the amount of covered loss that has been suffered. After a car accident, the adjustor will determine how much it should cost to fix the car (and therefore the reimbursable loss). The agent will act as a best friend while a person is paying premiums. If that person files a claim, things change. The agents then play “good cop, bad cop” with the adjustors and home office. Policy holders should not expect agents to go to bat for them.

Medical Insurance

Medical insurance reimburses a person for large, unexpected medical costs. At the time of the writing this book, the federal government initiated a “health care reform,” which may change significantly the way people pay for health care. The government plan will use private insurers and government direct payment to pay for care. Regardless the type of insurance, it consists of several components.

Coverage Restrictions

The insurers usually place various restrictions on payment as well. Common techniques include:

Because of the high cost of medical insurance premiums, many employers have begun to buy cheaper managed health care contracts for their employees. These are generally not true insurance products (which indemnify, or agree to pay for a loss) but instead are forms of prepayment for care, which shifts the risk of overutilization of health services to the provider. The common forms are health maintenance organizations (HMOs), preferred provider organizations (PPOs), and independent practice associations (IPAs). These all have counterparts in the dental practice world and, like the dental products, reduce payment and increase risk for the provider. This is such a rapidly evolving portion of the insurance world that books are outdated by the time they are completed.

Purchasing Medical Insurance

Some general rules for the purchase of medical insurance coverage:

• The dentist should get adequate coverage. A $1 million comprehensive policy is a minimum.
• The better the coverage is, the higher the cost. Higher deductible, higher copayments, and required second opinions all lower the cost to the insured. The dentist should self-insure (pay out of pocket) if possible. It is usually cheaper, unless he or she knows the insurance coverage will be used.
• Costs to the consumer are almost always less with care using the insurer’s network of providers. If a person has a particular medical provider that he or she wants to use, this might be one of the deciding factors when looking at several potential policies.
• Group policies are usually cheaper than individual policies. If a group buys a policy, the insurer spreads the risk (chance of payment) over more people, many of whom will not use the coverage. (The only people who buy individual policies are the ones who think that they will use it.) Dental society group policies or a spouse’s work policy (if any) should be looked at; the savings can be substantial.
• The dentist should establish an office group policy or individual policies using a flexible benefit plan. The tax savings can be substantial.
• Almost all medical plans have some component of managed care.

Disability (Income) Insurance

The chance of a person becoming disabled at some point during his or her professional career is much greater than the chance of dying during that same time. According to the National Safety Council^®, in 2008, there were 2.1 million disabling injuries caused by a motor vehicle accident, but there were 39,000 fatal motor vehicle accidents.¹ Although death is certainly a more important event than disability, too many professionals carry life insurance but do not include disability insurance as part of their financial risk management plan.

Although a simple flu can disable a person for several days, a true disability is the inability to work for at least 30 days. Less than that is considered a simple illness. Disability insurance does not insure a person from becoming disabled and does not automatically pay if a person is disabled. It protects a person’s loss (of income) if disabled. So the more proper name for this type of insurance is disability income insurance. As with other insurable losses, a person has to show the loss to collect the benefits. For example, a dentist has to show that he or she lost $10,000 per onth in income for the policy to replace it. If he or she only had $3,000 per month of income, that is all the policy will replace, even if the policy had a $10,000-per-month face amount (limit). Disability insurance coverage, regardless the source, is designed to only replace about two-thirds to three-fourths of income. With multiple policies, the disability income insurance will generally exclude or offset payments from other policies. A common “insurance with other insurers” clause reduces payments proportional to other policies.

Disability can occur for many reasons. An automobile accident can leave a person unable to practice for the rest of his or her life. A skiing accident or simple fall in the home can render a person incapable for many months. Contagious diseases (e.g., Hepatitis B, HIV) can leave a person incapable of practice. A heart attack can di/>

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