Insurance, General

Insurance Q.& A. : Insurance, General

What kinds of insurance do I really need?

Perhaps the simplest advice offered for buying insurance is provided by Eric Tyson in his book, "Personal Finance for Dummie$" (IDG Books Worldwide Inc., Foster City, Calif.). His three laws are: 1. Insure for the big stuff, don't sweat the small stuff. You need things like life insurance, health insurance and (probably) disability insurance. You don't need "small potato" policies that insure against stuff like a canceled airline flight or lost contact lenses. 2. Buy the broadest coverage available. For example, you want life insurance that will pay off regardless of how you die. It's foolish to buy a more narrow policy, such as flight insurance, that will only pay if you die in an airplane crash. 3. The cost of insurance varies from company to company. Your best bet for getting a good insurance value is to buy from the number of companies that sell policies through organizations and associations.

How do I evaluate an insurance company's financial strength?

There are several methods of evaluating an insurance company's financial strength. The best way however, for most purposes, is to use one of the available rating services such as Duff & Phelps, Standard & Poor's, A. M. Best, Weiss Research, and Moody's. These publications are available in many libraries. The ability of an insurance company to deliver on its contractual promises is directly linked to its financial strength.

Should I use a large or small insurance company?

If you find an insurance policy you like, the size of the issuing company it isn't very important. What's really important is its financial strength, because you want to make sure the company will be able to pay your claims. The best way to gauge an insurer's financial health is to check with an insurance rating firm.

What's the difference between a mutual insurance company and a stock insurance company?

According to The Question and Answer Book of Money and Investing (Adams Publishing, Holbrook, Mass.), "Mutual insurance companies are insurance companies that are owned by the policyholders and rely on premiums for capital to support the company. Mutual companies generally charge higher premiums in order to create a pool of money that is sufficient for payment of claims. They return any excess money as dividends to the policyholders. The dividends are a return of overpaid premiums, so they are not considered taxable income to the policyholders. "Stock insurance companies are insurance companies that are owned by shareholders, like any other corporation. They rely on the shareholders for capital to support the company, so their premiums are generally lower than those of a mutual company. On the other hand, stock companies pay dividends to their shareholders, not to the policyholders.

What are conditionally renewable policies?

A conditionally renewable insurance policy is a policy that the insurer can unilaterally cancel if it feels that you have made too many claims. Thus, an insurer can drop you when you need the coverage most. For example, if you have held a conditionally renewable health insurance policy for the last 20 years and have dutifully made your payments without filing many claims, the insurer will have the power to drop you when you turn 60 or 70 -- the time when most people start visiting a doctor more frequently.

What are guaranteed renewable policies?

A guaranteed renewable insurance policy is a policy that prevents the insurer from unilaterally dropping you as long as you keep paying your premiums on time. Virtually all health insurance policies written today are guaranteed renewable. So are policies that provide many other types of coverage.

What is a split-dollar insurance policy?

Technically, there is no such thing as a split-dollar insurance policy. "Split dollar" is not a type of insurance. Instead, it is an arrangement by which premiums, cash values, and death benefits of a regular insurance policy are split by two or more parties. A split-dollar plan is a good tool for an employer -- especially the owner of a small business -- to reward loyal and hard-working employees. By using a split-dollar plan, the owner can provide key employees with life insurance protection and at the same time help them accumulate a fund to provide for supplemental retirement income or other uses.

What are uncancelable policies?

An uncancelable policy guarantees that the insurer will never drop you from the plan unless you stop paying your premiums on time. In addition, such policies guarantee that the rate structure will never be altered. Uncancelable policies are hard to find, and insurers often charge high premiums for them in exchange for providing such broad guarantees.

What does the underwriting process involve?

Insurance companies determine whether or not they'll give you a policy through a process known as underwriting. This process involves many factors, including your age, medical history, current health and occupation. Your hobbies can also effect your ability to get insurance. Playing pinochle won't hurt, but you may have trouble if you spend your weekends sky-diving, bungee-jumping or riding bulls in a rodeo.

What is post-claims underwriting?

When an insurance company sells you a policy and then revokes it when you file a claim, the process is called post-claims underwriting. This process would seem illegal, but sometimes it's quite legitimate. In general, an insurer has a two-year period to review your eligibility and cancel your policy. If you lied on your application form or otherwise mislead the insurer, the law allows the company to drop you like a bad habit-and it usually will. Beyond that two-year "right-to-cancel" period, an insurer can also drop your coverage and refuse to pay a claim at any time if it can prove that you withheld information that would have affected its decision to insure you in the first place. For example, if you asked to be reimbursed for a knee operation but never mentioned that you wrecked your knee cartilage playing football a few days before you took out the policy, the insurer can not only drop you from the plan but may be able to deny your claim as well.

What is an insurance policy's incontestability provision?

Virtually all insurance policies have an incontestability provision. According to The Question and Answer Book of Money and Investing (Adams Publishing, Holbrook, Mass.), "The incontestability provision gives the insurer two years (one year in several states) from the date of the application to discover any incorrect information, error, or even fraud in the application and use such information to contest payment of a claim. After the two years, the policy becomes incontestable, and even suicide cannot negate a claim to the death benefit." One key exception to the incontestability provision concerns a misstatement of age. Although age is a primary factor in establishing a policyholder's life expectancy and premiums, an insurer is not allowed to cancel a policy if the policyholder's age is misstated. Instead, the insurer may adjust the face amount of the policy to whatever amount the stated premiums would buy for a person of the insured's real age. The policy wouldn't be canceled, but its face value would likely be automatically lowered.

What insurance issues are involved when a couple is expecting a new baby?

If you're expecting a baby, you obviously need to find out what type of maternity coverage your health insurance provides. After the baby is born, you'll need to add the infant to your policy. You also need to ensure that you and your spouse have adequate life insurance coverage. According to "The New Century Family Money Book" (Dell Publishing), "With your new parental responsibilities, you should also review the other areas of insurance coverage to ensure that you now have coverage and that you have enough of it. The plain fact is that you can no longer afford to take chances by skipping or shortchanging certain areas of insurance. You need sufficient disability insurance to replace 60% to 70% of your income, and, if applicable, your spouse's income. You need a renter's insurance policy because you can no longer afford the risk of going without." Obviously, if you own a home, you need homeowner's insurance rather than renter's insurance. And whether you rent or own, you should also probably purchase umbrella liability insurance because you can't afford to lose what you have already saved -- and possibly even your future earnings -- in a lawsuit.

How does the death of a spouse affect the surviving spouse's insurance coverage?

If you're married but your spouse dies, you need to review your own insurance coverage to make sure that you have adequate protection and to determine whether any changes are needed. According to "The New Century Family Money Book" (Dell Publishing), "If your spouse handled your insurance, you may be unfamiliar with policy features, etc. In this case, you will need to educate yourself on your insurance needs. Besides revising and changing the beneficiary designations on existing policies, you have to assess your own insurance needs as a result of the changed circumstances. If you were formerly covered as a spouse under a health insurance plan, continuing coverage will have to be acquired. Depending on your individual circumstances, you may also need to buy or increase your own disability and life insurance coverage.

What tax form will I receive if I receive pension plan, annuity or insurance distributions?

If you receive a distribution from a pension plan, annuity or insurance contract, the company that makes the payment will send you a Form 1099-R. This form also is sent by organizations that distribute payments from a profit-sharing plan, Individual Retirement Account (IRA), or other retirement program.