Making a Decision to Buy Insurance

To purchase insurance, one needs to look at options of not buying one first. Participating employer’s self-insured plan is one option. Another option would be checking out government insurance plans. If the decision is to buy the insurance, one should go through some thought process.

Employer’s insurance-plan options

In the old days, of course, there were no insurance companies. When people needed protection against risk, they needed to come up with their own funds to deal with the disaster. Nowadays, insurance costs go up very quickly, and they become less affordable. More people go through the route of self-insuring when they feel the probability of a disaster event is low and manageable. In general, anyone who doesn’t buy insurance can claim that they are self-insured. Yes, they have to foot all the bills when high cost strikes should those low-frequency serious problems happen in life. One of our clients didn’t buy any health-insurance plan and got serious hypoglycemia. She was sent to the emergency room and had to pay $2,000 out-of-pocket after all the deductions. This is still much lower than what she would pay at $6,000 a year for a health-care insurance premium.

We should also point out that the federal and state governments may require students to buy insurance, and if not, there are fines involved. There are also some partial self-insured plans. It’s called self-insurance but has little to do with the individual, as with self-insured plans by employers. We will use this as an example to check out the pros and cons of being self-insured versus insurance company-insured. Also, as students start working, they may run into this type of plan.

Self-insured employer plan

If you are in a self-insured plan, your employer pays for all your care directly instead of paying an insurance company to handle it. If the cost of care ends up higher than your employer predicted, your employer must cover the cost.

Reasons for self-insured plan

Why do employers use self-insured plan? There are a lot of good reasons to self-insure:

More control over plan design

Commercial insurance companies usually offer set packages of benefits. By self-insuring, employers can tailor a plan for their workers that they may not be able to buy “off-the-shelf.”

Cost savings

Self-insured plans are not commercial products, so they have different types of costs. They don’t need to build in extra charges for profits or taxes.

Better cash flow

In a self-insured plan, the employer pays the actual cost of care instead of a fixed monthly premium. With a commercially insured plan, the employer pays the same premium, even if members use less care one month than predicted. In that case, the insurance company would set aside the difference for future months, when costs might be higher. But in a self-insured plan, the employer holds on to that extra money.

Commercial plans

There are also good reasons for employers to buy commercially insured plans:

Costs are fixed

In a commercially insured plan, your employer pays a set premium each month, no matter how many doctor’s visits, hospital visits, and prescriptions you and the other members of your plan use. In a self-insured plan, your employer’s costs might be high one month and low the next.

Costs can be higher than anticipated

In a self-insured plan, there will likely be times when more employees need medical care than expected. Or if an employee gets seriously ill, the treatment costs could run into the hundreds of thousands or even millions of dollars. Some employers may not be able to absorb these costs and buy commercially insured plans to protect themselves from the risk.

Overall, the overwhelming reason for self-insurance by an individual or company is cost and control. Now, if the person wants to use a commercial plan and learn about all the common types of insurance, what’s the next step?

Government insurance programs

For those people who can’t afford insurance, federal and state governments also provide DI, Social Security, and Medicare to workers.

Social Security was developed as a government program to provide financial assistance for income loss due to illness, disability, or premature death. Of course, people who could enjoy social-security benefits must be qualified due to

  • retirement after age sixty-two;
  • disability, if a worker who has been disabled for five months and will be disabled for twelve months;
  • death;
  • survivors, including spouse and children under eighteen; or

We have discussed in an earlier chapter how Social Security is funded, which is through pay deductions and self-employed income taxes. The employee needs to contribute 6.2 percent of his or her income to Social Security and 1.45 percent to Medicare. The employer contributes the other 6.2 percent of employee income to Social Security and 1.45 percent to Medicare. Self-employed people need to contribute 12.4 percent of their net income to Social Security and 2.9 percent to Medicare.

Some state governments also provide DI to workers. Usually, an individual must meet certain wage requirements to be eligible for temporary disability benefits provided by different states.

Steps in making a decision

When buying insurance, discuss with students on how to make a decision. The following steps in Figure 2 can be used in the decision process.

Figure 2: Insurance-Purchasing Decision Flow

To make the decision to purchase an insurance contract, one can follow the step-by-step decision thought process above. It’s important to find out the type of loses, dollar amount, affordability, and choices.

Consumer-protection regulations

Students should be very confident that the US and state governments have laws to protect consumers from unsafe products, fraud, deceptive advertising, and unfair business practices through a variety of federal, state, and local laws.

The Federal Trade Commission

The principal consumer-protection agency at the federal level is the FTC. The FTC administers a wide variety of consumer-protection laws by its own initiatives and in coordination with other federal agencies, with two main goals:

  • To protect consumers by preventing fraud, deception, and unfair business practices in the marketplace
  • To maintain competition by preventing anti-competitive business practices

Other agencies that protect consumers

At the federal level, there are many agencies that are designated to protect consumers of certain products or services. We can name a few here:

  • The Consumer Product Safety Commission (CPSC) aims to reduce injury or death caused by consumer products other than food, drug, cosmetic, and medical devices.
  • The Food and Drug Administration (FDA) concentrates on food, drug, cosmetic, and medical-device safety.
  • The National Highway Traffic Safety Administration (NHTSA) covers automobile, truck, and motorcycle safety.
  • The Federal Communications Commission (FCC) has jurisdiction over broadcast communications and communication common carriers (any person engaged as a common carrier for hire, in interstate or foreign communication by wire or radio or in interstate or foreign radio transmission of energy), and it resolves consumer complaints regarding communication services.
  • The Bureau of Consumer Financial Protection is charged with regulating the offering and provision of consumer financial products or services under the federal consumer financial laws.

In most of the fifty states, the state attorney generals are charged with enforcing the consumer-protection laws. They have the authority to issue Civil Investigative Demands (CID). Most states have statutes prohibiting unfair and deceptive business practices.

Small claims

To reduce the burden of litigation costs for consumers, a municipality usually has a civil court to handle claims with limited amounts less than $10,000. The small-claims court provides a place where one can quickly get back the money that someone owes.

Exercises
  1. What are the ways to prevent online identity theft?
  2. What are the consumer laws to protect consumers from unsafe products and unfair practices?
  3. use the family situation as an example and ask students to work together and make a decision for the following insurance, using the four-step approach. It can be auto insurance for a family car or home insurance.

______________________________________________________

                                      Company A  Company B   Company C

Type of insurance

Protected amount

Budgeted premium

Final decision ______________________