Chapter 21 – Protecting Human Capital

Protecting your human capital means protecting your ability to earn money.

Types of Human Capital Insurance

There are three primary forms of insurance that you can use to protect your human capital. They are health insurance, disability insurance, and long-term care insurance.

1. Disability Insurance

Do you have a job? Disability insurance protects you in case you became sick or injured and can’t work. Every person who depends on their paycheck needs disability insurance to protect them. Many employers offer disability as part of their benefits package. However, if your employer doesn’t offer it, you can always go out and buy it on your own.

The price of the policy will depend on several factors. The elimination period (also called the waiting period) is how long you have to wait after you are injured before your insurance will begin to make payments to you. A policy with a 6 week elimination period will not begin to pay you until 6 weeks after you become disabled. The longer the elimination period, the more money you will need in your emergency fund to make sure you don’t run out of money before the insurance starts to pay you! The longer the waiting period, the cheaper the policy will be.

The benefit period is how long the policy will make payments if you become disabled. For example, a policy with a 6-month benefit period will make payments for only 6 months after you become disabled. The longer the benefit period, the more expensive the policy will be. Disability policies with benefit periods of les than one year are called short-term policies. Disability policies that have benefit periods longer than one year are called long-term policies.

2. Long-Term Care Insurance

Did your parents, grandparents, and great-grandparents live much longer than usual for their time? If so, then you should probably plan on living a long time as well. If you don’t want to live with your children when you are very old, then you may need assisted living. Assisted living centers are very expensive. This is why long-term care insurance policies were created. These policies will help the insured to pay for the cost of their assisted living if they need it. Long-term care policies should ideally be purchased when you are a bit older, but don’t wait too long. You want to purchase when you are still healthy, but not too young in order to get the best premium on the policy. Start shopping for long-term care insurance sometime in your mid 50's.

3. Medical Insurance

Medical expenses can be very unpredictable in both their frequency and severity. For this reason, it is recommended that everyone purchase medical insurance. Medical insurance is complicated, so we will spend the rest of this chapter discussing it.

Medical Insurance

Your health care costs can be covered in a number of different ways. Health maintenance organizations (or “HMO’s” for short), traditional preferred provider organization health insurance plans ("PPO" for short), high deductible health care plans, Medicare for those over 65, Medicaid for low income households, and the S-Chip program for kids are all potential sources of health care coverage.

All policies, regardless of type, use the same basic terminology. A co-payment is a fixed amount of money you pay out of pocket each time you use a given service, such as filling a prescription or visiting a physician. A deductible is the amount of money you must pay out of your own pocket before the insurance will begin to make payments. The deductible represents a retention of risk for the insured. The larger the deductible, the cheaper the insurance policy will be. Co-insurance is the percentage of the costs above the deductible that the insurance will pay. Coinsurance rates are generally 80-90%.

Deductibles and co-insurance make more sense when you see them in action. Check out the workbook for steps on using these figures to calculate your medical expenses.

HMOs vs PPOs

HMOs are insurance policies that cover hospital, surgical, and preventative health care services. These types of policies often require small copayments. The monthly payment for an HMO policy is considered a prepayment for health services. This fee is based on the actual health service costs of all other HMO participants.

Under an HMO policy, the subscriber is assigned a primary care physician who coordinates all of the medial services for the insured person. They also act like a gatekeeper to prevent the insured from incurring unnecessary medical expenses. A person insured through an HMP must first get the approval of their primary care physician before they can have any procedure. If the primary care physician does not approve a treatment, then the HMO will not pay anything for the treatment. This exclusion does not apply to emergency room visits.

Traditional health insurance plans work a bit differently from HMOs. These types of plans are also called preferred provider plans, or PPOs. Under a PPO, medical service providers agree to provide their services to insured patients at a discounted rate. This means you can get insurance coverage for any doctor at any time without the need to get approval from a primary care physician. However, if you go to a provider who is “in network”, you can get better insurance coverage than if you go to a provider who is “out of network”. These plans most commonly provide comprehensive health insurance. They cover hospital care, surgery, preventative care, and other medical expenses.

Neither an HMO nor a traditional PPO is strictly better than the other. The benefits of an HMO are that you get consistent interaction with your primary care physician, a simpler cost structure, and generally lower premiums. The disadvantage of HMOs is that they provide absolutely no coverage for out-of- network providers and for services which are not preapproved by the primary care physician.

Traditional PPO insurance policies allow you to change your doctor any time you wish, do not require preapproval for services, and will provide coverage for out of network providers, although at a reduced rate. This flexibility comes with a cost though, as the premiums of a PPO are generally higher than those of an HMO.

High Deductible Plans

Any kind of insurance plan can be classified as a high deductible plan. The key characteristic of a high deductible health care plan is a high deductible, sometimes even exceeding $10,000 per year. These policies also have higher out of pocket limits.

The benefit of retaining higher deductibles is reduced premium costs. These types of policies are often good for households who generally have little to no medical expenses each year because of the small premiums. Using a health savings account or a health reimbursement account to accumulate funds to meet the high deductible with is often a good idea. A health savings account is an account that allows you to save money of taxes if you use that money to pay deductibles and other out of pocket health costs. Health reimbursement accounts are similar to health savings accounts, except they are funded by the employer, not the employee.

Health insurance policies typically do not cover dental or vision expenses. Many employers do offer dental and vision insurance separate from the standard health insurance plan.

Lecture:

This is an excellent time to watch Lecture 14 from the course pack.

Definitions:

Elimination period (waiting period): how long you have to wait after you are injured before your insurance will begin to make payments to you

Benefit period: how long the policy will make payments to the insured

Co-payments: a fixed amount of money you pay out of pocket each time you use a given service

Deductible: the amount of money you must pay out of your own pocket before the insurance will begin to make payments

HMO’s: insurance policies that cover hospital, surgical, and preventative health care services.

Primary care physician: coordinator of the medial services to prevent the insured from incurring unnecessary medical expenses

Pre-existing condition: is a medical condition that the insured person had prior to joining the insurance plan