Understanding Health Insurance and Disability Income Insurance

Determining Health Insurance Needs

Since you have no way of knowing ahead of time what to expect in the way of medical bills, a two-fold approach to fitting the cost of medical care into the family financial plan is best. First, plan to pay for the normal or routine cost of medical care directly out of income. These costs include items such as regular examinations, inoculations, general dental care and first-aid supplies. You may also choose to budget for your insurance deductible and coinsurance maximums. The policy provisions section of this publication will help explain these terms. Second, carry insurance to take care of unexpected and costly emergencies.

You must match your health insurance coverage to your needs and ability to pay. It is just as possible to be over-insured as to be underinsured. Determine the kind and size of losses that can occur. Then match these against the resources you have available to cover the losses. Purchase enough insurance to cover the difference between your possible losses and your available resources.

When determining your possible losses from an injury or accident, weigh the costs of direct medical care such as a hospital room, doctor's fee and lab work. Include the need for recuperative care and rehabilitation expense. Remember the cost of lost income. Be aware of how large and unpredictable these costs can be.

You will not need to purchase health insurance if you are fortunate enough to have sufficient resources to cover all your health related losses. In determining resources consider your savings, investments and other assets. Find out if you are eligible for other forms of insurance (other than health insurance) which will pay for health related losses. Check into the medical payments coverage of the automobile policy. Consider government funded programs such as

• medicare,
• medicaid,
• veteran's benefits, and
• Social Security disability income insurance
• Comprehensive Health Association of North Dakota*
• Minnesota Comprehensive Health.*

If you are found to be high risk and non-insurable due to pre-existing conditions, these health plans are administered through the Blue Shields of Minnesota and North Dakota. Patients do have high premiums and there is usually a six-month wait before the policy will pay on pre-existing conditions.

The coverage from these sources is limited. In most instances you will need to consider some other kind of health insurance. The next section describes the types available.

Kinds of Health Insurance Policies

The term health insurance is a general name for a wide variety of insurance policies and plans that cover financial losses resulting from illness, injury or disability. No one policy or plan provides coverage for all types of losses that can occur.

Group policies covering employees of a business or other organization provide most health insurance coverage. Group coverage usually applies automatically to those employed by organizations that have group policies in force. People not covered by group plans purchase individual policies that cover one person or one family. They are sometimes used to supplement the coverage provided by group policies. Individual policies often are obtained from the same agents who handle the rest of a family's personal insurance needs. Group coverage is generally more economical than individual policies.

There are five standard types of health insurance that cover the cost of treatment associated with an illness or an accident. They are

• hospital expense insurance,
• surgical expense insurance,
• regular medical insurance,
• major medical expense insurance, and
• comprehensive medical insurance.

Supplemental health insurance plans are designed to fill the gaps in the coverage of the five standard health insurance plans or to provide reimbursement in addition to that provided by the standard plans. These plans usually are advertised directly through the mail or on television. Many of these plans are not all they claim to be and their prices are too high. Often these policies contain severe limitations on the coverage provided or the amount to be paid under the policy. Purchasers sometimes are unaware of the limitations until they request a reimbursement. The supplemental policies to purchase with caution are

• accidental death and dismemberment insurance,
• specific disease insurance, and
• hospital indemnity insurance.

Dental insurance is a relatively new form of insurance, mainly acquired through group plans. It covers your costs for dental care.

Disability insurance is the form of health insurance that covers your loss of income while you recuperate from an accident or illness. If you are a wage earner, it is essential that you purchase disability insurance.

Hospital Expense Insurance

This kind of insurance covers the hospital's charges for room and board and may also cover additional expenses such as operating room fees, lab work, x rays and medicines. A specific amount usually is allowed for each day in the hospital up to a limited number of days. Hospital expense insurance is the most basic form of health insurance available. Important things to consider when purchasing this kind of coverage are

• number of days in hospital covered;
• amount policy will pay per day for board and room;
• amount policy will pay for additional services such as x-rays, lab work and medication;
• waiting period for certain illnesses;
• amount of deductible, if any;
• exclusions or limitations in the policy; and
• provisions for renewing the policy.

Surgical Expense Insurance

Benefits for surgical care usually are paid according to a predetermined schedule of fees that states the maximum payment for each kind of operation. Fees for office calls made before and after the operation may be included. Benefits are not the same for all policies. Frequently, surgical insurance is purchased in combination with the hospital policy. Evaluate a surgical expense policy by questioning whether

• the benefits are in line with surgeons' fees in your community,
• the policy pays a cash or service benefit,
• the policy covers surgery only if you are hospitalized,
• the policy pays for services of a second surgeon or the anesthesiologist, and
• the policy has benefit limitations and exclusions.

Regular Medical Expense Insurance

Medical expense insurance provides reimbursement for doctors' services other than those connected with surgery. Such policies usually include a dollar maximum per year, as well as a coinsurance clause and a deductible clause. Determine how adequate a policy is by comparing

• what is covered,
• the deductible and coinsurance clause, and
• the limitations and exclusions.

Major Medical Expense Insurance

Benefits provide protection against the large cost of serious accidents or expensive, prolonged illnesses. Major medical covers a broad range of medical services with a single policy by paying a major share of the cost of a treatment prescribed and performed by a doctor, including hospital, surgical and other treatment.

This kind of policy usually includes a large deductible, that can range from $300 to $1,000 or more, and a coinsurance provision that requires the insured to pay anywhere from 10 to 30 percent of a claim. This means that the insured pays a percentage of the total over and above the deductible portion of the expense. A stop-loss feature sets the maximum the insured must pay on a claim. This may be $1,000 or more and substantially reduces the burden of the coinsurance feature. Usually, there is a maximum amount of benefits for each policy, which may be as high as $1,000,000. Deductibles are an important way to reduce the premium costs of small claim handling and duplication of coverage.

Major medical coverage often is used as a supplement to a basic plan. It also may be combined into a single policy called comprehensive major medical insurance. Analyze a major medical policy be checking

• the policy limits,
• the size of the deductible,
• provisions of the coinsurance clause,
• renewability of the policy, and
• how maximum policy limits are computed.

Comprehensive Medical Insurance

This is a plan that combines the features of the basic (hospital, medical and surgical) and major medical expense insurance plans. It generally has a coinsurance provision and a deductible clause in which the insured patient pays a certain percentage of the bill, depending on the policy. Like major medical expense insurance, the maximum benefits usually are high. Determine the adequacy of a policy by comparing the features previously mentioned for other kinds of policies.

Accidental Death and Dismemberment Insurance

This policy covers reimbursement for medical costs resulting from accidents. An injured person might receive $500 for the loss of a leg, $1,500 for the loss of an eye and so on, with a maximum payment of $10,000 if the insured dies.

Accident insurance is considered a poor insurance buy. You can purchase other types of health insurance to cover the medical costs of accidents, disability insurance to cover loss of income, and life insurance to cover loss of life.

Specific Disease Insurance

Specific disease insurance provides an unallocated benefit (paid directly to the insured) subject to a maximum amount for expenses incurred in connection with the treatment of specific dreaded diseases such as cancer. The limits on these policies usually are quite large and the premium is quite low.

These policies, like accident insurance, are almost always a poor insurance buy. The likelihood of contracting the specified dreaded disease covered by the policy is small. You should purchase a comprehensive policy that covers all kinds of diseases and accidents.

Hospital Indemnity Insurance

Hospital indemnity or income plans provide a stipulated daily, weekly or monthly benefit during hospital confinement only. Be aware of misleading advertisements offering large payment figures. If a policy states that it will pay $1,000 per month, in reality it will pay only about $33 per day.

Many of these policies do not start paying benefits until after you have been in the hospital for 6 days. The average hospital stay in the United States is less than 6 days. Chances are that you will not collect many benefits with this kind of policy. If you are unfortunate enough to be in the hospital for more than 6 days, you will find the settlement insignificant.

Dental Insurance

Dental expense insurance is a rapidly expanding kind of coverage that helps pay for normal dental care as well as damage caused by accidents. Generally, it is available through insurance group plans, prepayment plans and dental service corporations.

Under these programs virtually all forms of dental care are covered, including oral examinations, x-rays, fillings, cleaning, extractions, inlays, bridgework, dentures, oral surgery, root canal therapy and orthodontia.

The cost of dental insurance, like the cost of health insurance, is subject to many variables. Policy limits, deductibles, coinsurance clauses and exclusions vary widely among policies. A common feature is a schedule of benefits for specified procedures.

Policy Provisions

Deductible

The requirement in an insurance policy that the insured pay an initial portion of a loss before receiving insurance benefits is the deductible. It will range from $100 upward. This policy provision is designed to eliminate small claims. Check to see whether the deductible applies to each illness, to a particular time period, and to one person or all family members collectively.

Coinsurance Clause

The coinsurance clause is a policy provision in a health insurance contract by which both the insured person and the insurer share the covered losses in a specified ratio, typically, 80 percent by the insurer and 20 percent by the insured. The deductible is paid by the insured before this shared arrangement. For example, a policy with a $300 deductible and an 80-20 coinsurance clause with a claim of $1,300 results in a payout by the insurance company of $800.

Total claim minus deductible times coinsurance percentage equals payment.
(1,300 - $300) x 80% = $800

Policy Exclusion

Specific conditions or medical procedures may be excluded in a policy; this means that the policy will not provide benefit payments. Some policies do not cover normal childbirth. Most exclude elective cosmetic surgery. Avoid policies that exclude treatment for mental illness or coverage for convalescent expenses, such as nursing home care required after major surgery.

Waiting Periods

The waiting period is the length of time the insured must wait for coverage by the insurance company. Policies that cover maternity benefits usually have a waiting period of 9 or 10 months.

Renewability

Renewability refers to a policy that guarantees the insured person the right to renew a policy by timely payment of premiums. This contract usually is more expensive than one that may be canceled at any time. Avoid buying a policy renewable at the company's option because the company may cancel when you need the insurance the most.

Policy Limits

The maximum amount a policy will pay is known as the policy limit. Such limits may apply to each illness, to the life of the policy or to a calendar year. Computation per illness is considered best, computation per calendar year is second best, and computation over a lifetime is least desirable.

Benefit Payments

Three types of benefit payments are the specified amount benefit, the cash benefit and the service benefit. The specified amount or flat dollar benefit pays you a stipulated amount for a loss. What you do with the money you receive is up to you. Hospital indemnity plans offer an example of this form of payment.

Some policies pay a cash benefit for each covered health care service up to a set maximum. These policies include a schedule of benefits paid. If your costs are less, the reimbursement would be for that smaller amount. If your costs are more, the reimbursement will be for the maximum amount scheduled and you will pay the difference. Surgical expense policies offer an example of this form of payment.

When a health insurance policy states that it will pay all necessary and reasonable charges, it provides a service benefit. Service benefits are subject to a deductible and coinsurance clause. The payments under service benefit contracts are generally made directly to the hospital or doctor. Major medical expense insurance typically provides service benefits.

Coordination of Benefits

Most insurance policies are designed to indemnify, which means "return you to the financial position you were in before you suffered the loss." They will pay no more than the actual financial loss suffered. This is maintained in health insurance policies through the coordination-of-benefits clause. This clause prevents you from collecting more than the 100 percent of a loss and designates the order in which policies will pay benefits if more than one policy applies to the loss. The primary policy is the insurance policy that will be applied to the loss first. If the primary policy fails to reimburse 100 percent of the loss, the secondary policies will be applied in order until the loss is paid fully or benefits are exhausted, whichever occurs first.

If possible, you should "assign benefits" to the provider so the insurance company pays the provider (the doctor) directly.

Insurance Purchase

Group Health Insurance

A group health insurance policy is made available through a contract with an employer or other source that covers a group of persons identified as individuals by reference of their relationship to group.

In most instances, it is to a person's advantage to be enrolled in a group insurance plan. In many cases, an individual will be covered immediately and often may be insured, regardless of physical condition. Also, the premiums generally are lower than for an individual policy. Many times employers will contribute much of the premium or will at least have the payroll method of deduction available.

Should you have group health insurance through work and lose your job, there are steps you can take to protect yourself and your family until you find another job.

First, find out exactly how long, or if, your insurance will continue after your last day at work. It may be 30 days, sometimes longer, depending on your employer's policy.

Next, check to see how you can convert your group coverage to an individual policy. Keep in mind that your benefits might not be as good as they were before, and the policy will be more expensive.

COBRA (Consolidated Omnibus Budget Reconciliation Act) may be available for up to 18 months for employees who have been terminated. These employees must have been covered under a group plan and will be allowed to pay for their own premiums at the group rate.

If your spouse is employed, see if you can receive coverage through his or her employer.

If you prefer not to convert your group coverage, are healthy, and want more complete protection, consider an interim or short-term medical policy.

These policies frequently will insure you from two to six months including payments toward hospitalization, intensive care treatment, doctor in-hospital visits, surgical expenses, miscellaneous hospital expenses and nursing home care. Outpatient diagnostic x-ray or laboratory procedures and ambulance coverage also are included.

Most interim policies are effective immediately or within 30 days of purchase. Many may be reissued once during a 12-month period.

As with other kinds of health insurance, you are advised to take the interim policy in which you absorb the small medical bills, while your insurance company handles the big ones.

Individual Health Insurance

There are private insurance companies, nonprofit health insurance organizations, and an alternative to traditional health insurance -- the health maintenance organizations (HMOs) and Preferred Provider Organizations (PPOs).

Blue Cross and Blue Shield plans are probably the best known sources of health insurance protection. There are about 100 individual Blue Cross and Blue Shield plans operating in the United States. They provide group or individual policies. Each is a separate organization of doctors and hospitals in a geographic area that provides health care protection on a nonprofit basis.

Blue Cross is the hospital expense insurance portion of the Blues, as they often are called. In addition to paying for room and board charges, the insurance covers lab fees, x-rays, operating room charges and prescription drugs. Blue Shield offers the surgical expense coverage, and contracts generally state that payment will be made for all "reasonable and necessary charges." The coverage is broader than just surgical expense because it also reimburses for some physician's fees that do not involve surgery.

There are hundreds of private health insurance companies operating in the country, providing benefits for over one-half of the population. Individual or family policies may be bought through an agent or directly through a company. An individual policy can be tailored to fit a particular need.

Private health insurance policies also may be offered through magazines, newspapers or by direct mail. Before purchasing a policy offered by one of these methods, compare the benefits with another company. You should be suspicious of companies that offer extremely high benefits for small premiums. Rarely will such advertisements mention the exclusions that drastically reduce benefits.

In North Dakota, you can contact the State Insurance Department through a toll-free number (1-800-247-0560) to determine if a company is licensed to do business in the state and if complaints have been filed against any particular company.

Health maintenance organizations are health care providers who operate on a regular prepayment basis. The insured pays a set fee each month. This fee takes care of regular checkups and other outpatient expenses, and often includes dental care. When sick, the insured also gets most of the necessary health services. This includes doctor's care, specialists if needed, lab work, x-rays, drugs, hospitalization and surgery at no extra cost.

When hospitalized or in need of expensive medical care, the HMO pays the bill. Therefore, there is a financial incentive to keep patients healthy. HMOs that stress preventive health care are increasing in number.

Some insurers offer Preferred Provider Organizations. Increasingly popular, these are groups of doctors who have agreed to discount their fees.

If you sign up for a PPO and use a non-PPO doctor, you may have to pay as much as 40 to 50 percent of the doctor's bill yourself and also suffer other penalties.

Disability Income Insurance

Disability income insurance is thought to be more important for a wage earner to purchase than life insurance. Statistics show that eight out of every ten people between the ages of 25 and 65 will become disabled for 90 days or more sometime during their lives. If you are over 50, there is one chance in four that you will be disabled for 6 months or more before you retire.

Disability income insurance is a form of health insurance that provides payments for a specified period of time. The payments are for partial replacement of income lost by an insured person who is unable to work as a result of an illness, injury or disease. It is important to note the waiting period, or stated time, between the period of disability and the start of disability insurance benefits, during which no benefits are payable.

The amount of the benefit may vary depending on whether the disability is partial or total, and the duration of the benefits may vary depending on whether the disability is the result of an injury or illness.

Total disability may be defined as "your complete inability to perform any and every duty pertaining to your own occupation" or "your complete inability to engage in any reasonably gainful occupation for which you may become fitted by education, training or experience." The first definition is more liberal than the second because it refers to your own occupation rather than to any occupation. Some policies combine the two definitions, using the first to satisfy the requirement for total disability during an initial stated period of disability (usually 2 years) and defining total disability thereafter in terms of the second definition.

Partial disability is even more difficult to define than total disability. It usually is measured in terms of your ability to perform some of the important duties of your job. One policy defines it as "the inability to perform one or more, but not all, of the important daily duties pertaining to your occupation."

A policy's definition of disability heavily influences the probability of your qualifying as disabled. The more restrictive the definition, the less likely you will collect benefits. A liberal definition of a disability is desirable although the annual premium will be higher per dollar of income coverage.

Disability income policies generally are divided into two kinds: those that provide benefits for up to two years (short term) and those that provide benefits for a longer period, usually five years or to age 65 (long term).

When determining your disability insurance needs, consider other sources of income available to you such as sick leave, worker's compensation, Social Security, employer plans, credit disability on loans or home mortgages, and other assets.

Buy disability income insurance with as long a waiting period as your budget will allow. This will lower the premium considerably. Purchase a policy that is noncancellable and guaranteed renewable until you reach a certain age, usually 65. As with all health insurance policies, check the policy exclusions.

When You Decide to Buy Health Insurance

When you decide to buy the insurance, complete the application carefully. Some companies ask for detailed medical information. If they do, omitting specific medical information or submitting false information can be costly to you. The company can refuse coverage for an omitted condition for a period of time, or it may deny a claim and cancel your policy.

Pay by check or money order made payable to the insurance company, not the agent or anyone else.

You should be given a clearly worded summary of the policy. Read it carefully. By law, a health insurance policy must be written in nontechnical language (be easy to read), be in large print, and must have a disclosure statement and a glossary.

Companies must give you at least 10 days to review the policy. If you decide you do not want to keep it, send it back to the agent or company within 10 days of receiving it and you will get a refund of all premiums you paid.

The insurance company should deliver a policy within 30 days. If not, contact the company and obtain in writing a reason for failure to deliver. If 60 days go by without information, contact the North Dakota Insurance Commissioner. The same schedules should be followed if you return the policy but do not receive your refund.

Some Final Tips

• Shop carefully before you buy health insurance. Policies differ widely in coverage and cost. Compare policies carefully before you buy.
• Do not buy more coverage than you need by trying to cover 100 percent of your costs. A single comprehensive policy is better than several policies with overlapping or duplicate coverages.
• Choose a comprehensive policy with a large deductible. The savings on premiums will be substantial. Set up a special savings account to cover the large deductible using the saved premium dollars.
• Increase your stop-loss to further reduce your premium costs.
• Do not buy insurance against named accidents or diseases. Get coverage against medical expenses from any cause.
• Avoid supplying inaccurate information on your insurance application. If you fail to mention a preexisting condition, you may not get paid when you need it.
• Do not try to insure against routine or predictable expenses such as checkups. Buy a policy that will reimburse you substantially for large expenditures.
• Check for preexisting condition exclusions that reduce or eliminate coverage for existing health conditions. Many policies exclude coverage or require a waiting period before covering preexisting health conditions.
• Do not be misled by the phrase "no medical examination required." If you have had a health problem, the insurer might not cover you for expenses related to that problem.
• Beware of replacing existing coverage because you think it is out of date. Changing policies may subject you to new waiting periods and new exclusions. Consider adding to your present policy if necessary.
• On the other hand, do not keep policies that are inadequate just because you have been a customer for many years.
• Most policies have a limit (maximum) to the benefits they will pay. This may be expressed in terms of dollars or in the number of days for which payment will be made.
• Check your right to renew. Beware of policies that let the company refuse to renew your policy on an individual basis. Policies that automatically can be renewed offer added protection.
• Know with whom you are dealing. A company must meet certain qualifications to do business in North Dakota. This is for your protection. Agents must be licensed and must carry proof of licensing showing their name and the company they represent. If the agent cannot show proof, do not buy from that person. A business card is not a license.
• Keep the agent's and the company's name and address. Write them down or ask for a business card.
• Take your time when buying health insurance. Do not be pressured by a short-term enrollment period. Professional salespeople will not rush you. If you question whether a policy offers sufficient benefits, ask the salesperson to explain it to a friend or relative whose judgement you respect.
• Insurance is cheaper if the premium is paid yearly. Any insurance plan where an agent collects at the door weekly or monthly will have higher rates for less coverage.
• Keep your insurance policy in a safe place at home. Keep a master list of all insurance policies and policy numbers in a safe-deposit box. If the policy is lost or destroyed, request a replacement policy from the insurance company using the policy number from the master list.
• Purchase insurance from a substantial, well-established company rated A or above by insurance rating services.
• Beware of health insurance sold through the mail or in television and newspaper advertising. Be particularly cautious if the policy has unique guarantees for the elderly, veterans or for dreaded diseases such as cancer. Check these companies with the State Insurance Commissioner and compare their offerings to those of a local, reputable company before buying.
• Report all problems to the North Dakota Insurance Commissioner located at the state capitol in Bismarck.

Comparison of Health Insurance Policies

			Insurer 1	  Insurer 2	   Insurer 3

COMPANY		   _________________  _________________  _________________	

POLICY LIMITS
Hospital room
($ /maximum days)  $_____ for___days  $______for___days  $_____ for___days

Surgical maximum   $________________  $________________	 $________________

Hospital extras	   $________________  $________________  $________________

Physician care	   $________________  $________________  $________________

Major medical 
maximum	           $______ per _____  $______ per _____	 $______ per _____	

Deductible	   $______ per _____  $______ per _____	 $______ per _____

Coinsurance 
percentage	    ___________%       ___________%	  ___________%

Stop-loss amount   $________________  $________________  $________________


Other policy 
features	   _________________  _________________  _________________

		   _________________  _________________  _________________

		   _________________  _________________  _________________


Renewability p
rovisions	   _________________  _________________  _________________

Policy exclusions  _________________  _________________  _________________

Waiting period 
for pre-existing
  conditions	   _________________  _________________  _________________


ANNUAL PREMIUM	   $________________  $________________  $________________

Adapted from an original publication by Mary J. Stephenson, Ph.D., CFP, CLU, Extension Specialist, Maryland Cooperative Extension Service

HE-515, February 1993