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Terms & Help


Medicare Advantage

Hospital and medical insurance (for senior citizens and others who qualify for Medicare) provided by private companies rather than the federal government. Medicare Advantage plans, also called “Part C” plans, provide the same Part A (hospital) and Part B (medical) coverage that Medicare does, with the exception of hospice care. They usually provide Part D (drug) coverage as well. As of 2014, about one-third of Medicare participants used a Medicare Advantage plan.

Read more: Medicare Advantage Definition | Investopedia


Medigap

Also called Medicare Supplement Insurance, Medigap is health insurance coverage provided by private companies designed to cover excess costs not covered by original Medicare.

Original Medicare, defined as parts A and B, will not cover all expenses associated with an illness. Under original Medicare you would pay 20% of the Medicare allowed amount cost for doctor visits and medical procedures, most of your prescription drugs unless you add a Part D plan, and at least $1,200 if admitted to a hospital.

Medigap covers all or a portion of those extra charges depending on the coverage type. Although private insurance companies offer the coverage, the federal government requires companies to offer standardized policies. Your choices are Plans A, B, C, D, F, G, K, L, M and N.

Read more: Medigap Definition | Investopedia


Short Term Medical

Short-term health plans, also called gap plans or temporary plans, typically cover a period of one to 12 months. They’re designed to cover unforeseeable medical needs that arise, offering an alternative to going uninsured and paying the out-of-pocket for any procedure or treatment. In some cases, you can get approved for a policy almost immediately after applying.

Today’s short-term plans are similar to the individual plans that existed before Obamacare became effective. They don’t have to cover what the law deems "essential health benefits" (see Essential Health Benefits Under the Affordable Care Act), including emergency room visits, hospitalization, lab services and maternity care. So read the policy carefully to see what it will pay for and what it won’t. (Services That Health Insurers Often Decline provides some general rules-of-thumb.)

These plans are subject to medical underwriting and aren't guaranteed issue, meaning you could be rejected if insurers think you’re too big a risk. For example, some policies say you shouldn’t even bother to apply if you’re pregnant, have diabetes or have cancer; you won’t get approved. Short-term health insurance doesn’t cover pre-existing conditions and policies can only be renewed a limited number of times – or in some cases can’t be renewed at all, especially if you end up filing an expensive claim.

Read more: Do You Need Short-Term Health Insurance? | Investopedia


LIfe Insurance

Life insurance is a contract between an individual with an insurable interest and a life insurance company to transfer the financial risk of a premature death to the insurer in exchange for a specified amount of premium. The three main components of the life insurance contract are a death benefit, a premium payment and, in the case of permanent life insurance, a cash value account.

Death Benefit: The death benefit is the amount of money the insured’s beneficiaries will receive from the insurer upon the death of the insured. Although the death benefit amount is determined by the insured, the insurer must determine whether there is an insurable interest and whether the insured can qualify for the coverage based on its underwriting requirements.

Premium Payment: Using actuarially based statistics, the insurer determines the amount of premium it needs to cover mortality costs. Factors such as the insured’s age, personal and family medical history, and lifestyle are the main risk determinants. As long as the insured pays the premium as agreed, the insurer remains obligated to pay the death benefit. For term policies, the premium amount includes the cost of insurance. For permanent policies, the premium amount includes the cost of insurance plus an amount that is deposited to a cash value account.

Read more: Life Insurance Definition | Investopedia


Whole Life Insurance

Cash Value: Permanent life insurance includes a cash value component which serves two purposes. It is a savings account that allows the insured to accumulate capital that can become a living benefit. The capital accumulates on a tax-deferred basis and can be used for any purpose while the insured is alive. It is also used by the insurer to mitigate its risk. As the cash value accumulates, the amount the insurer is at risk for the entire death benefit decreases, which is how it is able to charge a fixed, level premium.

Read more: Life Insurance Definition | Investopedia


Annuity

An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.

BREAKING DOWN 'Annuity'

Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets.

Annuities can also be created to turn a substantial lump sum into a steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery.

Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

Types of Annuities

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. Annuities can be created so that, upon annuitization, payments will continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Furthermore, annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

Annuities can be structured generally as either fixed or variable. Fixed annuities provide regular periodic payments to the annuitant. Variable annuities allow the owner to receive greater future cash flows if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for a less stable cash flow than a fixed annuity, but allows the annuitant to reap the benefits of strong returns from their fund's investments.

One criticism of annuities is that they are illiquid. Deposits into annuity contracts are typically locked up for a period of time, known as the surrender period, where the annuitant would incur a penalty if all or part of that money were touched. These surrender periods can last anywhere from 2 to more than 10 years, depending on the particular product. Surrender fees can start out at 10% or more and the penalty typically declines annually over the surrender period.

Read more: Annuity Definition | Investopedia