546 Chapter 13 Insurance and Risk ManagementWhile most people tend to focus on their rate of pay, benefits often represent a very
significant part of a worker’s overall compensation, and also often represent a very
significant cost to the employer. Not every employee has the same benefits needs, how-
ever. A worker who is the sole breadwinner for a family will place great value on health
insurance coverage provided at a reasonable cost. For a married person whose spouse gets
fully paid family coverage at work, this benefit may be of no interest at all. In fact, if he can
get health coverage at no cost or lower cost through his spouse, he probably would prefer
to forego this coverage and obtain other benefits instead. To address the different needs of
different employees, some employers offer cafeteria plans.
Under a cafeteria plan, each worker is given a range of benefit choices, and a certain
amount of “benefit allowance.” The employee can select the benefits she wants, using
her benefit allowance toward the cost of each benefit. (If the costs of the desired benefits
exceed the allowance, she can pay for these costs as a deduction from salary.)
Cafeteria plans may offer a spectrum of different insurance benefits, as well as other
options, such as purchasing additional vacation time.
Because of the costs of administering these types of plans (including ensuring compli-
ance with tax laws, which can become complicated with these sorts of plans), cafeteria
plans are much more common among large companies. Cafeteria plans are discussed in
more detail in Chapter 15.A. Deductible and Coinsurance PlansIn each of Exercises 1 to 10, assume that the people described are covered by a deductible and coinsurance health insurance
plan with a $350/$700 deductible and 80% coinsurance. The out-of-pocket maximum is $3,000. Assume that none of the
individuals have submitted any insurance claims for the year prior to the ones described.- Dave submits claims for himself totaling $675. How much of these claims will his insurance cover?
- Nehan submits claims for herself totaling $325. How much of these claims will her insurance cover?
- Bob submits claims of $775 for himself and $1,560 for his daughter. How much will his insurance cover?
- Sid submits claims of $425 for one of his sons, $535 for his other son, and $1,250 for his wife. How much will his
insurance cover? - Brody submits a claim of $10,000 for his wife. How much will the insurance cover?
- Gideon submits claims totaling $585 for his wife, $355 for his son, and $820 for himself. How much will insurance
cover? - Tessa submits claims of $300 for her husband and $400 for herself. How much will her insurance cover?
EXERCISES 13.2