Indemnity (or traditional) insurance plans pay for some expenses, though usually at a set percentage of the cost (for instance, the insurance company pays 80 percent and the insured pays 20 percent; the 20 percent is called a coinsurance payment) up to a certain limit per year (the out-of-pocket maximum), beyond which the company pays 100 percent of qualifying expenses. The insured can choose any standard health-care provider or hospital and must pay for whatever services are not covered by the plan. In addition to premiums and coinsurance, the insured must pay a deductible each year. A deductible is a fixed initial sum, ranging from a few hundred to several thousand dollars, in qualified medical costs that the insured pays before insurance coverage takes over its part. Many insurance plans allow the insured to choose among deductible amounts: a higher deductible means a lower premium and vice versa. Plans that have very high deductibles and that are designed to cover only long-term or catastrophic illness or injury are called major-medical plans. Indemnity plans are the most flexible medical insurance coverage in terms of choice, but they often cost more than managed-care plans.

Both health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are types of managed care, a concept that began to influence health-care policy in the 1980s. Managed care was designed to reduce medical costs in several ways, including by encouraging doctors and patients to choose less expensive forms of care, by reviewing services patients or doctors request to determine whether they are medically necessary, and by controlling admissions to hospitals and lengths of hospital stays. HMOs provide the actual health services to their clients rather than reimbursing patients for medical expenses. They require that the insured’s health care be coordinated through a primary care physician (PCP), who must be consulted first and who can then write out a referral for any specialist care. The insured must choose providers and hospitals from a list of those associated with the HMO and must pay a co-payment (a standard fee, usually $10 or $20) at the time of service. HMOs provide insurance coverage through employers and are usually the least expensive type of private insurance.

PPOs are insurance companies that work with networks of physicians and hospitals who agree to provide medical services and supervision at reduced fees to people insured under their plan. Most PPO plans require payment of a deductible and coinsurance. The insured may choose to receive services from a doctor or an institution not on the plan (these are called out-of-network providers), but the insured will have to pay a larger portion of the bill and in some cases the whole bill.

The U.S. government provides some insurance programs that are free or inexpensive for qualified users and that are funded by federal income taxes and some premiums. These include Medicare, which covers U.S. citizens who are 65 or older, people with disabilities, and others with specific illnesses; Medicaid (this program is cofunded by the states, which administer the program), for people who live on very low incomes or who have a disability not covered by Medicare; the State Children’s Health Insurance Program, which covers children of low-income families; and the U.S. Department of Veterans Affairs, which covers injured veterans (former members of the armed services) and currently active servicemen and women.

People usually need to begin thinking about medical insurance when they turn 21 or graduate from college; they may be covered under family insurance plans or children’s health-care programs until they are 21, and most universities provide students with medical insurance. It is commonly considered risky to forgo insurance altogether, because an accident or illness can use up savings and lead to large debts. Also many insurers refuse to cover any condition that develops during a gap in coverage. There are benefits to going directly from one group medical insurance plan to another, such as that preexisting conditions (these may include bunions, asthma, depression, cancer, and so forth) may continue to be covered if the lapse in coverage is 30 days or less. Full-time jobs often come with medical insurance benefits (even if there has been a gap in coverage), but sometimes employees cannot enroll in a plan until they have been on the job for several months, and any health care related to preexisting conditions may not be covered for a certain period of time after the policy does become effective.

Associated costs that are rising include hospital stays and specialist charges. The price of a day in the hospital rose from less than $200 in 1965 to more than $1,200 in 2004. Patients are seeing specialists more often, and charges for their services are nearly twice as high as for more general practitioners. Americans do not go to the doctor or hospital more than people in other countries, but the treatment they get is more intensive and the costs are higher. Insurance premiums are also skyrocketing. In 2006 a single person who had insurance through work paid approximately $627 a year in insurance premiums, while the employer paid an additional $3,615 for that worker; a family of four paid $2,973, with the employer contributing another $8,508. To make matters worse, fewer employers are offering health benefits to their employees: 69 percent in 2000, as compared to 60 percent in 2005.

Americans spend more on health care than do people in any other country: in 2005 the United States spent $5,267 per person, compared with $2,931 in both Great Britain and Canada; 14.6 percent of the U.S. gross domestic product (the total financial value of all goods and services produced in the country in a given time period) goes to medical costs, as opposed to 9.6 percent in Great Britain and Canada. Also in 2005, 7.3 percent of U.S. national health spending went to administration and insurance costs, compared to only 1.9 percent in France. Many agree that the situation is not sustainable.

In 1976 some states began providing medical insurance plans for people unable to get medical insurance in other ways (because of preexisting conditions or self-employment), usually at a higher cost. In 2006 Massachusetts was the first state to pass a universal health-insurance coverage plan, and California, Maine, and Vermont are working on similar plans, with at least 15 other states considering this option.

At the federal level efforts to reform medical insurance practices have largely failed. President Bill Clinton (b. 1946) set up the Task Force on National Health Care Reform in 1992, charging it to come up with a plan that would provide universal health care for all Americans. Hillary Rodham Clinton (b. 1947) headed the committee, whose bill was finally defeated by Republican opposition and competing Democratic plans in 1994. A decade later President George W. Bush (b. 1946) signed the Medicare Prescription Drug, Improvement, and Modernization Act into law in 2003; it was to help senior citizens pay for their prescription drug costs. Opponents criticized the bill for its complexity and cost, and when the plan went into effect on January 1, 2006, some seniors were confused by its options and regulations and were concerned that the promised discounts would not materialize.

In the United States the first mutual protection association was established in San Francisco in 1851. In the 1870s railroad and mining industries began hiring company doctors to treat workers. The department store chain Montgomery Ward developed one of the first group medical insurance plans (in 1910). Before 1920 most Americans spent relatively little on medical treatment. A household’s main illness-related expense was lost wages from missed work. Private companies did not offer medical insurance. Proposals for universal health care were defeated by physicians and pharmacists, who feared their businesses would suffer, and by a lack of perceived need on the part of the population.

An increased demand for medical care in the United States in the 1920s coincided with advances in medical science and higher standards for physician licensing; medical costs began to rise. In 1929 Blue Cross established the first prepaid hospital care plan for Dallas public school teachers, who paid 50 cents a month for a guarantee of 21 days of hospital services. These plans became more common during the Great Depression (which lasted from 1929 to about 1939), when patients and hospitals both had less income. The first prepaid plan that covered physicians’ services was established in 1939 by physicians hoping to fight both hospital control of insurance and those who promoted compulsory insurance. The American Medical Association lobbied to defeat nationalized medical insurance proposals, including one made by President Harry S. Truman (1884–1972), in 1935 and 1949.

During World War II (1939–45) the U.S. government began providing tax benefits to employers and workers who participated in private medical insurance plans. The number of employers offering medical insurance through the workplace grew, and through these plans insurance companies targeted a relatively young, healthy population that would be profitable to work with. The number of people with medical insurance rose from fewer than 20,000 in 1940 to more than 120,000 in 1960. By 1959 more than 75 percent of Americans had medical insurance. In his 1960 presidential campaign John F. Kennedy (1917–63) supported the Medicare program, which, along with Medicaid, was signed into law by President Lyndon B. Johnson (1908–73) in 1965. Former president Truman was the first to enroll in Medicare.

Medical insurance exists in every country in the world, though the form it takes varies. The United States is the only developed, industrial nation without a universal health-care system (one in which all residents have access to health care regardless of their ability to pay or of their medical condition), though 27 percent of the population is insured by tax-financed government programs, such as Medicare and Medicaid. Under a fully public medical insurance system, the national government serves as an insurance company, collecting health-care fees (in taxes and government subsidies) and paying out costs. In contrast, private medical insurance companies are generally for-profit businesses that work with providers (physicians, hospitals, and others who supply health-care services) to offer several options in insurance plans. The financial goal of private-sector insurance is to end up with a profit after customers’ claims (requests for payment of medical expenses) are paid out of the premiums the company takes in.

The United States has a market-based system in which the private sector rather than the government provides most of the health care and insurance and in which costs are determined by market forces, such as supply (what providers are willing to provide and at what price) and demand (what consumers want and are willing to pay for). The federal government allows individual states to regulate the health-insurance system, including the insurance companies’ conduct in marketing (advertising and selling their services), underwriting (selecting who and what they will cover and, conversely, which policyholders and risks they will deny for coverage), and rate setting.

About 60 percent of Americans obtain medical insurance through their workplace, which subscribes to and partially funds a group plan for employees. Insured employees pay a small part of the premium and, for a higher amount, can also cover spouses and children up to the age of 21, if the children are still in school. Federal law does not require workplaces to provide medical insurance packages to employees, though many states require employers to buy workers’ compensation insurance, which pays for care related to injuries suffered when a worker is on the job. Part-time workers and those who work for businesses with few employees often cannot get medical insurance through their workplace. State teachers associations, bar associations (for lawyers), and other work-related support groups sometimes provide insurance for members who qualify. Nine percent of Americans subscribe to individual medical insurance plans, which are costly and offer more limited options. Other people qualify for government-sponsored insurance (Medicare or Medicaid). Approximately 16 percent of Americans (more than 45 million people) are uninsured.

Aside from the client’s driving record, insurance companies base their determination of risk on several other factors. Insurance companies make these determinations based on close analysis of statistics from traffic accidents and past claims made on insurance policies. For example, young drivers aged 18 to 25 are a greater risk than older drivers, and they are therefore charged higher rates. In the 18-to-25 age range, male drivers are a greater risk than female drivers. Single drivers are a greater risk than married drivers. Where the car will be most frequently driven also affects the premium. For example, it costs more to insure a car that will be driven in a densely populated urban center than it costs to insure a car that will be driven in a rural area.

There are many different types of car insurance. Liability insurance covers bodily injury to others and damages to other drivers’ vehicles. The extent of liability insurance is usually listed as a series of three numbers that show how much money, in thousands of dollars, an insurance company will pay if it is determined that a policyholder is at fault in an automobile accident. For example, in the event of an accident a 100/300/50 liability insurance policy will pay up to $300,000 of bodily injury coverage to the injured parties (other than the policyholder) not exceeding $100,000 to any individual and $50,000 for property damages to third parties. Although laws in most states require substantially less liability coverage (15/30/5 in California, for example), most experts recommend that a driver purchase 100/300/50 worth of liability insurance.

Since injuries and damages caused by car accidents can be extremely costly, victims of accidents often sue the people they believe to be responsible for the damages. These lawsuits can cost millions of dollars. To limit the number of lawsuits, 12 states in the United States have adopted what is called “no-fault insurance.” No-fault insurance policies require drivers to purchase personal injury insurance (PIP) for their own protection and limit policyholders’ ability to sue other drivers for damages. In a no-fault system, a policyholder’s insurance company will cover injuries to the policyholder regardless of who is at fault. Meanwhile, the other driver’s insurance will cover his own injuries. Only one party in the accident will be permitted to sue if an arbiter determines that the personal injuries were excessively severe and that the fault lay with the other driver.

Other types of insurance include collision insurance and comprehensive insurance. Collision insurance covers the policyholder’s vehicle in the event of an accident in which the policyholder is determined to be at fault. This sort of insurance includes a deductible, or an amount of money that the policyholder must pay before the insurance company will begin to cover expenses. For example, if a driver holding $10,000 worth of collision insurance with a $500 deductible is at fault in an accident that causes $3,000 worth of damage to his vehicle, the policyholder will pay $500 for the repairs to his vehicle and the insurance company will pay the remaining $2,500. Comprehensive insurance covers damages to the policyholder’s vehicle caused by incidents that are not considered to be collisions. Such incidents may include theft, fire, hurricane damage, or vandalism.

An insurance policy can save a driver a considerable amount of money. For example, if an insured driver causes a collision that results in damage to another driver’s vehicle, the first driver’s insurance policy would pay a significant portion of the cost to repair or replace the other driver’s car. If the driver of the hit car also suffers bodily injury, the first driver’s insurance company would pay a significant portion of the injured driver’s medical fees.

Most car insurance policies in the United States last for six months. The person taking out the policy (the policyholder) pays the insurance company a fee called a premium, which is due every six months. If the policyholder is not involved in any collisions and does not cause damage with his or her vehicle, then most insurance companies will renew the insurance policy automatically at the end of each six-month term. In 2007 drivers paid on average $774 a year to insure a car in the United States. This means that U.S. drivers paid an average premium of $387 every six months for car insurance policies.

When establishing premiums actuaries consider a number of important variables, such as the age and gender of the client, the type of policy being purchased, and the number of dangerous lifestyle obligations, habits, or hobbies that the client maintains. Holding a life-threatening job, such as firefighting, or having a dangerous habit, such as smoking tobacco, or having a risky hobby, such as skydiving, increases the likelihood of an early death. Therefore clients who participate in such endeavors are required to pay higher premiums for their life insurance policies. Insurance companies also review the health history of a client’s family to determine the cost of the policy. If, for example, there is a history of cancer in his family, the client will be required to pay a higher premium. Evaluating risk and determining price through these exhaustive background checks, which include questioning both the client and his or her physician, is called “underwriting.” An insurance company pools the premiums it receives from individual clients and makes investments to cover losses incurred when a client dies.

Different types of life insurance are available; the most common are term insurance, whole life insurance, and universal life insurance. Term life insurance is the most basic and least expensive type of policy. It offers a predetermined payoff only in the event of the policyholder’s death. According to most term life insurance policies, the client begins by paying a small annual premium and gradually pays a higher rate as he or she gets older. Experts recommend term life insurance for young people in their early to mid-20s who do not receive some form of life insurance from their employers. Experts also recommend that these people obtain what is called a “guaranteed renewable policy,” since many life insurance companies retain the right to terminate the agreement if the condition of a policyholder’s life changes.

As with term life insurance, whole life insurance policies usually pay beneficiaries at the end of the insured’s life. However, with these policies the insured usually pays the same high premium throughout the policy. According to these policies, a specified portion of every premium is invested on the insured’s behalf in an interest-bearing account. The interest earned on the funds in this account increases the value of the payoff to the beneficiary upon the death of the client. There are many different types of whole life policies, each of which offer clients various options. According to some policies, clients can control the amount they invest and how the money is invested over the course of the policy. Clients can often borrow money against whole life policies. Despite these options, it has been shown that whole life insurance policies tend on average to yield relatively small returns. Universal life insurance policies were established in the 1980s to offer potentially higher returns than whole life policies. Such policies offer a wider range of investment choices and often guarantee fixed interest rates on investments for a year at a time.

For example, a life insurance policy identifies the policyholder’s wife as the beneficiary scheduled to receive $200,000 in the event of the policyholder’s death. The policyholder is required to pay a $90 premium annually. If the policyholder dies three years after buying the policy (having paid only $270), the insurance company will pay his wife $200,000. Assuming this is one of the most basic types of policies, the insurance company would be required to pay the same fee of $200,000 if the policyholder died 20 years after buying the policy, having paid a total of $18,000 in premiums to the insurance company. The policy also states that if the policyholder lives to be 95 years old, he will collect the $200,000. Over the life of the policy, the policyholder is free to change beneficiaries or to add beneficiaries to the policy. If the policyholder’s wife were to die before he did, he would be able to name one of his children as the new beneficiary. If the policyholder wishes to add a child to the policy, he is required to stipulate how the $200,000 should be divided among the beneficiaries.

Homeowner’s insurance is not required by law in the United States. The overwhelming majority of Americans who buy homes, however, do so with a home loan (also called a mortgage), and mortgage lenders require borrowers to purchase homeowner’s insurance as a precondition of granting the loan. Lenders do this to protect their own interests, because until the loan is paid off, the lender owns part of the home, so if the house were to be destroyed, it would be a loss for the lender. With insurance, in the event that the home is destroyed, the insurance company would be required to pay off the rest of the loan, and the lender would recoup its loss. In most cases, the premium for the home insurance policy is included in the borrower’s monthly payments to the mortgage lender.

A mortgage lender may not require homeowner’s insurance if the value of the land on which the house is built is equal to or greater than the balance (the amount remaining) on the borrower’s loan. For example, if a borrower had only $40,000 left to pay on his mortgage, and the plot of land on which his house was constructed was appraised at $50,000, then the lender may not require him to continue maintaining a home insurance policy. In such a case, if the uninsured home were destroyed and the borrower could not pay the balance owed on the loan, the bank would foreclose the loan, or repossess the property, and thereby immediately recoup the value of the outstanding balance on the loan.

Although home insurance policies exclude some notable disasters, they do cover a wide range of costly damages. For example, most policies include protection against water damage (other than that caused by floods or homeowner negligence). For example, if an early frost hit, causing a homeowner’s water pipes to freeze and burst, the insurance company would pay for repairs. If a policyholder had tile damage resulting from a chronically leaking hot water heater, however, the insurance company likely would not pay for repairs. If there were ice damage from hail or from the weight of ice gathered atop the house, most policies would cover the necessary repairs. Policies also protect against violence and vandalism. This means that if a teenager threw a rock through an expensive picture window or drove across a homeowner’s lawn, expenses for repairs would be covered by the insurance policy. Most home insurance policies also include a provision called “loss of use,” according to which the owner of the policy is reimbursed for the expense of having to live in another residence while his home is being restored following a disaster.

Many homeowners seek additional coverage such as extended replacement cost coverage. Such coverage pays a certain amount above the policy limit, usually 120 to 125 percent, to repair or rebuild a home that has been destroyed by a peril covered in the policy. Most policies account for inflation (the overall rising of prices throughout the economy), which means that the company agrees to pay a higher amount for repairs later in the policy as such costs rise. Some events, however, cause repair prices to rise well beyond the rate of inflation, in which cases extended replacement cost coverage is a great benefit. For example, if a hailstorm caused significant damage to 1,000 roofs in a given neighborhood, roofers in the neighborhood might conspire to charge exorbitant rates for repairs because the demand was so high. While an insurance agency might properly assess damages at $5,000, a roofer may ask for $6,500. In such a case, extended replacement cost coverage would make up the difference.

The extent of the perils covered by a home insurance policy depends on the type of policy, but a typical policy will protect against windstorms, fire, and theft. Most people purchase “all-risk” (also called “open-peril”) homeowner’s insurance, which protects against all perils except those specifically excluded in the policy. All-risk policies often exclude damages caused by floods and earthquakes; protection from these natural disasters can be purchased separately. Most homeowner’s policies do cover damages resulting from volcanic eruptions and hurricanes, but the deductible for hurricane damage is usually quite high. (A deductible is a previously agreed-upon amount of money that the homeowner has to pay toward the repairs before the insurance company makes its contribution.) The deductibles for hurricane and storm-related damage are larger in high-risk areas such as the Gulf Coast states, which include Texas, Louisiana, Mississippi, Alabama, and Florida. Damages caused by war are excluded from all policies.