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Lifting the veil on four confusing insurance terms

Life can be confusing enough without worrying about life insurance terminology, which can be downright baffling.

From "no fault" auto insurance to the Medicare "donut hole," this jargon raises a lot of questions for weary policyholders.

Here are some answers to what those confusing terms really mean.

1. Replacement cost vs. actual cash value

Bargain hunters shopping for home insurance may be tempted to purchase actual cash value coverage. Such insurance is less expensive upfront than springing for replacement cost coverage.

However, there's a catch.

"Actual cash value coverage provides you the value of what the lost item would be worth if you tried to resell it – broadly speaking, what you paid for it, minus depreciation," says Jim Quade, director of field sales at Liberty Mutual.

insurance-jargonSo, if your 11-year-old refrigerator is lost in a fire and you have actual cash value coverage, stop dreaming of a gleaming, state-of-the-art replacement.

By contrast, replacement cost coverage reimburses you for the cost of buying that new refrigerator – minus your deductible, of course.

Lynne McChristian, a spokeswoman for the nonprofit Insurance Information Institute, says the benefits of replacement cost coverage "clearly outweigh the cost."

"My motto is ‘Don't risk a lot of money by trying to save a little of it’," she says. "Buying replacement cost coverage generally costs about 10 percent more. But you get a lot more at claim time – sometimes 30 percent to 40 percent more."

2. Usual and customary fees

Everybody dreads it: You visit the doctor and a few weeks later, a notice arrives with the words "patient's responsibility" and a big dollar amount next to it.

If you're on the hook for a larger percentage of the bill than anticipated, the health care provider's pricing probably has exceeded your insurance company's "usual and customary fee." This fee is the average price charged for a given medical service, such as an X-ray, in a certain geographic area.

Consumers are vulnerable to such charges if they have indemnity health insurance plans – also known as fee-for-service plans – that allow them to see the doctors of their choice, including ones who are out of your insurer's network. Dental insurance companies are particularly notorious for levying such charges, says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group.

Susan Pisano, a spokeswoman for the America's Health Insurance Plans trade group, says there's one surefire way to avoid these charges: "Stay in network if at all possible."

If you do go out of network, all bets are off. Sherry says there's no good way to find out in advance whether you're at risk for getting hit with one of these charges.

"You can try to do it, but it's really difficult," Sherry says.

She suggests calling your insurance company before a procedure and asking for the insurer's usual and customary fee. Then, approach the health care provider and ask how much it charges for the service.

The difference between those two numbers should give you a "ballpark figure" on what you may owe in extra charges, she says.

3. No-fault insurance

"No fault" auto insurance sounds like a gift from heaven. Nobody is to blame, and after an accident we all drive away and move on with our lives, right?

Well, not exactly.

In general, states with no-fault insurance have laws that both:

  • Allow a policyholder to recover financial losses from his or her own insurance company, regardless of which driver was at fault in an accident.
  • Restrict the right of motorists to sue following an accident.

The idea behind no-fault insurance was to prevent frivolous and expensive lawsuits by streamlining the claims process and making it easier for victims to collect damages. But critics say state laws make it a little too easy, and that's led to abuses.

"The reality is that the noble intent of no-fault has eroded," McChristian says. "The cost of claims is rising because the no-fault benefit is seen as a 'dollar target.'"

Drivers in no-fault states must purchase personal injury protection (PIP) insurance, which pays for the medical care of a driver and any passengers following a crash.

Sometimes, fraud rings – complete with phony accident victims – intentionally cause minor wrecks. After an "accident," shady doctors diagnose phantom injuries, all in the hopes of cashing in.

"If the no-fault benefit is $10,000, an unscrupulous medical provider might prescribe treatment up to that amount," McChristian says.

Currently, 12 states – Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah – have no-fault laws. But in several of these states, including Florida, Michigan and New York, efforts to reform the laws are under way.

4. Medicare 'donut hole'

Trying to calculate whether you're in jeopardy of falling into the dreaded Medicare "donut hole" is painful – nearly as bad as the stomachache from overindulging at Dunkin' Donuts.

The donut hole is a feature of the prescription drug component of Medicare, the government health insurance program for people 65 and older and people of any age who have certain disabilities.

This coverage – known as Medicare Part D – has a monthly premium and works this way in 2012:

  • You pay 100 percent of drug costs until you reach the deductible, set at $320.
  • Once you've reached the deductible, your plan starts to pay the bulk of the drug cost and you pay a copayment until you and your plan have spent a combined $2,930 on drugs over the calendar year.
  • At this point, the "donut hole" kicks in. In 2012, you'll get a discount of 50 percent on covered brand-name drugs. You'll be responsible for paying 86 percent of the cost of covered generic drugs. This will go on until the amount you've spent and the 50 percent discount spent by your plan combine to reach $4,700.
  • For the rest of the year, you'll pay only a small co-insurance fee.

Got that?

"It's a complex rule," Sherry says.

Pisano urges anyone who is confused about the donut hole to visit the federal government's website on the topic. State government offices affiliated with the State Health Insurance Assistance Program can help as well.

"They have individuals who can help seniors who can work through issues," Pisano says.

Some Medicare recipients qualify for assistance and rebates related to the donut hole. And things should get better over time. As a result of federal health care reform, the donut hole itself gradually will narrow before finally closing altogether in 2020.

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