Chapter 10. Learning Objectives (part 1 of 3) Identify the types of risks for which insurance coverage is appropriate Describe the basic principles of.

Chapter 10

Learning Objectives (part 1 of 3)

Identify the types of risks for which insurance coverage is appropriate

Describe the basic principles of insurance and how an insurance premium is determined

Describe the basic coverages of an automobile insurance policy

Ascertain an optimal amount of auto coverage for the minimum premium

Learning Objectives (part 2 of 3)

Describe the various forms of homeowner’s insurance

Explain the consequences of buying less than full replacement value coverage

Describe the appropriate coverages for owners of condos, renters, and college students

Learning Objectives (part 3 of 3)

Ascertain an optimal amount of homeowner’s coverage for the minimum premium

Discuss the issues associated with working with agents and representatives

Check out an insurance company’s rating and complaint record

Explain the role of an umbrella insurance policy

Risks for which insurance coverage appropriate

Insurance should be bought to protect against catastrophic disasters, not to protect against commonplace events.

Premature death & disability Major assets such as house & car Major health problems Lawsuits

Basic Principles of Insurance Loss must be fortuitous Loss must be well-defined Loss predictable in the aggregate Loss must be personal Large number of policies with

similar risk exposure available Loss exposures widely distributed

How an insurance premium is determined Basic premium + loadings Basic premium based on actuarial

tables that reflect likelihood of a claim

Loadings include: Expenses of doing business Profit margin

Two factors to reduce a premium Deductibles

Insured pays for the initial expenses out of pocket

Coinsurance The insurance is only for a percentage

of the claim

Basic Coverages of an Auto Insurance Policy property damage to the insured’s

car physical injury to the insured and

any occupants of the insured’s car legal liability for damage to the

property of others legal liability for injury to others

Description of Basic Coverage

Policies normally described as XXX/YYY/ZZZ (in thousands)

XXX = extent of personal injury coverage per person

YYY = aggregate personal injury coverage per accident

ZZZ = Property damage coverage

Other Coverages in a Policy Medical Payments Underinsured/Uninsured Motorists

Coverage Collision and Comprehensive

Protection Towing Insurance

Extent of Coverage The wealthier you are, the more

coverage needed Medical coverage offset by a

health insurance policy The older the car, the less need for

comprehensive

Strategy for buying auto insurance Obtain the highest liability coverages

available (incremental coverage is relatively inexpensive)

Agree to the highest deductibles offered A $1,000 deductible is not a catastrophic

loss Breakeven period usually about 4 years

for savings

Factors that determine auto insurance premiums Probability of driver having an

accident Women have fewer accidents People over 25 have fewer accidents Married people have fewer accidents People with clear driver records and who

had a safe driving course have fewer Features of the car Area in which a person lives

Basic Coverages of a Homeowner’s Insurance Policy property damage to the insured’s

home, its contents, and related personal property

physical injury to the insured’s guests legal liability for damage if the insured

causes damage to the property of others

legal liability if the insured causes injury to others

Forms of Homeowner’s Insurance HO-1: least coverage, 11 named perils HO-2: more coverage, 18 named perils HO-3: comprehensive coverage on

home, and named peril on contents HO-5: comprehensive coverage on

both home & content HO-8: special policy for older homes

Coverages of an HO-3 Policy (1 of 2) Coverage A: Covers the dwelling

(defines amount of policy) Coverage B: Covers detached

structures (10% of A) Coverage C: Personal property of

insured (50% of A), usually based on actual cash value, and contains internal limits on special items (e.g., cash)

Coverages of an HO-3 Policy (2 of 2) Coverage D: Temporary living

expenses (20% of A) Coverage E: Liability protection

($100,000 is standard amount) Coverage F: Medical expenses

($1,000 is standard amount)

Buying less than full replacement value If have at least 80% of

replacement value, then no problem on “small” claims

If less than 80%, then all claims will be prorated

If at least 80% but less than 100%, then only problem is if claim is for more than 80%

Other types of policies HO-4: Renter’s insurance (contents

and liability only, 17 names perils) HO-6: Condo insurance (also 17

named period College students:

Could be covered under parent’s policies

Might need to buy renter’s insurance

Strategy for buying homeowner’s insurance Set coverage A to just cover cost of

rebuilding home Land and foundations are not

insured Use maximum deductibles Obtain maximum liability coverage Safety features reduce cost (e.g.,

alarm system, deadbolt locks)

Agents vs. Representatives Agents will sell policies for multiple

companies Representatives will sell for only

one company Agent may be more supportive of

customer in a dispute Representatives tend to have

lower premiums

Selecting an insurance company Check out rating of company, to

assure it is in good financial health Check on any publicly available

complaint records for company & avoid those companies with high ratios of complaints per policy outstanding

Umbrella Insurance Provides back-up liability coverage Sold in increments of $1 million. Usually require a minimum liability

coverage on auto & homeowner’s Best strategy is to buy an umbrella

and set other liability coverages to the minimum designated (most coverage for the least $$)