Insurance

Chapter 8

What is Insurance?

Protection against possible financial loss Property loss Illness Injury

Insurance company (insurer): a risk-sharing business that agrees to pay for losses that may happen to someone it insures

What is Insurance?

Policy: written contract for insurance Policyholder: person who owns an

insurance policy Premium: amount of money a policyholder

is charged for an insurance policy Coverage: the protection provided by the

terms of an insurance policy Insured: a person covered by an insurance

policy

Types of Risks

Risk: the chance of loss or injury No one can predict trouble

Peril: anything that may cause a loss Fire, windstorms, explosions, robbery, accidents

Hazard: anything that increases the likelihood of loss through some peril Defective wiring, etc.

Types of Risk

Most common risks: Personal

Loss of income or life due to illness, disability, old age, or unemployment

Property Loss of property caused by perils, such as fire or theft,

and hazards Liability

Losses caused by negligence that leads to property damage or injury

Negligence—failure to take ordinary or reasonable care to prevent accidents from happening

Risk Management Methods

Risk Avoidance Avoiding risk by not doing something

Examples: taking precautions in high crime areas, not driving

Risk Reduction Decrease the likelihood that you will be harmed

Examples: wearing your seat belt, not smoking, eating right and exercising, installing fire extinguishers and smoke detectors

Risk Management Methods

Risk Assumption Taking on responsibility for the negative results

of a risk Makes sense if you know that the possible loss

is small Makes sense if you have taken all the necessary

precautions you can to avoid or reduce the risk Example: not buying collision insurance on an old

car

Risk Management Methods

Risk Shifting Transferring risk to an insurance company

In exchange for a fee, the insurance company agrees to pay for your losses

Most insurance policies include a deductible Deductible: set amount that the policyholder must pay per

loss on an insurance policy Example: a falling tree damages your car, you may have

to pay $200 toward repairs and the insurance company will pay the rest

Planning an Insurance Program

Set Insurance Goals Reduce possible loss of income caused by

premature death, illness, accident, or unemployment

Reduce possible loss of property caused by perils such as fire or theft, or hazards

Reduce possible loss of income, savings, and property because of personal negligence

Planning an Insurance Program

Develop a plan to reach your goals What do you need to insure? How much should you insure it for? What kind of insurance should you buy? Who should you buy insurance from?

Planning an Insurance Program

Put your plan into action Purchase additional insurance if necessary Adjust your budget to cover costs of additional

insurance Expand savings and investment programs Respond to changing life situations

Birth Death College Teenage drivers Buying a house

Planning an Insurance Program

Check your results Review plan every 2-3 years Adjust plan for changing needs Adjust budget for changing needs

Property and Liability Insurance

Each year in the United States home owners and renters lose billions of dollars from: More than 3 million burglaries 500,00 fires 200,000 cases of damages from other perils

Property and Liability Insurance

Potential Property Loss Two basic types of risk:

Physical damage caused by perils such as fire, wind, water, and smoke

Loss or damage caused by criminal behavior such as robbery, burglary, vandalism, and arson

Personal and Liability Insurance

Liability Protection Legal responsibility for the financial cost of

another person’s losses or injury If you are found liable, it’s because of negligence

on your part Examples: letting young children swim without

supervision, cluttering a staircase with things that could make someone slip and fall

Home and Property Insurance

Homeowner’s Insurance Coverage Building in which you live and any other structures

on the property Detached garage Tool shed

Additional living expenses Motel or apartment while your home is being repaired

Personal property Furniture, appliances, clothing up to a portion of the

insured value of your home (usually 55, 70, or 75%) Create a household inventory with purchase dates and cost

information

Home and Property Insurance

Homeowner’s Insurance Coverage Personal liability and related coverage

Most homeowner’s policies provide for basic personal liability insurance coverage of $100,000

Umbrella policy: supplements your basic personal liability coverage

Medical payments coverage Specialized coverage

Floods, earthquake Renter’s Insurance

Provides protection for your personal belongings

Home and Property Insurance

Home Insurance Property Forms Provide different combinations of coverage May be different based on where you live Range from basic to expanded If you have a home based business you may

need additional coverage

Home Insurance Cost Factors

How much coverage do you need? Should be based on the amount of money you

would need to rebuild or repair your house, not the amount you paid for it

Actual cash value (ACV): claim settlement method in which the insured receives payment based on the current replacement cost of the damaged or lost item, less depreciation

Replacement Value: claim settlement method in which the insured receives the full cost of replacing or repairing a damaged or lost item

Factors Affecting Home Insurance Costs

Location of Home Type of Structure Coverage amount and policy type Home insurance discounts

Reductions for smoke detectors and fire extinguishers, dead bolt locks and alarm systems

Company Differences Comparing several companies

Automobile Insurance

If you hurt someone while driving, there is no limit to the amount he/she can sue you for

Premiums are based on the type of coverage you choose and the track record of other drivers

Automobile Insurance

Factors that raise or lower your premium: Age Gender Type of car How often you use your car Location Driving record Claim history Credit history

Coverage

Main types of automobile insurance coverage: General liability: covers damage to other

people’s property and bodily injuries Medical payments: cover immediate

compensation for bodily injury to you and your passengers regardless of fault

Collision: repairs for damage you cause to your car caused by an accident

Coverage

Main types of automobile insurance coverage: Comprehensive: covers fire damage, break-ins,

vandalism, or theft, as well as natural disasters Uninsured motorist: covers lost wages and

medical expenses if you are in an accident with someone who doesn’t have auto insurance

Underinsured motorist: covers you when the cost of repairs from an accident caused by another driver exceeds his/her coverage

Coverage and Conditions

Popular add-ons: Towing expenses Renting a car while yours is being repaired

Conditions: define your and the insurance company’s rights, duties, and responsibilities Actions in the event of loss:

Notification Honest information Change in circumstances When is loss not covered Cancellation procedures

Ways to reduce premiums

Higher deductible Shop around Ask about discounts:

Good grades Multiple vehicles Safety features on car

Drive less Move to a safer zip code Get married Keep your driving record clean

Making Sure You’re Covered

Work with an insurance agent Buy insurance directly from the company Information you need:

SS# Length of time you’ve had your license Email address How you pay for your car Vehicle ID # Make, model, body style, and safety equipment on car # of moving violations # of claims (accidents, theft) Current insurance company Current liability coverage limits Policy expiration date

If You Have an Accident

Call insurance agent right away Fill out a claim form Have damage evaluated Work with the claims adjuster—he/she

investigates claim and works with you to fix the damage

Other Types of Insurance

Health Insurance Property Insurance Life Insurance Disability Insurance Liability Insurance Special Insurance:

Boat Travel Wedding Malpractice Errors and omissions Pet health Kidnap and ransom