BUS 116 Chap019 insurance

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  • 1. Chapter 19 Insurance
  • 2. Learning Objectives 1. Define risk management and explain the purpose of insurance. 2. Identify the contractual elements of an insurance agreement. 3. Make clear the importance of insurable interest. 4. Differentiate among the different types of life insurance. 5. Explain how insurable interest differs with life insurance and property insurance. 2
  • 3. Learning Objectives (cont.) 6. Explain the coinsurance clause in most property insurance policies. 7. Describe coverage given by fire, marine, homeowner’s, renter’s, and flood insurance. 8. Differentiate among the principal kinds of automobile insurance. 9. Describe the benefits included in health insurance policies. 10. List the steps in applying for, obtaining, and maintaining an insurance policy. 3
  • 4. Risk Management • Insurance – a transfer of the risk of economic loss from the insured to the insurance company. • Purpose of insurance is to spread the losses among a greater number of people 4
  • 5. 5
  • 6. Parties to an Insurance Contract • Insurer – accepts the risk of loss in return for a premium (the consideration paid for a policy) and agrees to indemnify, or compensate, the insured against the loss specified in the contract 6
  • 7. Parties to an Insurance Contract • Insured – the party (or parties) protected by the insurance contract. • Policy – The contract of insurance 7
  • 8. Parties to an Insurance Contract • Life of the Policy – The period of time during which the insurer assumes the risk of loss • Beneficiary – A third party, to whom payment of compensation is sometimes provided by the contract 8
  • 9. Contractual Elements • Insurance policies, like other contracts, require: – an offer, – an acceptance, – mutual assent, – capable parties, – consideration, – a legally valid subject matter 9
  • 10. Insurable Interest • The financial interest that a policyholder has in the person or property that is insured • Example: Life insurance - who has an insurable interest in me? – – – – Myself My spouse (or other close family member) My employer My business partner Can someone secretly take out a policy on me? Wager on life is void 10
  • 11. Subrogation • Substitution of one person in place of another, relative to a lawful claim • If another person causes you a loss, and your insurance company pays you for it, your insurance company can sue the person who caused the loss What is subrogation? 11
  • 12. Types of Insurance Life insurance Property insurance Health insurance 12
  • 13. Life Insurance • An insurance contract that provides monetary compensation for losses suffered by another’s death. • Premiums based on age, health, amount of coverage, type of policy, etc. • The person taking out the policy must have an insurable interest in the insured’s life (at the time of the policy’s creation), but the beneficiary doesn’t necessarily 13
  • 14. Straight life insurance (ordinary, whole life) • Requires the payment of premiums throughout the life of the insured and pays the beneficiary the face value of the policy upon the insured’s death • Cash Surrender Value - an investment feature – usually builds up slowly at first but in later years approaches the face amount of the policy – at some stated point (usually at the age of 95 or 100 years), it equals the face value of the policy. – insured can cancel a straight life policy at any time and receive its cash surrender value 14
  • 15. Straight life insurance (ordinary, whole life) • Loan Value - an amount of money that may be borrowed against the cash surrender value of the policy – usually at a relatively favorable rate of interest. – when bank interest rates are high, insurance policies are often excellent sources of loans at low interest rates 15
  • 16. Life Insurance • Universal life – a form of straight life insurance – allows the policy owner flexibility in choosing and changing terms of the policy • increase/decrease premiums within policy limits • increase/decrease amount of insurance • borrow up to max. loan value at prearranged interest rate – Policy loans reduce cash surrender value and death benefit • make withdrawals from cash surrender value 16
  • 17. Limited-Payment Life Insurance • Limited-payment life insurance – provides that the payment of premiums will stop after a stated length of time—usually 10, 20, or 30 years – amount of the policy will be paid to the beneficiary upon the death of the insured, whether the death occurs during the payment period or after – premiums usually higher than for straight life, but cash surrender value grows faster 17
  • 18. Term Insurance • Issued for a particular period, usually 10-20 years • Least expensive kind of life insurance because term policies have no cash or loan value • Convertible term insurance – Can be converted to a straight life policy • Decreasing term insurance – Premiums stay constant, but death benefit decreases over the years (ex: mortgage life insurance) 18
  • 19. Annuity • Guaranteed retirement income purchased by paying either a lump-sum premium or making periodic payments to an insurer. • Insured can usually choose to receive payments: – For a fixed # of years, with a beneficiary receiving remainder after insured’s death or – For as long as insured lives, losing any remainder upon death 19
  • 20. Exemptions from Risk • Policies can include clauses that exempt the insurance company from liability in certain situations. For instance, if death happens from: – Breaking the law – Flying – Dangerous occupations – Suicide – Military service • There could be more or less exemptions 20
  • 21. Optional Provisions • May be purchased for an additional premium • Some popular options: – Double indemnity (accidental death benefit) • Insurer pays double the amount of the policy if the insured dies from accidental causes – Waiver of Premium • Excuses insured from paying premiums if he/she becomes disabled – Guaranteed Insurability • Option to buy additional insurance at specified times later, no questions asked (even if insured develops serious illness) 21
  • 22. Property Insurance • To protect real and personal property • Insurable interest exists if insured can demonstrate a monetary loss if property is damaged/destroyed – At the time the loss occurs (unlike life insurance) 22
  • 23. Property Insurance • Deductible – an amount of any loss that is to be paid by the insured – can be a $ amt., a % of claim amt., or amt. of time that must elapse before benefits are paid • The bigger the deductible, the lower the premium charged for the same coverage 23
  • 24. Property Insurance • Coinsurance – A provision under which the insurer and the insured share costs, after the deductible is met, according to a specific formula 24
  • 25. Fire Insurance • Covers fire damage • Also usually covers losses related to fire damage, such as: – Water used to fight the fire – Smoke damage – Deliberate destruction of property in an effort to control the fire 25
  • 26. Marine Insurance • Ocean marine insurance – Covers ships at sea • Inland marine insurance – Covers goods that are moved by land carriers such as rail, truck, and airplane – Also covers such items as: • Jewelry, fine arts, musical instruments, wedding presents • Customer goods in the possession of a bailee (fur storage houses, dry cleaners, etc.) 26
  • 27. Marine Insurance • Floater Policy – Insures property that cannot be covered by specific insurance because the property is constantly changing in either value or location. – A personal property floater, for example, covers personal property in general, wherever it is located. 27 27
  • 28. Homeowner’s and Renter’s Insurance • Homeowner’s policy – Gives protection for many types of losses and liabilities related to home ownership. • Fire, windstorms, burglary, vandalism • Injuries suffered by other persons while on the property • Usually excludes things like floods and earthquakes • Renter’s insurance – protects tenants against the loss of personal property, liability for a visitor’s personal injury, and liability for negligent destruction of the rented premises. 28
  • 29. Flood Insurance • Usually not included in homeowner’s and renter’s insurance and must be purchased additionally • Most flood insurance backed by National Flood Insurance Program (NFIP) • Lenders might require it if you own property in a Special Flood Hazard Area (SFHA) Insurance problems after Hurricane Katrina 29 29
  • 30. Automobile Insurance The most common types of automobile insurance: • Bodily injury liability insurance. • Uninsured-motorist insurance. • Medical payments insurance. • Property damage liability insurance. • Collision insurance. • Comprehensive coverage. • Substitute transportation insurance. • Towing and labor insurance. Consumer information – Auto insurance in NC 30
  • 31. Health Insurance Health insurance policies often include: • Physician care • Prescription drugs • Inpatient and outpatient hospital care • Surgery • Dental and vision care • Long-term care for the elderly Consumer Information – Health Insurance in NC 31
  • 32. Age to Receive Social Security Benefits 32
  • 33. Medicare and Medicaid • Medicare – a federally funded health insurance program for people 65 years of age and older who are covered by Social Security • Medicaid – a health care plan for low-income people 33
  • 34. The Insurance Policy • Application – an offer made by the applicant to the insurance company • Binder – will provide temporary insurance coverage until the policy is formally accepted – Also called binding slip 34
  • 35. The Insurance Policy • Premiums – Payment determined by the nature and character of the risk and by how likely the risk is to occur • Lapse – When the insured stops paying premiums insurance contract terminates 35
  • 36. Cancellation of Insurance Policies 36
  • 37. Estoppel • Estoppel – An insurer may not deny acts, statements, or promises that are relevant and material to the validity of an insurance contract 37
  • 38. Question? What provides temporary insurance coverage until a policy is formally accepted? A. Application B. Claim C. Binder D. Surrogate policy 38
  • 39. Question? Which type of insurance covers ships at sea? A. Aqua-marine insurance B. Ocean marine insurance C. Inland marine insurance D. Open ocean insurance 39
  • 40. Question? What is an amount of any loss that is to be paid by the insured? A. Co-pay B. Deductible C. Abstract D. Escrow 40
  • 41. Question? What is the substitution of one person in place of another relative to a lawful claim? A. Legal replacement B. Subrogation C. Legal proxy D. Legal surrogate 41
  • 42. Question? Which party is protected by the insurance contract? A. Insured B. Beneficiary C. Underwriter D. Insurer 42
  • 43. Question? Who accepts the risk of loss in return for a premium? A. Insured B. Applicant C. Underwriter D. Insurer 43