Chapter 8


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Chapter 8

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Chapter 8

  1. 1. 8 Home and Automobile Insurance • Insurance – Protection against possible financial loss – Provides peace of mind • Insurance company (insurer) – Risk-sharing firm that assumes financial responsibility for losses from an insured risk • Procedure – Purchase a policy known as coverage – Insurance firm assumes a risk for a fee – Insured policyholder pays a periodic premium 8-1
  2. 2. Objective 1 Identify Types of Risks and Risk Management Methods and Develop a Risk Management Plan • Risk – Chance of loss or injury – Uncertainty or lack of predictability • Peril – Anything that may cause a loss – Fire, windstorm, robbery, or accidents • Hazard – Anything that increases the likelihood of a loss – For example, driving drunk, defective house wiring 8-2
  3. 3. Most Common Types of Risk • Personal Risks – Loss of income or life – Caused by illness, disability, old age, or unemployment • Property Risks – Losses to property – Caused by perils such as fire or theft • Liability Risks – Losses caused by negligence – Resulting in injury or property damage • Pure Risk = Insurable – Accidental, unintentional – Nature and financial loss of the risk can be predicted • Speculative Risk = Uninsurable – Chance of loss or gain – Starting a small business, gambling, or investing 8-3
  4. 4. RiskRisk AvoidanceAvoidance RiskRisk ShiftingShifting RiskRisk AssumptionAssumption RiskRisk ReductionReductionWays toWays to ManageManage RiskRisk Don’t stop at a convenience store in a bad part of town after midnight Wear seatbelts Install an alarm system Buy Insurance Self Insurance 8-4
  5. 5. Planning an Insurance Program 1. Set insurance goals to reduce possible loss of: • Income due to premature death, illness, accident or unemployment • Property caused by perils • Income, savings and property due to personal negligence 2. 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? 2. Put your plan into action 3. Check your results • Insurance needs and goals change 8-5
  6. 6. Property and Liability Insurance • Potential property losses – Home, automobiles, furniture, clothing, personal belongings – Risk #1: Physical damage caused by perils (e.g., fire) – Risk #2: Loss or damage caused by criminal behavior • Liability = legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable) • Liability due to negligence – Failure to take ordinary and reasonable care • Vicarious Liability – You are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window 8-6
  7. 7. Homeowner’s Insurance Coverage – Damage or destruction of the building in which you live, and other structures on the property • Garage, tool shed, trees, and shrubs – Additional Living Expenses • May be limited to 20-30% of property value • May be limited to 6-9 months Objective 2 Assess the Insurance Coverage and Policy Types Available to Homeowners and Renters 8-7
  8. 8. Homeowner’s Insurance Coverages – Personal Property • Furniture, appliances and clothing • Household inventory advisable • Usually 55%, 70%, or 75% of property value • Limits on certain items such as jewelry – Personal Liability and Related Coverage • Covers injuries to others on property (e.g., fall on ice) – Specialized Coverage • Earthquake endorsement • Flood coverage 8-8
  9. 9. Homeowner’s Insurance Coverages • Medical Payments Coverage – Coverage for minor injuries caused by you, your family members, or pets, occurring on your property or away from home • Personal Liability Coverage – Umbrella policy - also called a personal catastrophe policy – Supplements basic personal liability coverage – $1,000,000 or more in coverage • Endorsements and Floaters – Endorsements add coverage – Personal property floater • Covers specific items of high value • Jewelry, furs, art collections 8-9
  10. 10. Renter’s Insurance • Broad Form – Covers personal property loss or damage specified in the policy • Comprehensive Form – Protects property against all perils not excluded • Renter’s insurance is relatively inexpensive – Replacement value coverage more costly – Covers property only in your home – Usually includes liability coverage • Many renters do not have insurance 8-10
  11. 11. Home Insurance Policy Forms • Basic Form (HO-1) – Protects against perils such as fire, lightning, windstorms, hail, smoke, theft, vandalism and riots (specific named perils) • Broad Form (HO-2) – Wider coverage including falling objects and damage from ice, snow or sleet (more specific named perils) • Special Form (HO-3) – Basic + Broad form + all other risks unless specifically excluded (commonly earthquake, flood, nuclear accidents, business usage) • Tenant’s Form (HO-4) – Covers personal property against listed risks • Comprehensive Form (HO-5) – Expands HO-3 coverage to replacement cost; increasingly rare! • Condominium Owner (HO-6) – Covers personal property and building additions 8-11
  12. 12. Objective 3 Analyze the Factors that Influence the Amount of Coverage and Cost of Home Insurance • Determine amount of coverage needed: – Replacement value of home ? – Value of home’s contents ? – Protection for specific items ? (Jewelry, furs, art) – Liability coverage ? • Consider “loss frequency” (likely # of times for loss) and “loss severity” (potential magnitude of a loss) • Principle of Indemnity- insurance will pay no more than actual financial losses suffered • Policy Limits- specify the maximum dollar amounts that will be paid under a policy 8-12
  13. 13. Policy Provisions • Look for a policy with full coverage (100% value) – Coinsurance clause requires you to pay a part of a loss. • Claim settlement methods: – Actual Cash Value (ACV) • Replacement cost less depreciation – Replacement Cost • Full cost to repair or replace the damaged or lost item • 10-20% > actual cash value coverage 8-13
  14. 14. Factors That Affect Home Insurance Costs • Location of Home (e.g., rural vs. urban) • Type of Structure (e.g., brick vs. wood) • Coverage Amount and Policy type • Home Insurance Discounts – Alarm system – Smoke detectors – If you insure car with the same company • Company Differences – Compare costs and coverages 8-14
  15. 15. Objective 4 Identify the Important Types of Automobile Insurance Coverage • Financial Responsibility Law – State legislation requiring proof of financial ability to cover the cost of damage or injury caused in an automobile accident – 45 states have compulsory automobile liability insurance laws – NJ has very low liability limits:15/ 30/5 8-15
  16. 16. Motor Vehicle Bodily Injury Coverage • Bodily Injury Liability – Covers financial loss due to legal expenses, medical expenses, lost wages, etc. associated with injuries caused by an accident for which you were responsible – Expressed as 3 numbers: 100/300/50 • Maximum coverage in $1,000’s • $100,000 maximum paid for injuries to any one person • $300,000 maximum paid in total (2+ people) • $50,000 maximum paid for property damage 8-16
  17. 17. Motor Vehicle Bodily Injury Coverage • Medical Payments Coverage – Covers the cost of health care for persons injured in your automobile, including yourself – Also covers you or family members injured while riding in or hit by another vehicle • Uninsured Motorist’s Protection – Protection against the risk of getting into an accident with someone with no insurance • Underinsured Motorist’s Coverage – Pays costs if your car is hit by a person who doesn’t have enough insurance to cover the damage they did to you and your car 8-17
  18. 18.       Motor Vehicle Property Damage Coverage Property Damage Liability – Covers damage to the other person’s car when you are at fault. – Includes damage to such things as street signs, telephone poles, and buildings • Example: during a snow storm you accidentally slide your vehicle into a neighbor’s mailbox. This coverage would pay for repair or replacement of the mailbox 8-18
  19. 19. Collision Coverage Pays for damage to your automobile, regardless of who is at fault. – If you are not at fault, your insurer will try to collect from the other driver’s property damage liability first. – Coverage limited to the retail value of your vehicle  8-19
  20. 20. Comprehensive Physical Damage Covers damage to your vehicle not caused by a collision, such as: – Fire, theft or vandalism – Glass breakage – Hail, sand, or wind storm – Falling objects or hitting an animal 8-20
  21. 21. No-Fault Insurance • Each driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs • 30 states have some variation of the system • Intended to provide fast, smooth method of paying for damages without determining fault • Variations among states; designed to reduce cost and time to settle cases 8-21
  22. 22. Objective 5 Evaluate Factors that Affect the Cost of Automobile Insurance Automobile Insurance Costs • Legal Concerns – Have enough coverage if you are sued – Recommendations: • $100,000/$300,000 bodily injury liability • Additional $1,000,000+ umbrella liability policy • Property Values – $50,000-$100,000 suggested for property damage liability 8-22
  23. 23. Motor Vehicle Insurance Premium Factors • Vehicle Type – Year, make, model, and theft rate • Rating Territory – Accident, auto theft, and vandalism rates in the area where you live • Driver Classification – Age, sex, marital status, credit history, driving record, driving habits – Assigned risk pool for those unable to obtain insurance Reducing Automobile Insurance Premiums • Compare Companies • Premium Discounts – Establish and maintain a good driving record – Non-smoker – Install security devices such as a car alarm – If more than one vehicle, insure with the same company – Larger deductibles 8-23
  24. 24. Wrap Up • Chapter Quiz • Concept Check 8-1- Four Methods of Avoiding Risk with Examples • Concept Check 8-2- Complete the Statements • Concept Check 8-3- True of False? • Concept Check 8-4- True or False?