Learning Objectives part 1 of 2

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Chapter 10
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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

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Learning Objectives (part 2 of 3)

• Describe the various forms of homeowners
  insurance
• Explain the consequences of buying less than full
  replacement value coverage
• Describe the appropriate coverages for owners of
  condos, renters, and college students

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Learning Objectives (part 3 of 3)

• Ascertain an optimal amount of homeowners
  coverage for the minimum premium
• Discuss the issues associated with working with
  agents and representatives
• Check out an insurance companys rating and
  complaint record
• Explain the role of an umbrella insurance policy

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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

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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

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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

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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

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Basic Coverages of an Auto Insurance Policy

• property damage to the insureds car
• physical injury to the insured and any occupants
  of the insureds car
• legal liability for damage to the property of
  others
• legal liability for injury to others

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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

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Other Coverages in a Policy

• Medical Payments
• Underinsured/Uninsured Motorists Coverage
• Collision and Comprehensive Protection
• Towing Insurance

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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

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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

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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

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Basic Coverages of a Homeowners Insurance Policy

• property damage to the insureds home, its
  contents, and related personal property
• physical injury to the insureds guests
• legal liability for damage if the insured causes
  damage to the property of others
• legal liability if the insured causes injury to
  others

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Forms of Homeowners 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

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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)

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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)

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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

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Other types of policies

• HO-4 Renters insurance (contents and liability
  only, 17 names perils)
• HO-6 Condo insurance (also 17 named period
• College students
• Could be covered under parents policies
• Might need to buy renters insurance

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Strategy for buying homeowners 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)

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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

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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

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Umbrella Insurance

• Provides back-up liability coverage
• Sold in increments of 1 million.
• Usually require a minimum liability coverage on
  auto homeowners
• Best strategy is to buy an umbrella and set other
  liability coverages to the minimum designated
  (most coverage for the least )