Pesonal finance 6th madura chapter 11 aut and homeowner insurance

All Rights Reserved11.1 Explain insurance and risk management 11.2 Describe the role of insurance companies 11.3 Provide a background on auto insurance 11.4 Identify the factors that

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SIXTH EDITION

Chapter 11

Auto and Homeowner’s

Insurance

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11.1 Explain insurance and risk management

11.2 Describe the role of insurance companies

11.3 Provide a background on auto insurance

11.4 Identify the factors that affect your auto insurance premium

11.5 Explain how to respond if you are in an auto accident

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11.6 Describe the key provisions of homeowner’s insurance

11.7 Describe financial coverage provided by homeowner’s insurance

11.8 Describe the use of renter’s insurance

11.9 Describe the use of umbrella personal liability insurance policies

11.10 Explain how insurance fits within your financial plan

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Background on Insurance

• Property insurance ensures that damages to your auto and home are covered

• Also protects your personal assets from liability

• Liability: the amount that you may be required to pay someone for damages that you caused

• Its primary function is to maintain your existing level of wealth

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• Risk: exposure to events or perils that can cause financial loss

• Risk management: decisions about whether and how to protect against risk

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• Accept risk

– Feasible when likelihood of financial loss is low

– Buying insurance differs from other purchases in that there is no immediate benefit

– Remember that you do not have control over adverse events

• Insure against risk

– Premium: the cost of obtaining insurance

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• Economic impact on the decision to insure against risk

– When economic conditions are favorable, people are willing to purchase or increase insurance coverage

– When economic conditions are weak, they tend to reduce insurance

– Consider the possible danger in reducing insurance coverage

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• Types of insurance

– Many types of insurance available

 Most popular forms are property and casualty insurance, life insurance and health insurance

– Relationship between insurance companies and premiums

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EXHIBIT 11.1 Common Events That Could Cause a Financial Loss

You have a car accident in which another person in your car is injured Medical bills and liability Auto insurance

You have a car accident in which another person in the other driver’s car is

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– Underwriters: from an insurance perspective, underwriters are hired to calculate the risk of specific insurance policies, decide what policies to offer, and what premiums to charge

– Group insurance company policies for employers

 Allows a company’s employees to obtain discounts

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• Role of insurance agents and brokers

– Insurance agent: recommends insurance policies for customers

– Captive (or exclusive) insurance agent: works for one particular insurance company

– Independent insurance agent: represent many different insurance companies

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• This Web site provides information on how insurance companies are rated.

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• Auto insurance protects you from financial loss from damage or liability resulting from automobile accidents

• Cost has increased in recent years

– Personal injury attorneys

– No-fault insurance programs: do not hold a specific driver liable for causing the accident

 Idea is to reduce costs

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• Auto insurance policy provisions

– Insurance policy: contract between an insurance company and policyholder

– Auto insurance policy: specifies the coverage provided by the insurance company for a particular individual and vehicle

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• Coverage A: Liability Coverage

– Bodily injury liability coverage: protects against liability associated with injuries caused by the policyholder

– Property damage liability coverage: protects against losses that result when the policyholder damages another person’s property with his car

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EXHIBIT 11.3 Minimum Auto Insurance Liability Limits

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EXHIBIT 11.3 Minimum Auto Insurance Liability Limits

Source: Data from Insurance Information Institute.

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• Coverage C: Uninsured or Underinsured Motorist Coverage

– Uninsured motorist coverage: insures against the cost of bodily injury when an accident is caused by another driver who is not insured

– Underinsured motorist coverage: insures against bodily injury and drivers who have insufficient coverage

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– Collision insurance: insures against costs of damage to your car resulting from an accident in which the policy holder is at fault

– Comprehensive coverage: insures you against damage to your car that results from floods, theft, fire, hail, explosions, riots and various other events

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– Deductible: a set dollar amount that you are responsible for paying before any coverage is provided by your insurer

• Other provisions are available for an additional premium

• Summary of auto insurance provisions

– Contained in standard insurance policy

– Expenses incurred by auto insurance companies cover claims and lawyers’ fees

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EXHIBIT 11.4 Summary of Auto Insurance Provisions

Liability due to passengers in your car when you are at fault Bodily injury liability

Liability due to passengers in your car when you are not at

fault but driver of other car is uninsured or underinsured Uninsured/Underinsured Motorist

Financial Damages Related to the Other Car or Other Property in an Accident

Financial Damages Related to Your Car When Not in an Accident

Damage to your car as a result of theft, fire, vandalism, or other non-accident events Comprehensive

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• Characteristics of your car

– Value of car

– Repair record of your car

• Your personal characteristics

– Your driving record

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– Your location

– Your driver training

– Your school performance

– Always obtain several different quotes

– Several Web sites offer quotations

– Compare prices at renewal time

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• This Web site provides a recommendation on the amount of car insurance coverage that

is appropriate for you.

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• Contact police immediately

• Request information from the other driver(s), including insurance information

• Obtain contact information from witnesses

• Take pictures of any evidence

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• Write down details of accident

• Ask for a copy of police report

• File a claim with your insurance company immediately

• Save receipts for any expenses and submit to insurance company

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Insured Policyholder: Stephanie Spratt

Policy Number: WW77-QG22-999

Coverage Begins On: April 6 for one year

Insured Car: Honda Civic

Due Date: April 6

License Number: ZZ QQZZ Amount Due: $1,100 Drivers of Car in Your Household: One driver, age 25.

Ordinary Use of Car: Less than 10,000

miles per year.

COVERAGE

Liability

Bodily Injury ($100,000/$300,000 limit)

Property Damage ($50,000 limit)

Uninsured/Underinsured Motorist ($100,000/$300,000 limit) $210

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• Homeowner’s insurance: provides insurance in the event of property damage, theft, or personal liability relating to your home

• Covers events from fire to burglary

• Homeowner’s insurance structured in six packages, each covering different perils in different amounts

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EXHIBIT 11.7 Types of Perils Protected by Homeowner’s (HO) Insurance Policies

HO-1: Protects against fire, lightning, explosions, hail, riots, vehicles, aircraft, smoke, vandalism, theft, malicious mischief, glass breakage.

HO-2:

Protects against the events identified in HO-1, along with falling objects, the weight of ice, snow, or sleet, the collapse of buildings, overflow of water or steam, power surges, and the explosion of steam

or hot-water systems, frozen plumbing, heating units, air-conditioning systems, and domestic appliances.

HO-3:

Protects the home and any other structures on the property against all events except those that are specifically excluded by the homeowner’s policy The events that are typically not covered by this insurance are earthquakes, floods, termites, war, and nuclear accidents It may be possible to obtain additional insurance to protect against floods or earthquakes This policy also protects personal assets against the events that are listed in HO-2.

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– Cash-value policy: pays you for the value of the damaged property after considering depreciation

– Replacement-cost policy: pays you for the actual cost of replacing the damaged property

 Minimum limit—many insurers require at least 80% of replacement cost

 Financial institutions may require enough insurance to cover your mortgage

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• Other structures on property may also be covered

• Personal property is covered up to a specified amount

– Home inventory: contains detailed information about your personal property that can be used when filing a claim

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– Personal property replacement cost coverage is available

– Personal property floater: an extension of the homeowner’s insurance policy that allows you to itemize your valuables

– Home office provision may be requested or you could purchase a separate policy

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• Liability

– Included to cover any lawsuits resulting from an event occurring in your home or on your property

• Other types of provisions

– Additional living expenses

– Loss of use provisions

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• Factors that affect homeowner’s insurance premiums

– Value of insured home

– Deductible

– Degree of protection

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• Strategies to reduce your homeowner’s insurance premium

– Increase your deductible

– Improve protection

– Use one insurer for all types of insurance

– Stay with the same insurance company

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• Go to http://www.insurance.com

• This Web site provides answers to many important questions concerning homeowner insurance.

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Filing a Claim

• Contact insurance company immediately if damage occurs

• Claims adjuster estimates damage

• Present your home inventory

• Get an independent estimate

• Appeal low estimates by insurance company

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EXHIBIT 11.9 Stephanie Spratt’s Homeowner’s Insurance Policy

Coverages and Limits

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Renter’s Insurance

• Renter’s insurance: an insurance policy that covers your possessions within a house, condo, or apartment that you are renting

• Renter’s insurance policy provisions

– Specifies maximum coverage for personal assets

– Also covers liability from damages to a person on your property

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• Umbrella personal liability policy: a supplement to auto and homeowner’s insurance that provides additional personal liability coverage

– Especially important for wealthy people

– Must show proof of existing coverage

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• Key decisions about car and homeowner’s insurance for your financial plan are:

– Do you have adequate insurance to protect your wealth?

– How much insurance should you plan to have in the future?

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EXHIBIT 11.10 How Auto and Homeowner’s Insurance Fit Within Stephanie Spratt’s Financial Plan

GOALS FOR AUTO AND HOMEOWNER’S INSURANCE PLANNING

1 Maintain adequate insurance for my car and my home.

2 Determine whether I should increase my auto and homeowner’s insurance levels in the future.

ANALYSIS

Auto Protects one of my main assets

and limits my potential liabilities.

Already have insurance, but I’m considering more liability coverage.

Homeowner’s Protects my largest asset and limits my potential liabilities Recently purchased homeowner’s

insurance as a result of buying a home.

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EXHIBIT 11.10 How Auto and Homeowner’s Insurance Fit Within Stephanie Spratt’s Financial Plan

DECISIONS

Decision on Whether My Present Insurance Coverage Is Adequate:

I may increase my auto insurance liability coverage to 100/300/40 While more costly, the increased liability coverage could be worthwhile I will also consider raising my deductible, which would reduce the insurance premium.

I currently have sufficient homeowner’s insurance, but I will consider switching my policy over to my auto insurance company when the present policy expires I will receive a discount on the insurance premium as a result of having multiple insurance contracts with the same insurance company I will create a home inventory I might also consider increasing my deductible on

my home in order to pay a lower insurance premium.

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