Insurance
Protection against possible financial loss
Pooling Risks
Principle on which insurance is based
=policyholders pay a small premium into a central pool that eventually helps to cover the small policyholders that actually need it
Insurer/Company
Agrees to assume financial responsibility for losses that may result from an insured risk
Policy
Contract between the insurer and the consumer
Insurer agrees to assume the risk for a fee
Premium
The fee the policyholder pays to place the risk upon the insurer
Risk
Uncertainty or lack of predictability
Property or insured person
Peril
Cause of a possible loss
Causes someone to take out insurance
Ex: robbery, accidents, premature death, fire
Hazard
Increases the likelihood of loss through some peril
Ex: defective house wiring is a hazard that increases the likelihood of the peril fire
Personal Risk
Uncertainties surrounding loss of income or life due to premature death, illness, disability, old age, unemployment
Property Risk
Uncertainties of losses to personal or real property due to fire, accidents, theft, other hazards
Liability Risk
Possible losses due to negligence
Pure Risk
Personal, Property, and Liability
=Insurable risk
Accidental risks for which the nature and financial cost of the loss can be predicted
Speculative risk
Carries a chance of either loss or gain
Not insurable (opposite of pure)
Insurance is not the only way to...
Deal with risk
Risk Avoidance
Avoid risk by not doing the risky action
You can avoid car accidents by not driving or riding in a car
Not possible to avoid all risks
Risk Reduction
Taking precautions to reduce risk
Ex: wearing a seat belt
Risk Assumption
Taking on responsibility for the loss or injury that may result from a risk
Self-insurance
Establishing a monetary fund to cover the cost of a loss
Risk Assumption
Risk Shifting
Shift = transfer to an insurance company
Personal insurance program
1. Set insurance goals
2. Develop a plan to reach goals
3. Put plan into action
4. Check results
Step 1
Cover basic risks: illness, premature death, accident, unemployment, fire
Step 4
Needs of individual are different than needs of family/group
Insurance can be viewed as...
An investment
Two types of property risk
Physical damage: fire, wind, water
Loss of use: robbery, vandalism
Liability
Legal responsibility for the financial cost of another person's losses or injuries
Liability is caused by...
negligence
Strict liability
when a person is held responsible for intentional or uninentional actions
Vicarious liability
when a person is held responsible for the actions of another person
Homeowner's insurance
Coverage for your residential property of hazards
Additional living expense coverage
Pays for the cost of living in a temporary location (max 6-9 months)
Personal property coverage
Insurance that covers belongings (up to 75% of the cost)
Some items have limits
Personal property floater
covers the damage or loss of a specific item of high value...covers it also while it is away from home
Household inventory
A list of personal belongings with purchase dates and cost information
Liability insurance
Also covers legal fees
Not all who enter your property are covered
Umbrella policy
#NAME?
Extended liability
With large net worth, worth $1 million or more
Medical payments coverage
Pays the cost of minor accidental injuries on your property...does not cover the people living inside the home
Homeowner's insurance does not cover...
floods and earthquakes...need own policy/endorsement
Renter's insurance
Important insurance for college students
Renters are not covered by the owner's property insurance
Home insurance policy forms
-Special form (HO3) covers lots of perils
-Tenants form (HO4) covers personal belongings
-Comprehensive form (HO5) HO3 + endorsements
-Condominium form (HO6) personal belongings and additions to living unit
-Country home form (HO7) non-farm business rural
Mobile homes
More prone to fire and wind damage
How much coverage do you need?
Protection should be based on the amount needed to rebuild or repair your house (it should rise with inflation)
Coinsurance clause
Past policy that said the building could be insured for at least 80% of the replacement value
The homeowner would have to pay for part of the losses if the property was not insured for the specified percentage
Actual Cash Value method
One of the ways insurance companies base claim settlements
The payment your receive is based on the current replacement cost of a damaged or lost item
Take the current cost of the item, subtract depreciation from it (480 - 5yrs = 300. =60/yr)
Replacement value method
One of the ways insurance companies base claim settlements
You receive the full cost of repairing or replacing a damaged or lost item (depreciation not considered)
Costs about 10-20% more than ACV coverage
Factors that affect home insurance costs
Location of home: more claims filed = more expensive
Type of structure: sturdy = less expensive, but more expensive for earthquake
Increased premium = decreased deductible
How to reduce home insurance costs
Put in safety features (smoke alarm, fire extinguisher, "claim free")
Financial responsibility law
state legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by a car accident
Two categories of main auto coverages
Bodily injury and Property damage
(others include wage loss, towing, death, car rental)
Bodily injury liability
Covers risk of financial loss due to legal expenses, medical expenses, lost wages, and others, when YOU are responsible for the accident
Split limit (50/100/50): 1st number = limit for claims that can be paid to one person. 2nd number = limit for each acc
Bodily injury medical payments
Covers the health care for people who were injured in YOUR vehicle
Bodily injury uninsured motorist protection
Covers the cost of injuries to your and your family if the accident was caused by someone without insurance
Bodily injury no-fault insurance
Drivers collect compensation from their own insurance companies
No legal action required
Difficult because they vary from state to state
Property damage liability
Protects against financial loss (other vehicles and other property outside the vehicle)
Last number in the 1/2/3 coverage numbers
Property damage collision
-Pays for damage regardless of who's at fault
(if it was not your fault, your company might try to get charges from the person at fault's company first)
-Subrogation = the insurance company's right to recover the amount it pays for the loss from the perso
Property damage comprehensive
Covers risks such as natural disasters and vandalism
Only applies to your car and claims are paid without considering whose fault it was
Other auto insurance coverages
wage loss, towing and emergency road service
Amount of auto coverage
increased cost of vehicle, legal fees
Auto premium factors
Type of car: expensive parts = expensive rates
Rating territory = place of residence used to determine premium (bigger city = bigger premium)
Driver classification: based on age, sex, marital status, driving record (very young and very old = higher rates)
Premium discounts
Establish and maintain a safe driving record
Good grades in school
Installing safety features
Increase deductible = decreased premium
Carpool to and from work