Presentation on theme: "CHAPTER 8 Property and Motor Vehicle Insurance"— Presentation transcript:
1CHAPTER 8 Property and Motor Vehicle Insurance Insurance: The Necessary Evil
2Insurance and Risk Management Insurance is protection against possible financial lossAn insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured riskPeople purchase a policy and the insurance firm assumes a risk for a fee called the premium which the insured policyholder pays periodicallyAre insurance companies non-profit organizations? No! Never forget this.
3Risk, Peril, and HazardsRisk is uncertainty or lack of predictability, such as a loss that a person or property facesPeril is the cause of a possible loss, such as fire, windstorms, robbery, disease, or deathHazard is something that increases the likelihood of a loss, such as driving drunk, smoking in bed, or defective house wiring
4Coverage and Type of Risk Pure RiskInsurableAccidental, unintentionalNature and financial loss of the risk can be predictedCan be personal, property, or liability riskSpeculative RiskChance of loss or gainUninsurableSuch as starting a small business or gambling
5Risk ManagementRisk management is a long range, organized, planned strategy to protect your assets and familyRisk Avoidance – Don’t drive or ride in a carRisk Reduction – Ride but wear a seatbeltRisk Assumption – Drive but post a bond “self-insurance”Risk Shifting – Drive but buy insuranceMost people use a combination of these strategiesUsually without much planning or conscious forethoughtAll too often, most people are uninsured, under-insured, or they are insured for the wrong things
6Examples of Risks You Face Disability – most widely neglected risk (disability)Illness – (health insurance)Death – (life insurance)Property loss – (home and auto insurance)Physical damageLoss of usePersonal Liability – (liability insurance)You are legally responsible for another person’s losses or injuriesVicarious liability – you are responsible for the actions of another (example: parent/guardian)
7Liability and Negligence Failure to take ordinary and reasonable care – Example: Failure to remove items from a frequently used staircaseBeware the “Attractive Nuisance”Examples: Pools, ladders, appliances, carsForeseeability is a critical factor in determining what constitutes an attractive nuisance.
8Planning an Insurance Program Set your insurance goals and prioritize themDevelop a plan to reach your goalsPut your plan into actionReview your resultsTo put your risk management plan to work, ask yourself…What or who should be insured?For how much?What kind of insurance?From whom?Yet another example of our book’s sagacious pearls of financial planning wisdom.
9A More Practical Insurance Planning Program Ask yourself, “How much could we lose?”If the answer is, “Plenty!” you need insuranceFor Home or Auto, there is no question as to whether or not you need insuranceYou could lose “Plenty!” in both situationsTherefore,If you own a home, you need homeowner’s insuranceIf you own an automobile, you need automobile insurance (at least liability)In fact, it is legally required
10Homeowner’s Insurance Coverages Homeowners insurance is coverage for a place of residence and its associated financial risksBuildings and other structures, plus trees, shrubs and plantsAdditional living expensesPersonal propertyPersonal property “floater”Household inventory – take photographsEndorsements for specialized coverageFlood, earthquake, etc.Medical payments for minor injuries on your propertyPersonal liabilityMay need extra coverage for workers in the home
11Consider an Umbrella Policy Supplements basic personal liability coveragea.k.a. personal catastrophe policyAverage personal liability from homeowner’s insurance is only $100,000 to $300,000$1,000,000 or more in liability coverage is typical for umbrella policiesThat’s a whole lotta’ personal liability protectionYour home or auto insurer will also often offer you an umbrella policy.
13Personal Liability Example You are playing baseball and accidentally swing a bat into a friend’s head (Hey, it happens!)He now requires 24-hour skilled nursing careThe cost is $85,000 per year in perpetuity and risingYour homeowner’s personal liability limit is $300,000They will only pay $300,000 towards his careThe $1,000,000 umbrella policy will begin to pay for the care once the $300,000 limit is reachedGiven the cost of health care, personal liability awards can be enormous.
14Items Covered by Renter’s Insurance Personal property loss or damagePersonal liabilityAdditional living expensesA landlord’s insurance usually won’t cover personal belongingsOnly 40% of renters have renter’s insurance
15Home Insurance Policy Forms Basic form (HO-1)Broad form (HO-2)Special form (HO-3)Tenant’s form (HO-4)Comprehensive form (HO-5)Condominium form (HO-6)Modified coverage form (HO-8)Your lender is going to make you buy the HO-5 Comprehensive Form (HO-6 for condos)In addition, many homeowner policies cover such items as credit card fraud, check forgery, temporary repairs and fire department charges in areas with such fees.
16How Much Coverage Do You Need? Full coverage versus a coinsurance clauseWhat would it cost to replace your home?What is the likely “worst case” loss?Have sufficient liability coverage (umbrella policy)Include protection for specific items such as collections, cameras, and jewelry – “floaters”Determine the value of the contents of your homeActual cash value – original cost less depreciationReplacement cost – repair or replace with new itemYou want replacement cost coverage!
17The Coinsurance Clause Requires the homeowner to pay for part of the losses if the property is not insured for (typically) 80% of the replacement valueExample: $40,000 loss on a $200,000 homeHome worth $200,000 but only covered for $150,000$200,000 * 80% = $160,000 – Insufficient coverage!The homeowner was not in complianceThe home was “underinsured”The insurance company will only pay…$40,000 loss * ($150,000 / $200,000) = $30,000The homeowner must pay the extra $10,000
18Factors That Affect Home Insurance Costs Location of residenceHow close is the fire department?Type and age of the structureAmount of coverage and deductiblesDiscounts – alarm system, smoke detector, if you insure your car with the same companyCompany differencesCompare costs and coverages at sites such as insure.com, insweb.com, lifeinsure.comCustomer satisfaction information is available atClaims history – the number and type of claims
19Coverage Example 1Your home insurance policy has a $500 deductible. Your beautiful, towering eucalyptus tree drops a huge branch onto your roof and causes $4,500 worth of damage. What amount, if any, would be covered by your insurance?$500$4,000$4,500The insurance company would not pay anything.The correct answer is (B). You must pay the deductible before the insurance company will pay anything towards a claim.
20Coverage Example 2Your homeowner’s policy has replacement coverage for personal property. Guns and jewelry have a $1,000 maximum. Ignoring any deductible, if a $2,000 gun, a $3,000 bracelet, and a $2,000 computer were stolen from your home, what amount, if any, would be covered by your insurance?$4,000$7,000$1,000The insurance company would not pay anything.The correct answer is (A). $1,000 each for the gun and bracelet and $2,000 for the computer. (Note: If an item is not specifically excluded or limited, then it is fully covered.)
21Coverage Example 3Your homeowner’s policy has actual cash value coverage for personal property. Ignoring any deductible, if a $2,000 computer with a 4-year life span were stolen from your home after 3 years, what amount, if any, would be covered by your insurance?$500$1,000$1,500$2,000The correct answer is (A). $2,000 divided by 4 years = $500 per year. After 3 years, the item now has an actual cash value of only $500. ($2,000 minus $500 per year for 3 years)
22Home Insurance Availability For decades, availability was not an issueEvery homeowner could easily find insuranceRecently, insurers have become very picky about who they will insureInsurance companies are not only using claims historyThey are now using credit reports (?)And data from other homes in your areaAlso, some insurance companies are asking homeowners to effect expensive repairs before they will provide insurance
23What About Earthquake Insurance? All insurance companies that sell homeowner’s insurance must also offer earthquake coverageMinimum 10% Deductible! Even 15% to 25%On a $300,000 home, you pay for the first $30,000, $60,000 or even $75,000 of damageSurprise! The amount of damage to a $300,000 home in an earthquake is usually much less than $30,000Much depends on the type of home you ownWood frame versus brick; older versus newerAnd if a major earthquake did occur, the insurance companies would just claim bankruptcy!Bottom Line: We do not have itInstead, consider using the money you would spend on earthquake insurance to “earthquake-proof” your home
24Automobile Insurance Coverages Financial responsibility lawRequires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accidentOver 45 states have compulsory automobile insurance lawsCalifornia: Minimum 15/30/5Woefully inadequate insurance amounts!Get 100/300/50 at the very least!“But what do these numbers mean?”Hold on a minute…Have not changed since the 1950’s!
25Motor Vehicle Insurance Coverage Bodily injury liabilityBodily injury liability covers the risk of financial loss due to legal expenses, medical expenses, lost wages and other expenses associated with injuries caused by an accident for which you were responsibleMedical payments covers the cost of health care for persons injured in your automobile, including yourselfAs with personal liability, the compensatory awards for bodily injury liability can be enormous. Not only could you be forced to pay medical bills, you could be liable for a person’s missed wages.
26Motor Vehicle Insurance Coverage (continued)Property damage liability covers damage to another person’s car when you are at fault – It also includes damage to such things as street signs and buildingsFor example, during a rainstorm you might accidentally slide your vehicle into a neighbor’s mailbox or treeReview: In the event that the bodily injury or property damage liability limits are insufficient to cover the liability incurred, an umbrella liability policy will “kick in” and pay above and beyond those limits.
28Automobile Liability Example 1 Les Doulunche was judged at fault in an accident. The three occupants of the vehicle he hit were awarded damages of $30,000, $10,000, and $5,000. Les has 25/50/10 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Les?$5,000$10,000$15,000None. The total amount would be covered.The correct answer is (A). $25,000 is the most that would be paid to any one person.
29Automobile Liability Example 2 Mustaffa Rongnumba was judged at fault in an accident. The two occupants of the vehicle he hit were awarded damages of $130,000 and $70,000. Mustaffa had 100/300/50 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Mustaffa?$15,000$20,000$30,000None. The total amount would be covered.The correct answer is (C). $100,000 is the most that would be paid to any one person.
30Automobile Liability Example 3 Sydney First-Rowe was judged at fault in an accident. The four pedestrians he hit were awarded damages of $240,000, $200,000, $60,000 and $40,000. Sydney had 250/500/100 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Sydney?$20,000$40,000$60,000None. The total amount would be covered.The correct answer is (B). $500,000 is the most that would be paid to all persons involved.
31Automobile Liability Example 4 C. S. Verdad was judged at fault in an accident. He caused $45,000 worth of damages to a person's home. Señor Verdad had 50/100/25 liability coverage. What amount, if any, would not be covered by his insurance and would be expected to be paid by Señor Verdad?$20,000$40,000$60,000None. The total amount would be covered.The correct answer is (A). $25,000 is the limit for property liability.
32Okay, ‘fess up!How many of you know the limits on your automobile insurance policy?I know them!I have no idea.I think I knew what they were when I signed up but I can’t remember them now.
33How Much Coverage Do You Have? If you do know the limits on your automobile insurance policy, what are they?The minimum: 15/30/5 (or just a bit above)Maybe they are 50/100/25Somewhere around 100/250/50The maximum: 250/500/100 or higher25/50/10 is popular and would not even be enough property damage if you smashed into a parked new car at 10 mph!
34“How Much Coverage Do I Need?” Bodily Injury Liability Coverage$100,000/$300,000 is recommended for bodily injury liability, with an additional $1,000,000 or more umbrella liability policy recommendedProperty Damage Liability Coverage$50,000-$100,000 is usually suggested for property damage liabilityWe have 250/500/250Get the maximum – It’s not much more
35Motor Vehicle Insurance Coverage (continued)Uninsured motoristPays for the cost of injuries if your vehicle is hit by a person without insurance – However, it does not cover property damagesUnderinsured motoristPays 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 carHow many vehicles on the road are uninsured?I am not going to dare to ask you if you are uninsured!
36No-Fault Liability Insurance Each driver collects from their own insurance companyMedical expenses, lost wages, related injury costsIntended to provide fast and smooth methods of paying for damages without taking the legal action frequently necessary to determine faultHas not always lived up to its expectationsSystems vary from state-to-stateWhen you enter a state that has no-fault, your Calif insurance automatically becomes no-fault
37Collision CoverageWhen your car is in an accident, collision insurance pays for damage to your automobile, regardless of who is at faultHowever, if you are not at fault, the insurance company will try and collect from the other driver’s property damage liability first
38Comprehensive Physical Damage Covers damage to your vehicle that is not caused by a collision, such as...FireTheftVandalismGlass breakageHail, sand, or wind stormYour car rolls downhill into a treeWhy isn’t this covered under collision? My insurance company said it was.Comprehensive is now also being referred to as “non-collision” by some insurance companies.
39Auto Insurance Premium Factors Automobile typeYear, make and modelRating territoryAccident, theft, and vandalism rates in the area where you liveDriver classificationAge, sex, driving record, marital status, credit history, professional or group membership, and driving habits (how close to work, etc.)Once you get your driver’s license, the clock starts. After three years, your premiums go down substantially (providing you have been a decent driver). After you turn 25, they go down again.
40Legal Discrimination?Because of the past driving records of young adults, the insurance companies are justified in charging the rates they do.Strongly AgreeAgreeDisagreeStrongly Disagree
41Now How Do You Feel?What percentage of 16- to 19-year-olds are expected to have at least one accident within 3 years?25%50%75%100%The correct answer is (D). That is the average. Some have more than one!
42Reducing Automobile Insurance Premiums Find out how much it will cost to insure a car before you buy itCompare companies –The differences in prices are significantHave larger deductiblesLook for discountsEstablish and maintain a good driving recordNon-smoker – professional or group discountsInstall security devices such as a car alarmIf you have more than one vehicle, insure them both with the same company
43Your C.L.U.E. ReportA company called LexisNexis keeps track of personal property and automobile claims that you makeThey are called C.L.U.E. reportsComprehensive Loss Underwriting ExchangeC.L.U.E. Personal Property Loss ReportC.L.U.E. Auto Loss ReportOne free each of both reports every yearhttps://personalreports.lexisnexis.com/fact_act_claims_bundle/landing.jspSimilar to credit reportsUsed by insurance companies to rate your riskPlease no jokes about “getting a clue.”
44Bottom Line on Home & Car Insurance Get Sufficient CoverageBOHICAKeep your back to the wall when you deal with the insurance agents