1. Chapter 20 Life, Fire, and Auto Insurance McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2. 20-2 1. Explain the types of life insurance; calculate life insurance premiums 2. Explain and calculate cash value and other nonforfeiture options Life, Fire, and Auto Insurance #20 Learning Unit Objectives Life Insurance LU20.1

3. 20-3 1. Explain and calculate premiums for fire insurance of buildings and their contents 2. Calculate refunds when the insured and the insurance company cancel fire insurance 3. Explain and calculate insurance loss when coinsurance is not met Life, Fire, and Auto Insurance #20 Learning Unit Objectives Fire Insurance LU20.2

4. 20-4 1. Explain and calculate the cost of auto insurance Life, Fire, and Auto Insurance #20 Learning Unit Objectives Auto Insurance LU20.3

5. 20-5 Face amount - The amount received (proceeds) upon the death of the insured Insured - The policyholder receiving coverage Premium - Periodic payments you make for the cost of the insurance (determined by actuaries) Life Insurance Beneficiary - The person receiving the insurance proceeds at the death of the insured

6. 20-6 Step 2. Divide the amount of coverage by $1,000 and multiply the answer by the premium cost per $1,000 Step 1. Look up the age of the insured and the type of insurance in Table 20-1 (for females subtract 3 years). This gives the premium cost per $1,000 Steps in Calculating Annual Life Insurance Premiums

7. 20-7 Table 20.1 - Life Insurance Rates

8. 20-8 Straight Life (Ordinary Life) -- Provides permanent protection. The insured pays the same premium each year or until death. Has a built in cash savings feature. $200 x $14.54 = $2,908 Term Insurance -- Pays face amount only if you die within the period of the insurance. The cheapest coverage. $200 x $3.52 = $704 Calculating Insurance Premiums Bob Brady, age 40, wants to purchase a 5 year $200,000 insurance policy. Determine her annual premium $200,000 (Coverage) = 200 1,000 Step 1 Step 2

9. 20-9 Universal Life - A whole life insurance plan with flexible premium schedules and death benefits. Greater risk to the holder because premiums are subject to interest rate fluctuations Twenty-Year Endowment -- Most expensive. Combination of term and cash value. After 20 years your protection ends and you receive the face value of the policy. $200 x $33.36 = $6,672 Calculating Insurance Premiums Twenty-Payment Life -- Similar to straight life but insurer pays premiums for only the first 20 years. $200 x $18.61 = $3,722 Step 2

10. 20-10 Nonforfeiture Options - Figure 20.1 The value of an insurance policy that has built up cash value and provides an opportunity for insurance coverage without additional premiums. Option 1: Cash value (cash surrender value) a. Receive cash value of policy. b. Policy is terminated. The longer the policy has been in effect the higher the cash value because more premiums have been paid in. Option 2: Reduced paid-up insurance a. Cash value buys protection without paying new premiums. b. Face amount of policy is related to cash value buildup and age of insured. The face amount is less than original policy. c. Policy continues for life (at a reduced face amount). Option 3: Extended term insurance a. Original face amount of policy continues for a certain period of time. b. Length of policy depends on cash value built up and on insured’s age. c. This option results automatically if policyholder doesn’t pay premiums and fails to elect another option.

11. 20-11 Table 20.2 - Nonforfeiture Options based on $1,000 Face Value

12. 20-12 Nonforfeiture Options Assume Bob Brady purchased a 20-payment life policy and decided to stop the policy after it was in force for 10 years. What would be his options? 1. Cash Value $200,000 = 200 x $148 = $29,600 $1,000 3. Extended term insurance Continue this $200,000 policy for 20 years and 165 days 2. Reduce paid-up insurance $200,000 = 200 x $371 = $74,200 $1,000

13. 20-13 Fire Insurance Table 20.3 - Fire insurance rates per $100 of coverage Classification of building Class A Class B Rating of area Building Contents Building Contents 1.28.35.41.54 2.33.47.50.60 3.41.50.61.65

14. 20-14 Calculating Fire Insurance Premiums Premium = Insured value x Rate $100 Calculate the premium of a building with an insured value of $190,000 and a Class B, Area No. 2 rating. Insured contents are $80,000. Premium = $190,000 = 1,900 x $.50 = $950 $100 Premium = $80,000 = 800 x $.60 = $480 $100 Total Premium = $950 + 480 = 1,430

15. 20-15 Table 20.4 - Fire Insurance short-rate and cancellation table Time policy is Percent of annual rate Time policy is Percent of annual rate in force to be chargedin force to be charged Days 5 8%Months 552% 1010 661 20 15 7 67 25 17 8 74 Months 119 9 81 227 10 87 3 35 1196 444 12 100

16. 20-16 Canceling Fire Insurance (Refunds) Short-rate premium = Annual premium x Short rate Calculate the refund if the policy is canceled after 7 months Policyholder Cancels Short rate Premium = $1430 x.67 = $958.10 Refund = $1430 - $958.10 = $471.90 Refund = Annual premium - Short rate premium Insurer Cancels Charge = $1,430 x 7 = $834.17 12 Refund = $1,430 - $834.17 = $595.83 Months Elapsed

17. 20-17 Step 2. Multiply the fraction by the amount of loss (up to the face value of the policy) Step 1. Set up a fraction. The numerator is the actual amount of the insurance carried on the property. The denominator is the amount of insurance you should be carrying on the property to meet coinsurance (80% times the replacement value) Calculating What Insurance Company Pays with Coinsurance Clause The insured and the insurer share the risk. Encourages property owners to purchase adequate coverage

18. 20-18 $60,000 x $20,000 = $15,000 $80,000 Coinsurance Suppose we carry $60,000 of fire insurance on property that will cost $100,000 to replace. The coinsurance clause is 80%. If we suffer a loss of $20,000, how much will the insurance company pay? What you should have carried $100,000 x.80 Coverage Loss

19. 20-19 Auto Insurance Liability Insurance (Compulsory Insurance) - Covers any physical damages that you inflict on others or their property. (Mandatory) Bodily injury - injury or death to people in passenger car or other cars, etc. Property damage - injury to other someone else’s property, i.e. autos, trees, buildings, hydrants, etc.

20. 20-20 Auto Insurance Collision - provides protection against damages to your car caused by a moving vehicle. Covers the cost of repairs less the deductible. Comprehensive - covers damages resulting from theft, fire, falling objects, etc.

21. 20-21 Problem Calculate the annual auto premium for Shirley who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Shirley wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible 4.Comprehensive, $200 deductible 5.Substitute transportation 6.Towing & Labor

22. 20-22 Table 20.5 - Compulsory insurance Bodily injury to othersDamage to someone else’s property Class10/20Class5M* 10 $ 5510$129 17 9817 160 18 8018 160 20 11620 186 Explanation of 10/20 and 5 10205 Maximum paid toMaximum paid forMaximum paid for one person pertotal bodilyproperty damage accident for injury perper accident bodily injuryaccident *M means thousands.

23. 20-23 Calculating Premium and Optional Insurance Coverage Table 20.6 Bodily injury Table 20.7 Damage to someone else’s property

24. 20-24 Calculating Premium: Collision - Table 20.8

25. 20-25 Calculating Premium: Comprehensive – Table 20.9 Table 20.10 Transportation and Towing Substitute transportation$16 Towing and labor 4

26. 20-26 Problem Calculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Julie wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible 4.Comprehensive, $200 deductible 5.Substitute transportation 6.Towing & Labor Compulsory Bodily$ 98(Table 20.5) Property$160(Table 20.5) Options Bodily$228(Table 20.6) Property$168(Table 20.7) Collision$191(Table 20.8) ($148 + $43) Comprehensive$ 56(Table 20.9) ($52 + 4) Substitute trans. 16 Towing & Labor 4 Total annual premium - $921

27. 20-27 Problem 20-14: $1,547 x 0.35 = $541.45 $1,547 - $541.45 = $1,005.55 refund

28. 20-28 Problem 20-17: $300,000 $1,000 = 300 x $2.67 = $801 No cash value for term insurance.

29. 20-29 Problem 20-21: Class 18 operator Compulsory, 10/20/5 $ 240 ($80 + $160) Optional Bodily injury, 500/1,000 251 Property damage, 50M 168 Collision, $200 deductible 280 ($264 + $16) Comprehensive,$200 deductible 161 ($157 + $4) Total Annual Premium $1,100

30. 20-30 Problem 20-22: $100,000 $100 = 1,000 x $.66 = $660 Cost of premium =.96 x $660 = $633.60 Refund =.04 x $660 = $26.40

31. 20-31 Problem 20-23: $95,000 $100 = 950 x.59 = $560.50 8/12 = 2/3 x $560.50 = $373.67

32. 20-32 Problem 20-26: Insurance company paysRusty pays Property damage $ 3,600 $ 300 deductible Collision ($900 - $300) 600 5,000 bodily Bodily 10,000 7,000 $21,200 $5,300