Automobile and Home Insurance Chapter 14

Insurance Basics How Insurance Works Risk Management Shared Risk Risk Management means limiting possible financial losses to amounts you can handle. To manage your risk of financial loss from illness, injury, or damage, you can buy insurance. In exchange for this protection, you make a regular payment to the insurance company called a premium. Shared Risk The insurance company diversifies, not the customer. They sell to thousands of people.

How Insurance Works When you buy insurance, you sign a legal contract, called a policy. You become the policyholder. The policy spells out the specific loss that it covers and the specific loss that covers and the financial compensation the company will provide if you suffer that loss.

How Insurance Works If you do have a loss covered by the policy, you file a claim, a formal request for payment from the insurance company. The insurance company sells to many people. This concept is called shared risk. Premiums and Statistics Insurance companies use statistics from the past to predict how many losses are likely to occur within any large group of people.

How Insurance Works Statistics can also help insurance companies estimate how much they will have to pay to reimburse particular types of losses. What Insurance Protects Insurance is designed to restore your financial position to where it was before the loss-not allow you profit from the loss.

How Insurance Works To insure something you must have an insurable interest in the item. That is, it must be something of value that, if lost, would cause you financial loss. Determining to Value of Insurable Interest. Before you can insure your property, its value must be measured in financial terms. An appraisal is an expert’s determination of the value of a piece of property.

How Insurance Works Home insurance does not automatically cover some particularly valuable items, such as a diamond ring. To insure it, you would add a rider to your policy. A rider is a special addition to an insurance policy that covers a specific type of loss.

How Insurance Works Your life and health don’t carry a price tag the same way that property does. So life and health insurance is sold in different amount. You can choose the amount of protection you want. The greater the amount of coverage you choose, the higher the premiums.

How Insurance Works Your life insurance also depend on your life expectancy. Life expectancy is an estimate of the average number of years remaining in peoples lives, based on their gender and current age and health.

The Insurance Trade-Off Insurance should not be to protect you from any loss. So when you shop for insurance, decide how much of a loss you can reasonably cover yourself without too much financial hardship. For example, if you agree to pay the first $1000 of your medical insurance each year, then your premiums will be lowered than if you agree to pay the first $500.

Role of Insurance in the Economy Insurance provides security. Many business activities would not be possible without insurance. A bank wouldn’t lend you money to buy a home if you didn’t insure the home. Doctor’s usually don’t practice without insurance. One lawsuit could ruin them. Our economic system relies on sharing the risk through insurance.

Types of Insurance Property Insurance Insurance that protects you from financial loss when things you own are stolen, damaged, or destroyed. This is for cars, homes, and valuable possessions Designed two ways It pays based on items market value It pays based on items replacement value

Types of Insurance Property Insurance Liability Insurance Market Value is the amount an item is worth now. Replacement value is the cost of replacing the item. Liability Insurance Sometimes your actions cause losses to other people This insurance protects you from losses that you caused others.

Types of Insurance Personal Insurance Insurance that protects you, your spouse, and your children against financial loss due to illness, disability, or death.

How to Choose Automobile Insurance Types of coverage Bodily Injury Liability Coverage The amount of coverage is typically described by two numbers The might be shown as $250,000/$500,000 or 250/500 This means you policy will pay up to a maximum of $250,000 to any one person in a given accident. The policy will pay up to $500,000 for all injuries to other people in a given accident.

How to Choose Automobile Insurance Types of Coverage Property damage liability coverage It pays for damage you caused to another person’s property The policy may state this number after the bodily injury numbers as 250/500/50 The company will pay $50,000 for property damage.

How to Choose Automobile Insurance Types of coverage Medical payments coverage It pays medical and funeral expenses for you, your family members, and other passengers in your car because of injuries sustained in an accident-no matter who caused the accident. Uninsured/underinsured motorist coverage Pays medical and damage expenses for you and your passengers caused by a driver without insurance or with to little insurance to cover loss.

How to Choose Automobile Insurance Types of Coverage Comprehensive coverage Pays for damage to your car caused by something other than a collision. Examples: Earthquakes Fire Wind Hail Floods Vandalized or stolen

How to Choose Automobile Insurance Types of coverage Collision Pays for damage to your car caused by colliding with another car object, such as a tree or fire hydrant. This is usually most expensive Comprehensive and collision coverage often carry a deductible. A deductible is the amount you pay before the insurance company pays anything.

How to Choose Automobile Insurance Types of coverage Other Coverage Rental Car Towing Gap Insurance All these will increase your premium.

In September of last year, Donna Redman, a college student from Austin, Texas, caused a serious accident when she failed to yield to an approaching vehicle while attempting to make a left turn. Donna suffered a broken arm and facial cuts, resulting in medical costs of $ 1254. Her passenger, Philip Windsor, was seriously injured with head and neck wounds requiring surgery, a two- week hospital stay, and rehabilitation. Philip’s injuries generated medical costs of $ 17,650. The driver of the other car, John Monk, suffered serious back and internal injuries and facial burns that resulted in some disfigurement. His medical care costs totaled $ 22,948. His passenger, Annette Monk, suffered cuts and bruises requiring minor medical care at a cost of $ 423. Both cars were completely destroyed in the accident. Donna’s 10- year- old Buick was valued at $ 2150. John’s Mazda Miata was valued at $ 19,350. The force of the impact spun John’s car around, causing it to destroy a traffic- signal control box ( valued at $ 3650).

How Much Insurance Should You Buy All States set a minimum amount of liability insurance that you must buy. For a few states, this amount is as low as 10/20/5. The least you should consider buying is 50/100/25. Liability and Medical Paying for basic liability coverage is expensive. Increasing this to a larger amount does not cost that much

VA Requirements Bodily injury/death of one person $25,000 Bodily injury/death of two or more persons $50,000 Property damage $20,000

How Much Insurance Should You Buy Collision and Comprehensive The collision and comprehensive insurance depends on the value of the car and the size of the deductible you choose. If you have an old car collision may not even be worth buying

Cost of Automobile Insurance Causes of Increasing Insurance Cost One reason for the growing costs is that cars are more complicated today. New technology More expensive to repair Medical technology also adds to the cost of automobile insurance. Also, today, injured Americans are more likely to sue than in the past.

Factors Affecting Your Premium From an insurance company’s point of view, risk means the chance that the policyholder will have a loss that requires reimbursement. Driver Classification Age Gender Marital Status

Factors Affecting Your Premium Rating Territory Statistics show that more claims come from some locations than others. Driving Record Your driving record is an official list of your accidents and traffic violations. Points are added to your record More points higher premium

Factors Affecting Your Premium You can get dropped from your company and find that no other company will insure you. Because state law require all drivers to carry insurance the state will assign you to a company. You become an assigned risk, you will have to pay very high premiums.

Factors Affecting Your Premium Type of car Some cars are more expensive than others Some cars are stolen more than others Claims History The more claims you make on your policy, the more you cost the company, so your premiums will be higher.

Factors Affecting Your Premium You can reduce your premiums: Good Driving Record Good Grades Increase the size of your deductibles Living outside of city in safe neighborhoods Take a driver education course

Home Insurance Coverage How to Choose Home Insurance Homeowners Insurance provides personal property and liability protection for your home. Types of Coverage Personal Property The personal property portion of homeowner's insurance covers damage to or loss of your house and its contents

How to Choose Home Insurance Types of Coverage Exclusions Some items are specifically excluded or are not covered for their full value. Examples: stamp or coin collections, silverware, laptop computers You may have to buy special riders to cover these items Liability Covers bodily injury or damage you cause to others.

How to Choose Home Insurance Umbrella Policy An umbrella policy provides additional liability protection beyond that included in an homeowners policy. A $1,000,000 dollar umbrella policy typically cost less that $500 a year. Special Risk Coverage Hurricanes Floods Earthquakes

Basic Forms of Homeowner’s Insurance Renter’s Insurance This provides about the same property and liability coverage as a homeowner’s policy. It is not expensive – typically $200 to $300 per year. How Much Insurance Should You Buy? 80% Rule Buys at least 80% coverage of your houses replacement

Cost of Homeowner’s Insurance Factors Affecting Your Premium Location Age of House Distance to a Fire Station Reduce Your Premium Increase Your Deductible Upgrade Your Home Install Smoke Detectors Install More Security Special Discounts – Non Smokers

Providers and the Claim Process How to Choose an Insurance Provider Insurance is a service How to Choose and Agent Two Types Work for one agency Independent agent – work for many insurance offices Ask Friends Ask Family Their income is based on how much they sell

How to choose an Insurance Company Check Financial Health Best Insurance Reports in most libraries A.M. Best Company Web Site for a fee Standard & Poor’s and Duff & Phelps offer ratings online for free. Check speed and ease of claims process Check Consumer Reports

How to File a Claim Homeowners Claim Car Insurance Home Inventory Call Insurance Agent to report loss Agent will send an adjuster to assess the damage The check will be written to you to pay the contractor. Car Insurance No-fault Insurance. Who pays?

Insurance Fraud Studies show that 20 percent of insurance claims involve some amount of fraud. All this cost is passed on to the customers causing insurance premiums to go up.