2. Life, Fire, and Auto Insurance
Chapter 20
Life, Fire, and Auto Insurance
McGraw-Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

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

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

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

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

7. Steps in Calculating Annual Life Insurance Premiums
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

8. Table 20.1 - Life Insurance Rates

9. Calculating Insurance Premiums
Monica Monts, age 31, wants to purchase a 5 year $500,000 insurance policy. Determine her annual premium
Term Insurance -- Pays face amount only if you die within the period of the the insurance. The cheapest coverage. $500 x $1.86 = $930
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. $500 x $8.08 = $4,040

10. Calculating Insurance Premiums
Twenty-Payment Life -- Similar to straight life but insurer pays premiums for only the first 20 years. $500 x $11.12 = $5,560
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. $500 x $19.12 = $9,560
Universal Life - A whole life insurance plan with flexible premium schedules and death benefits. Great risk because premiums are subject to interest rate fluctuations

11. 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.

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

13. Nonforfeiture Options
Assume Monica purchased a 20-payment life policy and decided to stop the policy after it was in force for 10 years. What would be her options?
1. Cash Value
$500,000 = 500 x $186 = $93, $1,000
2. Reduce paid-up insurance
$500,000 = 500 x $521 = $260, $1,000
3. Extended term insurance
Continue this $500,000 policy for 28 years and 195 days

14. 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

15. Calculating Fire Insurance Premiums
Premium = Insured value x Rate
$100
Calculate the premium of a building with an insured value of $100,000 and a Class A, Area No. 1 rating. Insured contents are $40,000.
Premium = $100,000 = 1,000 x $.28 = $280
$100
Premium = $40,000 = 400 x $.35 = $140
Total Premium = $420

16. 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 charged in force to be charged
Days % Months %
Months

17. Calculating Fire Insurance Refunds
Short-rate premium = Annual premium x Short rate
Refund = Annual premium - Short rate premium
Calculate the refund if the policy is canceled after 6 months
Policyholder Cancels
Short rate Premium = $420 x .61 = $256.20
Refund = $420 - $ = $163.80
Insurer Cancels
Charge = $420 x 6 = $210 12
Refund = $420 - $210 = $210
Months Elapsed

18. Calculating What Insurance Company Pays with Coinsurance Clause
The insured and the insurer share the risk. Encourages property owners to purchase adequate coverage
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)

19. What you should have carried
Coinsurance
Suppose we carry $100,000 of fire insurance on property that will cost $150,000 to replace. If we suffer a loss of $30,000, how much will the insurance company pay?
Coverage
$100,000 x $30,000 = $25,000
$120,000
What you should have carried
$150,000 x .80
Loss

20. Auto Insurance
Liability 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.

21. 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.

22. Table 20.5 - Compulsory insurance
Bodily injury to others Damage to someone else’s property
Class 10/20 Class 5M*
$ $129
Explanation of 10/20 and 5
Maximum paid to Maximum paid for Maximum paid for
one person per total bodily property damage
accident for injury per per accident
bodily injury accident
*M means thousands.

23. Calculating Premium and Optional Coverage: Liability
Table 20.6 Bodily injury
Table 20.7 Damage to someone else’s property

24. Calculating Premium: Collision - Table 20.8

25. Calculating Premium: Comprehensive - Table 20.9

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 2 and symbol 6. Her state has compulsory insurance, and Julie wants to add the following options:
1. Bodily injury, 250/500
2. Property damage 10M
3. Collision, $200 deductible
4. Comprehensive, $200 deductible
Compulsory
Bodily $ 98 (Table 20.5)
Property $160 (Table 20.5)
Options
Bodily $228 (Table 20.6)
Property $164 (Table 20.7)
Collision $192 (Table 20.8)
($172 + $20)
Comprehensive $ 79 (Table 20.9)
($75 + 4)
Total annual premium - $921