Chapter 10

Beverly and Kyle Nelson currently insure their cars with separate companies, paying $650 and $575 a year. If they insured both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over 10 years based on an annual interest rate of 6 percent? Use Exhibit 1-B.

Annual savings = Annual premium × Discount rate = ($650 + 575) × 0.10 = $122.50 FV = Annual savings × Future value annuity factor = $122.50 × 13.181 = $1,614.67

What would it cost an insurance company to replace a family's personal property that originally cost $42,000? The replacement costs for the items have increased 15 percent.

Replacement cost = Original cost × (1 + Price increase) = $42,000 × (1 + .15) = $48,300

Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered with additional insurance. If $3,800 worth of jewelry and $2,800 worth of silverware were stolen from a family, what amount of the claim would not be covered by insurance?

The insurance company will pay the greater of the claim amount for each item or the insurance coverage limit. Since the values of both the jewelry and silverware stolen exceed their individual coverage limits, the insurance company will pay the coverage limits of $1,000 for jewelry and $2,500 for silverware. Amount not covered by insurance = ($3,800 - 1,000) + ($2,800 - 2,500) = $3,100

Becky Fenton has 25/50/10 automobile insurance coverage. If two other people are awarded $35,000 each for injuries in an auto accident in which Becky was judged at fault, how much of this judgment would the insurance cover?

The maximum amount the insurance company will pay is $25,000 per person with a maximum of $50,000 per accident for all persons.

When Carolina's house burned down, she lost household items worth a total of $50,000. Her house was insured for $160,000 and her homeowner's policy provided coverage for personal belongings up to 55 percent of the insured value of the house. (a)Calculate how much insurance coverage Carolina's policy provides for her personal possessions. (b)Will Carolina be reimbursed in full for her household items?

(a) Personal property coverage = Personal property percent × Coverage on home = 0.55 × $160,000 = $88,000 (b) Since the personal property coverage of $88,000 exceeds the claim amount of $50,000, Carolina will receive a full reimbursement for her loss.

If Carissa Dalton has a $130,000 home insured for $100,000, based on the 80 percent coinsurance provision, how much would the insurance company pay on a $5,000 claim?

Coinsurance requirement = 0.80×Value of home = 0.80 × $130,000 = $104,000 Amount paid = (Insurance coverage / Coinsurance requirement) × Claim amount = ($100,000 / $104,000) × $5,000 = $4,807.69

Matt and Kristin are newly married and living in their first house. The yearly premium on their homeowner's insurance policy is $450 for the coverage they need. Their insurance company offers a 5 percent discount if they install dead-bolt locks on all exterior doors. The couple can also receive a 2 percent discount if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $60 each. At the local hardware store, smoke detectors cost $8 each, and the new house has two floors. Kristin and Matt can install them themselves. Assuming their insurance rates remain the same, how many years will it take Matt and Kristin to earn back in discounts the cost of the dead-bolts? The cost of the smoke detectors?

Dead-bolt locks: Years to recover cost = Total cost / Annual discount = ($60 × 2) / $22.50 = 5.33 years Smoke detectors: Years to recover cost = Total cost / Annual discount = ($8 × 2) / $9.00 = 1.78 years

Matt and Kristin are newly married and living in their first house. The yearly premium on their homeowner's insurance policy is $450 for the coverage they need. Their insurance company offers a 5 percent discount if they install dead-bolt locks on all exterior doors. The couple can also receive a 2 percent discount if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $60 each. At the local hardware store, smoke detectors cost $8 each, and the new house has two floors. Kristin and Matt can install them themselves. What discount will Matt and Kristin receive if they install the dead-bolt locks? If they install smoke detectors?

Dead-bolt locks: Annual discount = $450 × 0.05 = $22.50 Smoke detectors: Annual discount = $450 × 0.02 = $9.00

(a)Wind damage of $835; the insured has a $500 deductible. (b)Theft of a home entertainment system worth $1,150; the insured has a $250 deductible. (c)Vandalism that does $425 of damage to a home; the insured has a $500 deductible.

Insurance payment = Greater of $0 or (Covered loss - Deductible) (a) Insurance payment = $835 - 500 = $335 (b) Insurance payment =$1,150 - 250 = $900 (c) Since the deductible exceeds the loss, the insurance payment will be $0.

What amount would a person with actual cash value (ACV) coverage receive for two-year-old furniture destroyed by a fire? The furniture would cost $1,000 to replace today and had an estimated life of five years.

Insurance payment = Replacement cost - Depreciation = $1,000 - [($1,000 / 5) × 2] = $600

Kurt Simmons has 50/100/15 auto insurance coverage. One evening he lost control of his vehicle, hitting a parked car and damaging a storefront along the street. Damage to the parked car was $5,400, and damage to the store was $12,650. (a)What amount will the insurance company pay for the damages? (b)What amount will Kurt have to pay?

Total claim for property damage= $5,400 + 12,650 =$18,050 (a) The insurance company will pay the greater of the claim amount or the policy limit. Since the property damage liability coverage is less than the claim amount, the insurance company will pay the policy limit of $15,000. (b)Kurt will be personally liable for any unpaid claim amount. Kurt's liability=Claim amount -Insurance payment =$18,050 − 15,000 =$3,050