Personal Finance Ch10

Five Factors affecting home insurance costs

1. Location of home (volunteer fire department vs. within city limits) 2. Type of structure - construction materials 3. Coverage amount and policy type - HO-3 v. HO-5, Deductibles 4. Home insurance discounts - Alarm system. smoke detector, multi-policy discount, sprinkler system, dead bolts, fire extinguisher 5. Company differences - Compare costs and coverage's and customer satisfaction index information

Your personal insurance program

1. Set Insurance goals 2. Develop a plan to reach your goals 3. Put your plan into action 4. Check your results

Rating territory

Accident auto theft, and vandalism rates in your area

Two basic types of risks:

Acts of God and Acts of man

Which type of claim settlement method is used?

Actual cash value (ACV) Replacement value

Driver classification

Age, sex, martial status, credit history, driving record and driving habits.

Deductibles

Amount insured pays before insurance company pays. The higher the deductible, the lower your premiums will be. Premiums (insurance cost) are usually the biggest factor in deciding coverage.

Risk Assumption

Assume the risk because the financial loss is small (don't insure $1,500 farm truck)

Speculative Risk

Chance of loss or gain, such as starting a business or gambling. Uninsurable

Reducing auto insurance premiums

Compare companies. Have larger deductibles. Premium discounts such as establish and maintain a good driving record, non-smoker, install security devices such as a car alarm, if you have more than one vehicle, insure them both with the same company, good student discount, driver training program.

Replacement value

Cost to repair or replace the damaged or lost item, without considering depreciation (HO-5 Comprehensive form). May limit replacement cost to 400% of actual cash value of item. Premium 10-20% more than ACV coverage

Property damage liability

Covers damage to other person's auto when you are at fault. It also includes damages to such things as street signs and buildings

Comprehensive (other than collision) Physical Damage

Covers damage to your vehicle that is not caused by a collision, such as: Fire, theft or vandalism. Glass Breakage. Hail, sand, or wind storm. Falling objects or hitting an animal. Somethings in your care, like some radios and stereo equipment, are not covered.

Bodily Injury Liability (in other cars)

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 responsible

Homeowner's insurance coverages

Damage to or destruction of your house and other structures, including landscaping. Additional living expenses - living elsewhere. Personal property at or away from home. Personal property floater - "schedule" high value items (e.g., wedding rings, musical instruments) Household inventory with documentation - you must prove ownership and value, video entire household contents

Negligence

Failure to take ordinary or reasonable care; such as failure to supervise children in a pool

100/300/50

First two numbers are for bodily injury liability (lost wages, lawyer expenses, medical costs). Last number, Property Damage liability.

Look for a policy with

Full coverage, rather than a coinsurance clause, where you have to pay for part of a loss if under-insured.

Fatal auto accidents by age

Highest for those under age 20 around 75% and then goes down for those in 20-24 to 48% and then 25-34 is 32% and then continues to go down until age 75 where it rebounds to 37%

Potential Property Losses

Home, real estate, Automobiles, furniture, clothing, and personal belongings.

Hazard

Increases the likelihood of a loss through some peril (e.g., driving drunk, defective house wiring)

100

Limit that will be paid to one person in an accident

Medical Payments Coverage (in your car)

Medical payments covers the cost of healthcare for persons injured in your automobile, including yourself. This is called Personal Injury protection (PIP). Usually very small coverage.

Risk Management

Organized, planned strategy to protect your assets and family

Towing and Emergency Road Service

Pays for the breakdowns and mechanical assistance

Uninsured/Underinsured Motorist's Protection

Pays for the cost of injuries to you and your family of your vehicle is hit by a person without adequate insurance. Often does not cover property damages (you need to add this to cover property).

Pure Risk (3)

Personal Risk, Property risk, Liability Risk. Chance of loss, not gain. Accidental, unintentional. Nature and financial loss of the risk can be predicted. Can insure any pure risk.

Two types of Property losses

Physical damage, examples, perils such as fire, wind, water and smoke, Destruction of property or temporary loss of use. And Loss of use, examples, due to accident, robbery, burglary, vandalism, or arson.

What is insurance?

Protection against possible financial loss; it gives you peace of mind. An insurance company, or insurer, is a risk-sharing firm that assumes financial responsibility for losses from an insured risk. You purchase a policy. The insurer assumes a risk for a fee called the premium, which is insured policyholder pays periodically.

Assigned risk pool for people who are unable to obtain insurance

Provided by insurers, not state

Wage loss insurance

Reimburse you for any salary or income lost due to injury in an automobile accident

Actual cash value (ACV)

Replacement cost less depreciation

How much coverage do you need?

Replacement value of the home. Value of the contents. Liability coverage desired. Protection for specific items such as jewelry, furs, cameras, silverware or antiques.

What are some risk management techniques?

Risk avoidance, don't drive or ride in car. Risk reduction, avoid busy streets, wear seat belt. Risk assumption, self insure. Risk shifting, purchase auto insurance.

Types of Risk

Risk, Peril, Hazard, Risk Management

Financial responsibility law

State legislation. Nearly all states have compulsory automobile liability insurance laws. Requires drivers to prove their ability to cover the cost of damage or injury caused by them in an automobile accident

Rental car reimbursement

Sya $30 per day, up to 30 days

No-fault Insurance

System intended to provide fast, smooth methods of paying for damages without taking the legal action frequently necessary to determine fault. All collect from own insurers.

Peril

The cause of a possible loss or risk, such as fire, windstorm, robbery, disease, or death

Risk

Uncertainty or lack of predictability as to loss that faces a person or property covered by insurance

Put your risk management plan work by asking yourself

What should be insured? Deductibles? For how much? What kinds of insurance? From whom?

Collision

When your car is in an accident, collision coverage pays for damages to your automobile, regardless of who is at fault. If you are not at fault your insurer will subrogate against the other drivers property damage liability fist for reimbursement. Coverage is limited to the retail value of your vehicle

Automobile type

Year, make, model and theft rate.

Vicarious Liability

You are held responsible for the actions of another person, such as your child breaking a neighbor's window.

Strict liability

You are held responsible for your own intentional or unintentional actions

Coinsurance Payment: on $100,000 house with $60,000 insurance coverage, 80% coinsurance % and $8000 loss

[(insurance coverage)/(coinsurance % x replacement cost)] x Loss [$60,000/(0.80 x $100,000)] x $8,000 = $6,000

Risk Avoidance

eliminate risk by not participating (don't sky dive)

Legal concerns

include having enough coverage if you are sued. 100/300 is recommended for bodily injury liability. An additional 1,000,000 or more umbrella liability protection

Liability

legal responsibility for cost of another person's losses or injuries

50

limit for payment for damage to property of others

300

limit that will be paid to all persons in an accident

Property Values

of vehicles have gone up. 100 is usually suggested for property damage liability.

Risk Reduction

take measures to reduce the risk (wear seat belt)

Risk Shifting

transfer the risk to another party, like an insurer (accident and illness)