Test 3 Part 2

Why is accident insurance typically not recommended? What's the best alternative for meeting these expenses?

Accident insurance only pays if medical expenses are incurred as a result of an accident and is usually limited to a specific benefit for days hospitalized or loss of a body part or limb. Instead of spending money on insurance coverage with limitations, consumers should buy comprehensive health coverage. It should provide protection not only against major catastrophes but also be comprehensive enough to cover all medical claims.

Explain the difference between all risks insurance and named perils insurance. List three perils not ordinarily covered under the basic homeowner's insurance.

All-risks insurance provides protection against all risks that are not specifically excluded in the policy. In contrast, named-perils insurance covers only risks that are specifically stated in the policy. The distinction is important as certain hazards are specifically excluded from the all-risks policy, while perils are named under the named-perils policy. Any losses resulting from earthquake, flood, nuclear accident, and war are excluded from all basic homeowners' policies.

How does a home owner obtain earthquake coverage?

Earthquake coverage is typically sold as an endorsement to the homeowner policy.

In a car accident which you have 100% of the responsibility and the damage cost of the other car is $1,600. There are three people who got hurt in the other car. The first one got minor injury and the hospital charged him $500. The second one got severe injury and the hospital charged him $20,000 for a big surgery. The third one was also sent to the hospital and his treatment cost $5,000. Suppose you have liability coverage and the policy limit is 10/30/10, how much cost will be covered by your auto insurance company? How much should be covered by you?

For each person who got injured by a car accident by you, your insurance company will cover at most $10,000. So both the first and third person's expenditure will be totally covered by your insurance company. But the second person will only get $10,000 from your insurance company. The total amount paid by your insurance company is $15,500, which is lower than $30,000. The remaining $10,000 for the second person should be covered by you. The damage of the other car is $1,600 which is lower than $10,000. So this full amount will be covered by your insurance company.So all in all, your insurance companywill cover $15,500 for the three persons' injury and $1,600 for the car damage. You are responsible for the remaining $10,000 for the second person's injury.

Which cost is greater for real estate property: replacement cost or actual cash value? Why?

For houses, usually replacement cost is greater than actual cash value, because it is based upon the amount needed to replace new for old, with no deduction for depreciation. Actual cash value is equal to replacement cost minus depreciation and is most often used as a reimbursement for personal property.

12. Describe the major differences between group health insurance and individual health insurance. Which is likely to be cheaper?

Group health insurance is provided to a specific group of people who are associated for a common purpose other than the purchase of insurance (e.g., association members, co-workers). Most employer group policies do not require policyholders to pass a medical exam. Costs of group health insurance are less than individual policies.Individual policy insurance is written for a specific person or family, usually requires a medical exam prior to issuance and is generally more expensive than group insurance. Important considerations are age, health, geographic location, and deductible amounts. The benefit is a policy specifically designed to your needs; cost is a major disadvantage.

Jerry Carter's home is currently valued, on a replacement cost basis, at $315,000. The last time he checked his home was insured for $235,000 and he did not have an inflation guard endorsement. If he has a $25,500 claim due to a kitchen fire, how much will his homeowner's insurance policy pay? How much would be paid if his home were totally destroyed. In order to obtain full replacement coverage, how much insurance should Jerry carry on his house?

Jerry's house is insured for less than 80 percent of its replacement value ($235,000 / $315,000 = 74.60%), therefore, Jerry will receive 93.25 percent of his claim because $235,000 is 93.25 percent of the 80 percent requirement ($252,000). So his reimbursement will be $23,779.76 = [($235,000 / ($315,000 × 0.80)] × $25,500), assuming this amount is greater than the actual cash value of the kitchen. If Jerry's homewere totally destroyed, the maximum he could collect is $235,000, or the full amount of his policy. This is $80,000 less than the cost to replace his home. He should maintain at least 80 percent coverage and probably 100 percent coverage to protect against a total loss. Recall that the deductible also must be applied as part of the homeowner's coinsurance, so if there is a deductible applied, he will actually receive something less than $23,780 once the deductible amount is subtracted.

Describe the two components of liability coverage in an auto insurance policy.

Liability coverage in an auto insurance policy contains two key components. Bodily injury liability protectsyou against liability associated with injuries that you cause. Bodily injury expenses include medical bills and lost wages as a result of an accident that you caused. The coverage is designed to protect you if you cause an accident and the driver of the other car sues you. Property damage liability coverage protects you from losses that result when you damage another person's property with your car.

What is the most important component of your auto insurance coverage? Why?

Liability is the most important component of your automobile insurance coverage. It is also required by all states. Liability coverage provides protection against bodily harm and property damage to others from negligent operation of the automobile. In addition, it represents a major risk of financial loss, as one accident can result in hundreds of thousands of dollars in insurance claims.

What is the purpose of life insurance? Do you think everyone needs life insurance? Explain.

Life insurance provides a payment to a specified beneficiary when the policyholder dies. It allows individuals to eliminate or substantially reduce the financial consequences of their death on their dependents. Life insurance is especially important to protect a family's financial situation in the event that the breadwinner dies; expenses such as burial expenses or medical expenses may be covered by life insurance. If no one relies on an individual's income, life insurance may not be necessary. For example, if you are single and are not providing financial support to anyone, life insurance is typically not needed. However, many individuals still want to leave money to their heirs.

Pete's health insurance policy specifies that he should pay 30% of expenses associated with a long-term illness, and he has a stop-loss provision of $35,000 in his policy. If Pete incurs expenses of $70,000, how much would he owe?

Pete would owe $21,000: Long-term health care expenses: $70,000 Percentage Pete pays: 30% Amount owed: $21,000 Pete's stop-loss provision prevents him from owing more than $35,000.

In a car accident which you have 100% of the responsibility and the whole damage cost is $1800, what will be the compensation you receive from the insurance company, if you have $250 deductible for your policy?

Since your insurance has the $250 deductible clause, you can only receive $1800-$250=$1550 from the insurance company.

What items are typically insured for replacement cost?

Structural damage to the home is usually covered at replacement cost. If the home is to be inhabitable it is essential that structural damage be repaired.

Describe the major differences between term and cash-value life insurance.

Term life insurance is pure life insurance and has no savings component. If an insured dies during the coverage period, his/her beneficiary receives the face amount of the policy. Cash-value life insurance has two components: life insurance and a savings plan. Part of a cash-value policy premium is used for each purpose. Cash-value policies are, thus, a form of forced savings.

Why is it important to insure your dwelling for at least 80% of its replacement cost? How does the coinsurance clause operate?

The coinsurance clause requires the homeowner to provide coinsurance when the dwelling unit is insured for less than 80% of replacement value. Therefore, it is important that the homeowner insure the dwelling for at least 80% to receive full replacement cost on structural damage. If less than 80% of the dwelling is insured, the policyholder becomes a coinsurer by having to pay the difference.

List and briefly discuss factors that will affect your auto insurance premium.

Value of the insured vehicle: The higher the value of the car, the higher the premium is.Repair record of the car: The more easily car damage can be repaired, the lower the premium is. Your age: Younger drivers have less experience and pay higher premiums. Your driving record: Individuals with poor driving records pay more than individuals with good driving records. Location: Insurance is higher in larger cities. Discounts: Due to discounts, premiums may be lower on cars with safety devices, for drivers who have had driver training, and students who have a high grade point. Your school performance: Good students are generally safer drivers and may pay lower premiums. Your credit record: Individuals with poor credit records may pay higher premiums.

Suppose you have $5,000 of health care expenses that are not covered by your basic health insurance. You have a major medical policy with $500 deductible and 20% coinsurance. What are your out-of-pocket expenses?

Your out-of-pocket expenses consist of the $500 deductible plus 20% of any expenses in excess of $500. Consequently, total out-of-pocket expenses are $1,400=$500+20%* ($5,000-$500).