1 (of 32) fin 200: personal finance topic 12-auto and homeowner’s insurance lawrence schrenk,...
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FIN 200: Personal Finance
Topic 12-Auto and Homeowner’s Insurance Lawrence Schrenk, Instructor
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Learning Objectives
1. Discuss the general types of insurance. ▪
2. Explain the general features of auto insurance.
3. Explain the general features of home owners insurance.
4. Calculate annuities with non-annual payments.▪
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Selected Types of Insurance
Don’t Forget: Expatriate Insurance, Pet Insurance, Kidnap and Ransom Insurance, Terrorist Insurance, etc...
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Terminology
Risk Management Insurance–Financial Contract...
That redistributes costs of financial losses, or in which one party compensates another party for
losses Insurer versus Insured Premium
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The Insurer
Profit Revenue
Earned Premium Investment Income
Costs Incurred Loss Underwriting Expenses
Diversification of Risk Captive versus Independent Agents
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Insurer Issues
Moral Hazard–Possibility that someone insured will act differently, i.e., to the detriment of the insurer, than when uninsured. If your apartment is insured against theft then
there is less incentive to be security conscious. Insurance changes our behavior.
Insurance Fraud
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The Insured The Psychological Bases of Finance
Greed Risk Aversion
Income
Smoothing Can’t insure
against
everything.
Income Patterns
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
Ye
ar
1
Ye
ar
2
Ye
ar
3
Ye
ar
4
Ye
ar
1
Ye
ar
2
Ye
ar
3
Ye
ar
4
Ye
ar
1
Ye
ar
2
Ye
ar
3
Ye
ar
4
A B C
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The Effect of InsuranceThe Effect of Insurance
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Year1
Year2
Year3
Year4
Year5
Year6
Year7
Year8
Year9
Year10
Expected
Actual
Insured
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Policy
Who’s Covered People Vehicle
Coverage Dollar limits Dates
Policy/Binder Number
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Coverage: Liability
Bodily Injury Caused by Insured Parties Medical and Lost Wages Limits
Individual (recommended minimum $100,000) Total (recommended minimum $400,000) You are liable above limits
Property Damage Recommended minimum $50,000
State Requirements DC 25/50/10
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Coverage: Medical Payments
Bodily Injury To Those in Insured Vehicle Recommended minimum $10,000 Distinguish from Regular Health Insurance
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Coverage: Un-/Underinsured
Uninsured Driver No Insurance Bankrupt Insurance Company
Underinsured Driver Insufficient Insurance
Applies if You are Not at Fault Recommended minimum $300,000
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Coverage: Collision and Comprehensive Collision
Damage to your car when you are at fault Comprehensive
Various damages to you car Flood, fire, theft
Optional May be required by lender
Kelley Blue Book Value Normally Maximum Deductable
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Coverage Types
Coverage A–Residence Coverage B–Detached Structures Coverage C–Personal Property Coverage D–Added Living Costs Coverage E–Personal Liability Coverage F–Medical Payments
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Coverage A–Residence
Repair/Replacement of Home Possible Causes or Loss
Fire, Tornado, etc. Land not included Two Suggestions
Insure for 100% of full replacement cost Don’t be underinsured.
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Coverage B–Detached Structures
Generally 10% of coverage A Possible Applications
Garage Barn In-Ground
Excludes structures used for business.
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Coverage C–Personal Property
Payout Values ‘Cash Value Policy’–After Depreciation ‘Replacement Cost Policy’–Actual Cost to
Replace (in theory) Coverage is normally 50-75% of coverage A. Do you need additional coverage?
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Coverage D–Added Living Costs
Home Unlivable due to Covered Loss Additional Living Expenses
New Costs Motels Take-Out Meals
Less Old Costs not Incurred Utilities
Possible Time Limits 12 Month Unlimited
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Coverage E–Personal Liability
Personal Liability for injuries and property damage you cause.
Two Important Points This is general liability insurance
Not restricted to your property Does not cover vehicular incidents
Covers Lawsuits and your Defense Usually $100,000 included. Do you need more?
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Coverage F–Medical Payments
Covers a guest hurt on your property. Can duplicate guests own health insurance.
Typical ‘Causes-of-Loss’
Included Fire, lightning, explosion, windstorm or hail,
smoke, aircraft or vehicle damage, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action
Excluded Earthquake, Flood, Faulty maintenance, Damage
from insects or vermin, Wear and tear, gradual damage or deterioration
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Other Issues
Deductible Estimating Coverage Documentation
Photos House-Interior and Exterior, Special Features Personal Property
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Annuities: Non Annual Payments
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Non-Annual Payments
We need to incorporate the possibility of non-annual payments into our financial calculations.
Fortunately this is simple... You need to change the payments per year (P/Y) to
12 for monthly payments. NOTE: HP users, your calculator is set to 12 by
default. Then do the problem just as you would for
annual payments.
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Changing P/Y (TI)
1. [2nd ] [I/Y]2. 12 (monthly or 4 quarterly, or 52 weekly)3. [Enter]4. [2nd ] [CPT]
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Future Value with a Calculator How much do we have after 3 years if we
save $200 per month beginning next month and the interest rate is 12%?
1. Input 36, Press N (3 x 12 = 36)
2. Input 12, Press I/Y
3. Input 200, press +/-, press PMT (you get -200)
4. Press CPT, FV to get $8,615.38
NOTE: N is the number of periods, so if you save weekly for 2 years, N = 2 x 52 = 104.
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Non-Annual Practice Problems
How much will you have if you save $100.00 per month for 25 years at 8%? $95,102.64
How much can you borrow if you pay $50.00 per week for 5 years at 7%? $10,962.57
How much do you need to save per month to have $10,000 in 5 years at 10%? ▪ $129.14 ▪
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Ethical Dilemma
You teach personal finance at a local community college. The state in which you teach requires proof of liability insurance in order to renew your license plates. During the discussion of this topic in class, several students admit that they obtain a liability policy just prior to the renewal of their license plates and then cancel it immediately thereafter. They do this because they know that the state has no system for is a following up on the cancellation of the liability policies once the license plates are issued. These students, who are out of work as a result of a local plant shutdown, indicate that they cannot afford to maintain the insurance, but they must have access to cars for transportation. a. Discuss whether you consider the conduct of the students to be
unethical. b. How does the conduct of these students potentially impact other
members of the class who maintain liability insurance on their vehicles?
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