automobile and home insurance chapter 14. insurance basics how insurance works how insurance works...

Automobile and Home Automobile and Home InsuranceInsurance

Chapter 14Chapter 14

Insurance BasicsInsurance Basics

How Insurance WorksHow Insurance Works Risk ManagementRisk Management

Risk Management means limiting possible Risk Management means limiting possible financial losses to amounts you can handle.financial losses to amounts you can handle.

To manage your risk of financial loss from To manage your risk of financial loss from illness, injury, or damage, you can buy illness, injury, or damage, you can buy insurance.insurance.

In exchange for this protection, you make a In exchange for this protection, you make a regular payment to the insurance company regular payment to the insurance company called a premium.called a premium.

Shared RiskShared Risk The insurance company diversifies, not the The insurance company diversifies, not the

customer. They sell to thousands of people.customer. They sell to thousands of people.

How Insurance WorksHow Insurance Works

When you buy insurance, you sign a When you buy insurance, you sign a legal contract, called a policy.legal contract, called a policy.

You become the policyholder.You become the policyholder. The policy spells out the specific loss The policy spells out the specific loss

that it covers and the specific loss that it covers and the specific loss that covers and the financial that covers and the financial compensation the company will compensation the company will provide if you suffer that loss.provide if you suffer that loss.


If you do have a loss covered by the If you do have a loss covered by the policy, you file a claim, a formal request policy, you file a claim, a formal request for payment from the insurance for payment from the insurance company.company.

The insurance company sells to many The insurance company sells to many people. This concept is called shared people. This concept is called shared risk.risk.

Premiums and StatisticsPremiums and Statistics Insurance companies use statistics from the Insurance companies use statistics from the

past to predict how many losses are likely to past to predict how many losses are likely to occur within any large group of people.occur within any large group of people.


Statistics can also help insurance Statistics can also help insurance companies estimate how much they companies estimate how much they will have to pay to reimburse will have to pay to reimburse particular types of losses.particular types of losses.

What Insurance ProtectsWhat Insurance Protects Insurance is designed to restore your Insurance is designed to restore your

financial position to where it was before financial position to where it was before the loss-not allow you profit from the the loss-not allow you profit from the loss. loss.


To insure something you must have an To insure something you must have an insurable interest in the item. That is, it insurable interest in the item. That is, it must be something of value that, if lost, must be something of value that, if lost, would cause you financial loss.would cause you financial loss.

Determining to Value of Insurable Interest.Determining to Value of Insurable Interest. Before you can insure your property, its Before you can insure your property, its

value must be measured in financial value must be measured in financial terms.terms.

An appraisal is an expert’s determination An appraisal is an expert’s determination of the value of a piece of property.of the value of a piece of property.


Home insurance does not Home insurance does not automatically cover some automatically cover some particularly valuable items, such as a particularly valuable items, such as a diamond ring.diamond ring.

To insure it, you would add a rider to To insure it, you would add a rider to your policy.your policy.

A rider is a special addition to an A rider is a special addition to an insurance policy that covers a insurance policy that covers a specific type of loss.specific type of loss.


Your life and health don’t carry a price Your life and health don’t carry a price tag the same way that property does.tag the same way that property does.

So life and health insurance is sold in So life and health insurance is sold in different amount.different amount.

You can choose the amount of You can choose the amount of protection you want.protection you want.

The greater the amount of coverage The greater the amount of coverage you choose, the higher the premiums.you choose, the higher the premiums.


Your life insurance also depend on Your life insurance also depend on your life expectancy.your life expectancy.

Life expectancy is an estimate of the Life expectancy is an estimate of the average number of years remaining average number of years remaining in peoples lives, based on their in peoples lives, based on their gender and current age and health.gender and current age and health.

The Insurance Trade-OffThe Insurance Trade-Off

Insurance should not be to protect you Insurance should not be to protect you from any loss.from any loss.

So when you shop for insurance, decide So when you shop for insurance, decide how much of a loss you can reasonably how much of a loss you can reasonably cover yourself without too much financial cover yourself without too much financial hardship.hardship.

For example, if you agree to pay the first For example, if you agree to pay the first $1000 of your medical insurance each $1000 of your medical insurance each year, then your premiums will be lowered year, then your premiums will be lowered than if you agree to pay the first $500.than if you agree to pay the first $500.

Role of Insurance in the EconomyRole of Insurance in the Economy

Insurance provides security.Insurance provides security. Many business activities would not be Many business activities would not be

possible without insurance.possible without insurance. A bank wouldn’t lend you money to buy a A bank wouldn’t lend you money to buy a

home if you didn’t insure the home.home if you didn’t insure the home. Doctor’s usually don’t practice without Doctor’s usually don’t practice without

insurance.insurance. One lawsuit could ruin them.One lawsuit could ruin them. Our economic system relies on sharing the Our economic system relies on sharing the

risk through insurance.risk through insurance.

Types of InsuranceTypes of Insurance

Property InsuranceProperty Insurance Insurance that protects you from Insurance that protects you from

financial loss when things you own are financial loss when things you own are stolen, damaged, or destroyed.stolen, damaged, or destroyed.

This is for cars, homes, and valuable This is for cars, homes, and valuable possessionspossessions

Designed two waysDesigned two ways It pays based on items market valueIt pays based on items market value It pays based on items replacement valueIt pays based on items replacement value


Property InsuranceProperty Insurance Market Value is the amount an item is Market Value is the amount an item is

worth now.worth now. Replacement value is the cost of Replacement value is the cost of

replacing the item.replacing the item. Liability InsuranceLiability Insurance

Sometimes your actions cause losses to Sometimes your actions cause losses to other peopleother people

This insurance protects you from losses This insurance protects you from losses that you caused others.that you caused others.


Personal InsurancePersonal Insurance Insurance that protects you, your Insurance that protects you, your

spouse, and your children against spouse, and your children against financial loss due to illness, disability, or financial loss due to illness, disability, or death.death.

How to ChooseHow to ChooseAutomobile InsuranceAutomobile Insurance

Types of coverageTypes of coverage Bodily Injury Liability CoverageBodily Injury Liability Coverage

The amount of coverage is typically The amount of coverage is typically described by two numbersdescribed by two numbers

The might be shown as $250,000/$500,000 The might be shown as $250,000/$500,000 or 250/500or 250/500

This means you policy will pay up to a This means you policy will pay up to a maximum of $250,000 to any one person in maximum of $250,000 to any one person in a given accident.a given accident.

The policy will pay up to $500,000 for all The policy will pay up to $500,000 for all injuries to other people in a given accident.injuries to other people in a given accident.


Types of CoverageTypes of Coverage Property damage liability coverageProperty damage liability coverage

It pays for damage you caused to another It pays for damage you caused to another person’s propertyperson’s property

The policy may state this number after the The policy may state this number after the bodily injury numbers as 250/500/50bodily injury numbers as 250/500/50

The company will pay $50,000 for property The company will pay $50,000 for property damage.damage.


Types of coverageTypes of coverage Medical payments coverageMedical payments coverage

It pays medical and funeral expenses for you, It pays medical and funeral expenses for you, your family members, and other passengers in your family members, and other passengers in your car because of injuries sustained in an your car because of injuries sustained in an accident-no matter who caused the accident.accident-no matter who caused the accident.

Uninsured/underinsured motorist coverageUninsured/underinsured motorist coverage Pays medical and damage expenses for you Pays medical and damage expenses for you

and your passengers caused by a driver and your passengers caused by a driver without insurance or with to little insurance to without insurance or with to little insurance to cover loss.cover loss.


Types of CoverageTypes of Coverage Comprehensive coverageComprehensive coverage

Pays for damage to your car caused by Pays for damage to your car caused by something other than a collision.something other than a collision.

Examples:Examples: EarthquakesEarthquakes FireFire WindWind HailHail FloodsFloods Vandalized or stolenVandalized or stolen


Types of coverageTypes of coverage CollisionCollision

Pays for damage to your car caused by Pays for damage to your car caused by colliding with another car object, such as a colliding with another car object, such as a tree or fire hydrant.tree or fire hydrant.

This is usually most expensiveThis is usually most expensive Comprehensive and collision coverage Comprehensive and collision coverage

often carry a deductible.often carry a deductible. A A deductibledeductible is the amount you pay before is the amount you pay before

the insurance company pays anything.the insurance company pays anything.


Types of coverageTypes of coverage Other CoverageOther Coverage

Rental CarRental Car TowingTowing Gap InsuranceGap Insurance

All these will increase your premium.All these will increase your premium.

In September of last year, Donna Redman, a college In September of last year, Donna Redman, a college student from Austin, Texas, caused a serious accident student from Austin, Texas, caused a serious accident when she failed to yield to an approaching vehicle while when she failed to yield to an approaching vehicle while attempting to make a left turn. Donna suffered a broken attempting to make a left turn. Donna suffered a broken arm and facial cuts, resulting in medical costs of $ 1254. arm and facial cuts, resulting in medical costs of $ 1254. Her passenger, Philip Windsor, was seriously injured with Her passenger, Philip Windsor, was seriously injured with head and neck wounds requiring surgery, a two- week head and neck wounds requiring surgery, a two- week hospital stay, and rehabilitation. Philip’s injuries generated hospital stay, and rehabilitation. Philip’s injuries generated medical costs of $ 17,650. The driver of the other car, John medical costs of $ 17,650. The driver of the other car, John Monk, suffered serious back and internal injuries and facial Monk, suffered serious back and internal injuries and facial burns that resulted in some disfigurement. His medical burns that resulted in some disfigurement. His medical care costs totaled $ 22,948. His passenger, Annette Monk, care costs totaled $ 22,948. His passenger, Annette Monk, suffered cuts and bruises requiring minor medical care at a suffered cuts and bruises requiring minor medical care at a cost of $ 423. Both cars were completely destroyed in the cost of $ 423. Both cars were completely destroyed in the accident. Donna’s 10- year- old Buick was valued at $ accident. Donna’s 10- year- old Buick was valued at $ 2150. John’s Mazda Miata was valued at $ 19,350. The 2150. John’s Mazda Miata was valued at $ 19,350. The force of the impact spun John’s car around, causing it to force of the impact spun John’s car around, causing it to destroy a traffic- signal control box ( valued at $ 3650).destroy a traffic- signal control box ( valued at $ 3650).

How Much Insurance How Much Insurance Should You BuyShould You Buy

All States set a minimum amount of All States set a minimum amount of liability insurance that you must buy.liability insurance that you must buy.

For a few states, this amount is as low as For a few states, this amount is as low as 10/20/5.10/20/5.

The least you should consider buying is The least you should consider buying is 50/100/25.50/100/25.

Liability and MedicalLiability and Medical Paying for basic liability coverage is expensive.Paying for basic liability coverage is expensive. Increasing this to a larger amount does not Increasing this to a larger amount does not

cost that muchcost that much

VA RequirementsVA Requirements

Bodily injury/death of one person Bodily injury/death of one person $25,000 $25,000

Bodily injury/death of two or more Bodily injury/death of two or more persons $50,000 persons $50,000

Property damage $20,000 Property damage $20,000

How Much Insurance How Much Insurance Should You BuyShould You Buy

Collision and ComprehensiveCollision and Comprehensive The collision and comprehensive The collision and comprehensive

insurance depends on the value of the insurance depends on the value of the car and the size of the deductible you car and the size of the deductible you choose.choose.

If you have an old car collision may not If you have an old car collision may not even be worth buyingeven be worth buying

Cost of Automobile InsuranceCost of Automobile Insurance

Causes of Increasing Insurance CostCauses of Increasing Insurance Cost One reason for the growing costs is that One reason for the growing costs is that

cars are more complicated today.cars are more complicated today. New technologyNew technology More expensive to repairMore expensive to repair Medical technology also adds to the cost Medical technology also adds to the cost

of automobile insurance.of automobile insurance. Also, today, injured Americans are more Also, today, injured Americans are more

likely to sue than in the past.likely to sue than in the past.

Factors Affecting Your PremiumFactors Affecting Your Premium

From an insurance company’s point From an insurance company’s point of view, risk means the chance that of view, risk means the chance that the policyholder will have a loss that the policyholder will have a loss that requires reimbursement.requires reimbursement.

Driver ClassificationDriver Classification AgeAge GenderGender Marital StatusMarital Status


Rating TerritoryRating Territory Statistics show that more claims come Statistics show that more claims come

from some locations than others.from some locations than others. Driving RecordDriving Record

Your driving record is an official list of Your driving record is an official list of your accidents and traffic violations.your accidents and traffic violations.

Points are added to your recordPoints are added to your record More points higher premiumMore points higher premium


You can get dropped from your You can get dropped from your company and find that no other company and find that no other company will insure you.company will insure you.

Because state law require all drivers Because state law require all drivers to carry insurance the state will to carry insurance the state will assign you to a company.assign you to a company.

You become an You become an assigned riskassigned risk, you , you will have to pay very high premiums.will have to pay very high premiums.


Type of carType of car Some cars are more expensive than Some cars are more expensive than

othersothers Some cars are stolen more than othersSome cars are stolen more than others

Claims HistoryClaims History The more claims you make on your The more claims you make on your

policy, the more you cost the company, policy, the more you cost the company, so your premiums will be higher.so your premiums will be higher.


You can reduce your premiums:You can reduce your premiums: Good Driving RecordGood Driving Record Good GradesGood Grades Increase the size of your deductiblesIncrease the size of your deductibles Living outside of city in safe Living outside of city in safe

neighborhoodsneighborhoods Take a driver education courseTake a driver education course

Home Insurance CoverageHome Insurance Coverage

How to Choose Home InsuranceHow to Choose Home Insurance Homeowners Insurance provides Homeowners Insurance provides

personal property and liability protection personal property and liability protection for your home.for your home.

Types of CoverageTypes of Coverage Personal PropertyPersonal Property

The personal property portion of The personal property portion of homeowner's insurance covers damage to or homeowner's insurance covers damage to or loss of your house and its contentsloss of your house and its contents

How to Choose Home InsuranceHow to Choose Home Insurance

Types of CoverageTypes of Coverage ExclusionsExclusions

Some items are specifically excluded or are Some items are specifically excluded or are not covered for their full value.not covered for their full value.

Examples: stamp or coin collections, Examples: stamp or coin collections, silverware, laptop computerssilverware, laptop computers

You may have to buy special riders to cover You may have to buy special riders to cover these itemsthese items

LiabilityLiability Covers bodily injury or damage you cause to Covers bodily injury or damage you cause to

others.others.

How to Choose Home InsuranceHow to Choose Home Insurance

Umbrella PolicyUmbrella Policy An umbrella policy provides additional liability An umbrella policy provides additional liability

protection beyond that included in an protection beyond that included in an homeowners policy.homeowners policy.

A $1,000,000 dollar umbrella policy typically A $1,000,000 dollar umbrella policy typically cost less that $500 a year.cost less that $500 a year.

Special Risk CoverageSpecial Risk Coverage HurricanesHurricanes FloodsFloods EarthquakesEarthquakes

Basic Forms of Homeowner’s Basic Forms of Homeowner’s InsuranceInsurance

Renter’s InsuranceRenter’s Insurance This provides about the same property This provides about the same property

and liability coverage as a homeowner’s and liability coverage as a homeowner’s policy.policy.

It is not expensive – typically $200 to It is not expensive – typically $200 to $300 per year.$300 per year.

How Much Insurance Should You Buy?How Much Insurance Should You Buy? 80% Rule80% Rule

Buys at least 80% coverage of your houses Buys at least 80% coverage of your houses replacementreplacement

Cost of Homeowner’s InsuranceCost of Homeowner’s Insurance

Factors Affecting Your PremiumFactors Affecting Your Premium LocationLocation Age of HouseAge of House Distance to a Fire StationDistance to a Fire Station

Reduce Your PremiumReduce Your Premium Increase Your DeductibleIncrease Your Deductible Upgrade Your HomeUpgrade Your Home Install Smoke DetectorsInstall Smoke Detectors Install More SecurityInstall More Security Special Discounts – Non SmokersSpecial Discounts – Non Smokers

Providers and the Claim ProcessProviders and the Claim Process

How to Choose an Insurance ProviderHow to Choose an Insurance Provider Insurance is a serviceInsurance is a service How to Choose and AgentHow to Choose and Agent

Two TypesTwo Types Work for one agencyWork for one agency Independent agent – work for many insurance Independent agent – work for many insurance

officesoffices Ask FriendsAsk Friends Ask FamilyAsk Family Their income is based on how much they sellTheir income is based on how much they sell

How to choose an How to choose an Insurance CompanyInsurance Company

Check Financial HealthCheck Financial Health Best Insurance Reports in most librariesBest Insurance Reports in most libraries A.M. Best Company Web Site for a feeA.M. Best Company Web Site for a fee Standard & Poor’s and Duff & Phelps Standard & Poor’s and Duff & Phelps

offer ratings online for free.offer ratings online for free. Check speed and ease of claims Check speed and ease of claims

processprocess Check Consumer ReportsCheck Consumer Reports

How to File a ClaimHow to File a Claim

Homeowners ClaimHomeowners Claim Home InventoryHome Inventory Call Insurance Agent to report lossCall Insurance Agent to report loss Agent will send an adjuster to assess the Agent will send an adjuster to assess the

damagedamage The check will be written to you to pay The check will be written to you to pay

the contractor.the contractor. Car InsuranceCar Insurance

No-fault Insurance. Who pays?No-fault Insurance. Who pays?

Insurance FraudInsurance Fraud

Studies show that 20 percent of Studies show that 20 percent of insurance claims involve some insurance claims involve some amount of fraud.amount of fraud.

All this cost is passed on to the All this cost is passed on to the customers causing insurance customers causing insurance premiums to go up.premiums to go up.

automobile and home insurance chapter 14. insurance basics how insurance works how insurance works...

Documents

insurance company

insurance basics

insurance works statistics

statistics insurance

risk of financial loss

home insurance chapter

specific loss

shared risk shared risk