CHAPTER 9:

INSURANCE

Key Terms• Policy: the contract between the insurer and the

insured.• Premium: the amount paid by the insured for the

protection provided by the policy.• Face value: the maximum amount of insurance

provided by the policy.• Beneficiary: the individual, organization, or

business to whom the proceeds of the policy are payable.

• Indemnity Principle: Person cannot collect more money from the damage/disaster

Fire Insurance

1. Protects the owner building against damage from a fire.

2. Include coverage for damage from smoke and the water needed to put out the fire.

3. Premiums based on amount of the coverage, location property, the contents of the building & location of fire hydrants.

Fire Insurance

Insurance rates are based on an annual amount per $100 in coverage. The amount due is called a premium. The annual premium is found by using this formula:

Annual Premium = Insured Value x Rate

100

Fire Insurance : Example

A homeowner insured his house for $80,000. If the rate is $0.74 per $100, find his annual premium.

Annual Premium = Insured Value x Rate

100

= $80,000 x $0.74

100

= $592

Fire Insurance : Coinsurance Clause

1. A coinsurance clause states that property must be insured for at least 50% clause of the replacement cost for full compensation for a loss.

2. Most companies use the 80% clause.

3. Businesses take out this kind of policy to save money on premiums since a fire, as in many cases of fire, the damage is only to part of the structure. It will usually not a total loss.

Coinsurance Clause Formula

Compensation (up to amount of loss)

= amount of loss (up to face value) x face value of the policy

80% of replacement value

Try ThisBudget Construction owns a building with a replacement value of $200,000. It has a fire insurance policy with an 80% coinsurance clause, and a face value of $130,000. There is a fire and the building damage is figured to be $50,000. What will the insurance company pay as a compensation?

SOLUTION :

Loss = $50,000

Face Value of the policy = $130,000

80% of replacement value = $200,000 x 0.8 (80%)

= $160,000

Try This

Compensation = amount of loss x face value of policy

80% of replacement value

= $50,000 x $130,000

$160,000

= $40,625

The owner received $40,625 compensation for its loss of $50,000

Try This

1. Find the annual premium on a $40,000 building if the rate is $0.87 per $100.

2. The owner of the building has $75,000 in insurance on a building worth $150,000. How much he can collect on a loss of $25,000 using the 80% coinsurance principle.

3. A person owns a building worth $200,000. He insures it for $150,000. It has fire insurance with 80% coinsurance clause policy. If the loss from a fire is $20,000, how much money he would receive?

Fire Insurance

1. There are maybe some cases where the owner would receive 100% compensation for all damages up to 80% of the property value. If the loss was greater than 80%,the owner would never get anything above 80%.

2. Another situation can occur is when a policy is cancelled before its expiration date. In this case, the insured person is due to a refund.

Fire Insurance : Refund

The amount of refund can be compute by this formula :

Amount of refund = Number of days left x Premium

365

Fire Insurance : Refund

A fire insurance policy on a building was purchased on March 6. The premium was $800. If the building was sold on November 10, find the amount of the refund.

Automobile Insurance

There are several factors that need to be considered when purchasing automobile insurance.

1.Liability

2.Bodily Injured

3.Collision Insurance

4.Comprehensive Insurance

Most insurance have deductible clause.

Automobile Insurance• Liability: The drive is liable for the safety of

passengers and safety of other drivers and other vehicles as well.

• Bodily injured: personal injury sustained in an accident.

• Collision Insurance: protection for the owner of a vehicle for damages to the insured’s vehicle for an accident that is the insured driver’s fault.

• Comprehensive Insurance: protection for the owner of the vehicle for damage caused by a non-accident incident, such as fire, water, theft or vandalism.

Automobile Insurance

Automobile insurance are written in terms the amount of the company is willing to pay per accident. It usually stated as 25/50/10/. Means that:

•In event of accident, insurance will pay up to $25,000 for an injury to one person.•Insurance will pay up to $50,000 for injuries to all the people involved in one accident.•Insurance will pay up to $10,000 for any property damage. The owner is liable for any other damage.

Automobile Insurance

Automobile insurance are written in terms the amount of the company is willing to pay per accident. It usually stated as 25/50/10/. Means that:

•In event of accident, insurance will pay up to $25,000 for an injury to one person.•Insurance will pay up to $50,000 for injuries to all the people involved in one accident.•Insurance will pay up to $10,000 for any property damage. The owner is liable for any other damage.

Automobile Insurance : Example

Catherine Reno was involved in an automobile accident in a $32,000 injury. The insurance policy contained 25/50/10 clause. How much did the insurance company have to pay.

Insurance will pay up to $25,000 for injury to one person

So, $32,000-$25,000= $7000

Automobile Insurance

Ping Kim and his wife were involved in an automobile accident. If Ping was awarded $28,000 in damages & injury and his wife awarded $12,000, how much money did the insurance company have to pay and how much money did the insured pay if his policy contained a 25/50/10.

Example

Sam Johnston is at fault in an automobile accident. He carries 50/100/10. The driver of the car he hit was awarded $52,000. Two passengers in the vehicles were awarded $8,000 and $7,000 respectively. Damage to Sam’s automobile was $5,000 and to the car he hit, $8,000. How much did his insurance company pay and how much was Sam’s liability?

Life Insurance

A person can insure his or her life by purchasing life insurance. There are certain types of insurance:

Straight life insurance – Requires insurers to pay premium for his/her entire life. Collect dividend and face value at the time of his/her death

Term life insurance – Requires the insured to pay premiums for a specific number of years such as 1 year, 5 years, 10 years or 20 years

Life Insurance

Limited payment – Policy requires payments be made for a specific number of years and beneficiary receives the value of the policy upon the death of the insured

Endowment Policy – Policy is paid is paid off in a specific number of years. If the insured lives past the maturity date, he receives the face value of the policy.

Life Insurance : Example

If healthy 45- year old female purchased $100,000,10 year old term policy and the premium was $61.80 per month, find the yearly premium and the total amount she would pay for 10 years.

1 year - $61.80 x 12 = $741.60

10 year - $741.60 x 10 = $7416.00

Life Insurance : Example

Sometimes rates are given per $1000. To find the annual premium use the following formula:

Annual Premium = Face Value x Rate

$1,000

Life Insurance : Annual Premium

Byron Simmons purchased a $50,000 straight life insurance policy. If the premium is $23.40 per $1,000 for a 35 years old male, what was his annual premium?

THE END