Home and Automobile Insurance
Home and Automobile Insurance Chapter Learning Objectives
LO8.1 Identify types of risks and risk management methods and develop a risk management plan. LO8.2 Assess the insurance coverage and policy types available to homeowners and renters. LO8.3 Analyze the factors that influence the amount of coverage and cost of home insurance. LO8.4 Identify the important types of automobile insurance coverage. LO8.5 Evaluate factors that affect the cost of automobile insurance.
Insurance and Risk Management LO8.1
What is Insurance? Insurance Protection against possible financial loss Provides peace of mind Insurance company ( insurer ) Risk-sharing firm that assumes financial responsibility for losses from an insured risk Procedure Purchase a policy known as coverage. Insurance firm assumes a risk for a fee. Insured policyholder pays a periodic premium .
Risk Chance of loss or injury Uncertainty or lack of predictability Peril Anything that may cause a loss Fire, windstorm, robbery, or accidents Hazard Anything that increases the likelihood of a loss For example, driving drunk, defective house wiring
Most Common Types of Risk
Personal risks Loss of income or life Caused by illness, old age, or unemployment Property risks Losses to property Caused by perils such as fire or theft Liability risks Losses caused by negligence Resulting in injury or property damage All of these types of risk are pure or insurable risk .
Pure Risk = Insurable Accidental, unintentional Nature and financial loss of the risk can be predicted. Speculative Risk = Uninsurable Chance of loss or gain Starting a small business or gambling
Pure Risk = Insurable Personal risks = loss of income or life Property risks = losses to property Liability risks = losses caused by negligence Negligence = failure to take ordinary care to prevent accidents
Risk Management Methods
Risk Management is an organized plan for protecting yourself, your family, and your property. Risk Avoidance Taking precautions to avoid risk Risk Reduction Taking actions to reduce risk Risk Assumption Insurance company Self-insurance Risk Shifting Insurance buyer Deductible is the set amount the policyholder must pay.
Risk and Risk Management Strategies
Creating a Personal Insurance Program Exhibit 8-2
Planning an Insurance Program
Set insurance goals to reduce possible loss of: Income due to premature death, illness, accident, or unemployment Property caused by perils Income, savings, and property due to personal negligence
Planning an Insurance Program, continued
Develop a plan to reach your goals What do you need to insure? How much should you insure it for? What kind of insurance should you buy? Who should you buy insurance from? Put your plan into action Check your results Insurance needs and goals change.
Property and Liability Insurance in Your Financial Plan
Recent major losses from natural disasters: First months of 2011 were violent with over $350 billion in economic loss. 2016: 15 weather-related disasters cost over $46 billion in damages. 2012: Superstorm Sandy = $18 billion in damages 2005: Hurricanes Katrina, Rita, and Wilma = $50 billion in damages 1992: Hurricane Andrew = $22.3 billion A claim is a request for payment to cover financial losses. Potential property losses Home, automobiles, furniture, clothing, and personal belongings
Property and Liability Insurance in Your Financial Plan, continued
Liability = legal responsibility for the financial cost of another person’s losses or injury Liability due to negligence Failure to take ordinary and reasonable care Vicarious Liability You are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window.
Home and Property Insurance LO8.2
Homeowner’s Insurance is coverage for your place of residence and its associated financial risks, such as damage to personal property and injury to others.
Broad form Covers personal property loss or damage specified in the policy Comprehensive form Protects property against all perils Renter’s insurance is relatively inexpensive Replacement value coverage more costly Covers property only in your home Usually includes liability coverage Many renters do not have insurance
Homeowner’s Insurance Coverages
Building and Other Structures Damage or destruction of the building in which you live, and other structures on the property Garage, tool shed, trees and shrubs Additional Living Expenses May be limited to 10–20% of property value May be limited to 6–9 months
Exhibit 8- 3 Building and other structures Home Insurance Coverage Personal property Loss of use/additional living while home is uninhabitable Personal liability and related coverages
Household Inventory Contents Exhibit 8-4
Homeowner’s Insurance Coverages, continued
Personal Property Furniture, appliances, and clothing Household inventory advisable Usually 55, 70, or 75% of property value Limits on certain items such as jewelry Personal property floater Personal Liability and Related Coverage Injuries to others on your property Umbrella Policy or personal catastrophe policy Medical payments coverage Specialized Coverage Endorsements Flood coverage
Home Insurance Policy Forms
Basic Form (HO-1) Protects against perils such as fire, lightning, windstorms, hail, smoke, theft, and riots Broad Form (HO-2) Wider coverage including falling objects and damage from ice, snow, or sleet Special Form (HO-3) Basic + Broad form + all other risks unless specifically excluded (commonly earthquake, flood, or nuclear accidents)
Home Insurance Policy Forms, continued
Tenant’s form (HO-4) Covers personal property against listed risks Comprehensive form (HO-5) Expands HO-3 coverage to replacement cost Condominium owner (HO-6) Covers personal property and building additions In addition, policies usually cover items such as credit card fraud, check forgery, temporary repairs, and fire department charges in areas with such fees.
Home Insurance Cost Factors LO8.3
Determine amount of coverage needed: Replacement value of your home? Value of your home’s contents? Protection for specific items? Jewelry and furs Art and collectibles Computer equipment Liability coverage? Look for a policy with full coverage . Coinsurance clause requires you to pay a part of a loss. Claim settlement methods Actual cash value (ACV) Replacement cost less depreciation Replacement Value Full cost to repair or replace the damaged or lost item Some companies limit to 400% of ACV. 10–20% > actual cash value coverage
Factors That Affect Home Insurance Costs
Location of Home Type of Structure Coverage Amount and Policy Type Home Insurance Discounts Alarm system Smoke detectors If you insure your car with the same company Company Differences Compare cost, coverage, and service
Automobile Insurance Coverages LO8.4
Financial responsibility law State legislation requiring proof of financial ability to cover the cost of damage or injury caused in an automobile accident All states have compulsory automobile insurance laws.
Motor Vehicle Bodily Injury Coverages
Bodily Injury Liability Covers financial loss due to legal expenses, medical expenses, lost wages, etc. associated with injuries caused by an accident for which you were responsible Expressed as 3 numbers: 100/300/50 Maximum coverage in $1,000’s $100,000 maximum paid for injuries to any one person $300,000 maximum paid in total (2+) $50,000 maximum paid for property damage
Medical Payments Coverage
Covers the cost of health care for persons injured in your automobile, including yourself Also covers you or family members injured while riding in or hit by another vehicle
Two Major Categories of Automobile Insurance Exhibit 8-7
Automobile Liability Insurance Coverage Exhibit 8-8
Uninsured Motorist Protection
insurance that covers you and your family members if you are involved in an accident with an uninsured or hit-and-run driver Underinsured Motorist’s Coverage protects you when another driver has some insurance but not enough to pay for the injuries he or she has caused
Motor Vehicle Property Damage Coverage
Property Damage Liability applies when you damage the property of others Includes damage to such things as street signs and buildings Example: During a snow storm, you accidentally slide your vehicle into a neighbor’s mailbox. This coverage would pay for repair or replacement of the mailbox.
Pays for damage to your vehicle, regardless of who is at fault The amount you can collect is limited to the actual cash value of your vehicle at the time of the accident. Keep a record of any extra features your vehicle has.
Comprehensive Physical Damage
Covers damage to your vehicle in a nonaccident situation , such as: Fire Theft Falling objects Vandalism Hail Floods Tornadoes Earthquakes Avalanches
Each driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs. It doesn’t matter who caused the accident. Coverage varies by state.
Other Automobile Insurance Coverages
Wage loss insurance Towing and emergency road service coverage Rental reimbursement coverage
Automobile Insurance Costs LO8.5
Amount of Coverage Legal concerns Have enough coverage if you are sued. Recommendations: $100,000/$300,000 bodily injury liability Additional $1,000,000+ umbrella liability policy Property values $50,000–$100,000 suggested for property damage liability.
Motor Vehicle Insurance Premium Factors
Vehicle type Year, make, model, and theft rate Rating territory Accident, auto theft, and vandalism rates in the area where you live to determine your rate. Driver classification Age, sex, marital status, credit history, driving record, and driving habits Assigned risk pool for those unable to obtain insurance; must obtain coverage at high rates through a state program
Reducing Automobile Insurance Premiums
Compare companies Rates and services vary, even up to 100% in the same area. Premium discounts Establish and maintain a good driving record Non-smoker Install security devices, such as a car alarm If more than one vehicle, insure with the same company Larger deductibles Make and model of your car Maintain a good credit history
Chapter Summary LO8.1: Identify types of risks and risk management methods and develop a risk management plan.
The main types of risk are personal risk , property risk , and liability risk . Risk management methods include avoidance , reduction , assumption , and shifting . Planning an insurance program is a way to manage risks. Property and liability insurance protect your homes and motor vehicles against financial loss.
Chapter Summary LO8.2: Assess the insurance coverage and policy types available to homeowners and renters.
A homeowner’s policy provides coverage for: Buildings and other structures Additional living expenses Personal property Personal liability and related coverages Specialized coverages Renter’s insurance provides many of the same kinds of protection as homeowner’s policies.
Chapter Summary LO8.3: Analyze the factors that influence the amount of coverage and cost of home insurance.
Factors that affect home insurance coverage and costs include: Location Type of structure Coverage amount Policy type, discounts Choice of insurance company
Chapter Summary LO8.4: Identify the important types of automobile insurance coverage.
Motor vehicle bodily injury coverages include: Bodily injury liability Medical payments coverage Uninsured motorist’s protection Motor vehicle property damage coverages include: Property damage liability Collision Comprehensive physical damage
Chapter Summary LO8.5: Evaluate factors that affect the cost of automobile insurance.
Motor vehicle insurance costs depend on: Amount of coverage needed Vehicle type Rating territory Driver classification