Bài giảng Personal Financial - Chapter 8: Home and Automobile Insurance

8 Home and Automobile InsuranceInsuranceProtection against possible financial lossProvides peace of mindInsurance company (insurer)Risk-sharing firm that assumes financial responsibility for losses from an insured riskProcedurePurchase a policy known as coverageInsurance firm assumes a risk for a feeInsured policyholder pays a periodic premium 8-*Objective 1Identify Types of Risks and Risk Management Methods and Develop a Risk Management PlanRisk Chance of loss or injuryUncertainty or lack of predictabilityPeril Anything that may cause a loss Fire, windstorm, robbery, or accidentsHazard Anything that increases the likelihood of a lossFor example, driving drunk, defective house wiring8-*Most Common Types of RiskPersonal RisksLoss of income or lifeCaused by illness, disability, old age, or unemploymentProperty RisksLosses to propertyCaused by perils such as fire or theftLiability RisksLosses caused by negligenceResulting in injury or property damagePure Risk = Insurable Accidental, unintentionalNature and financial loss of the risk can be predictedSpeculative Risk = UninsurableChance of loss or gainStarting a small business, gambling, or investing8-*RiskAvoidanceRiskShiftingRiskAssumptionRiskReductionWays toManageRiskDon’t stop at a convenience store in a bad part of town after midnightWear seatbeltsInstall an alarm systemBuy Insurance Self Insurance8-*Planning an Insurance ProgramSet insurance goals to reduce possible loss of:Income due to premature death, illness, accident or unemploymentProperty caused by perilsIncome, savings and property due to personal negligenceDevelop a plan to reach your goalsWhat 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 actionCheck your resultsInsurance needs and goals change8-*Property and Liability InsurancePotential property losses Home, automobiles, furniture, clothing, personal belongingsRisk #1: Physical damage caused by perils (e.g., fire)Risk #2: Loss or damage caused by criminal behaviorLiability = legal responsibility for the financial cost of another person’s losses or injury (if you are held legally liable)Liability due to negligenceFailure to take ordinary and reasonable careVicarious LiabilityYou are held responsible for the actions of another person, such as your child throwing a ball through a neighbor’s window8-*Homeowner’s Insurance CoverageDamage or destruction of the building in which you live, and other structures on the property Garage, tool shed, trees, and shrubsAdditional Living ExpensesMay be limited to 20-30% of property valueMay be limited to 6-9 monthsObjective 2Assess the Insurance Coverage and Policy Types Available to Homeowners and Renters8-*Homeowner’s Insurance CoveragesPersonal PropertyFurniture, appliances and clothingHousehold inventory advisableUsually 55%, 70%, or 75% of property valueLimits on certain items such as jewelryPersonal Liability and Related CoverageCovers injuries to others on property (e.g., fall on ice)Specialized CoverageEarthquake endorsementFlood coverage8-*Homeowner’s Insurance CoveragesMedical Payments CoverageCoverage for minor injuries caused by you, your family members, or pets, occurring on your property or away from homePersonal Liability CoverageUmbrella policy - also called a personal catastrophe policySupplements basic personal liability coverage$1,000,000 or more in coverageEndorsements and FloatersEndorsements add coverage Personal property floaterCovers specific items of high valueJewelry, furs, art collections8-*Renter’s InsuranceBroad Form Covers personal property loss or damage specified in the policyComprehensive Form Protects property against all perils not excludedRenter’s insurance is relatively inexpensiveReplacement value coverage more costlyCovers property only in your homeUsually includes liability coverageMany renters do not have insurance8-*Home Insurance Policy FormsBasic Form (HO-1)Protects against perils such as fire, lightning, windstorms, hail, smoke, theft, vandalism and riots (specific named perils)Broad Form (HO-2)Wider coverage including falling objects and damage from ice, snow or sleet (more specific named perils)Special Form (HO-3)Basic + Broad form + all other risks unless specifically excluded (commonly earthquake, flood, nuclear accidents, business usage)Tenant’s Form (HO-4)Covers personal property against listed risksComprehensive Form (HO-5)Expands HO-3 coverage to replacement cost; increasingly rare!Condominium Owner (HO-6)Covers personal property and building additions8-*Objective 3Analyze the Factors that Influence the Amount of Coverage and Cost of Home Insurance Determine amount of coverage needed:Replacement value of home ?Value of home’s contents ?Protection for specific items ? (Jewelry, furs, art)Liability coverage ?Consider “loss frequency” (likely # of times for loss) and “loss severity” (potential magnitude of a loss)Principle of Indemnity- insurance will pay no more than actual financial losses sufferedPolicy Limits- specify the maximum dollar amounts that will be paid under a policy8-*Policy ProvisionsLook for a policy with full coverage (100% value)Coinsurance clause requires you to pay a part of a loss.Claim settlement methods:Actual Cash Value (ACV)Replacement cost less depreciationReplacement Cost Full cost to repair or replace the damaged or lost item10-20% > actual cash value coverage8-*Factors That Affect Home Insurance CostsLocation of Home (e.g., rural vs. urban)Type of Structure (e.g., brick vs. wood)Coverage Amount and Policy typeHome Insurance DiscountsAlarm systemSmoke detectorsIf you insure car with the same companyCompany DifferencesCompare costs and coverages8-*Objective 4 Identify the Important Types of Automobile Insurance CoverageFinancial Responsibility LawState legislation requiring proof of financial ability to cover the cost of damage or injury caused in an automobile accident45 states have compulsory automobile liability insurance lawsNJ has very low liability limits:15/ 30/58-*Motor Vehicle Bodily Injury CoverageBodily Injury LiabilityCovers financial loss due to legal expenses, medical expenses, lost wages, etc. associated with injuries caused by an accident for which you were responsibleExpressed 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+ people)$50,000 maximum paid for property damage8-*Motor Vehicle Bodily Injury CoverageMedical Payments CoverageCovers the cost of health care for persons injured in your automobile, including yourselfAlso covers you or family members injured while riding in or hit by another vehicleUninsured Motorist’s ProtectionProtection against the risk of getting into an accident with someone with no insuranceUnderinsured Motorist’s CoveragePays costs if your car is hit by a person who doesn’t have enough insurance to cover the damage they did to you and your car8-*Motor Vehicle Property Damage Coverage Property Damage Liability Covers damage to the other person’s car when you are at fault. Includes damage to such things as street signs, telephone poles, and buildingsExample: during a snow storm you accidentally slide your vehicle into a neighbor’s mailbox. This coverage would pay for repair or replacement of the mailbox8-*Collision Coverage Pays for damage to your automobile, regardless of who is at fault. If you are not at fault, your insurer will try to collect from the other driver’s property damage liability first. Coverage limited to the retail value of your vehicle8-*Comprehensive Physical Damage Covers damage to your vehicle not caused by a collision, such as:Fire, theft or vandalismGlass breakageHail, sand, or wind stormFalling objects or hitting an animal8-*No-Fault InsuranceEach driver collects from his or her own insurance company for medical expenses, lost wages, and related injury costs30 states have some variation of the systemIntended to provide fast, smooth method of paying for damages without determining fault Variations among states; designed to reduce cost and time to settle cases8-*Objective 5Evaluate Factors that Affect the Cost of Automobile Insurance Automobile Insurance CostsLegal Concerns Have enough coverage if you are suedRecommendations:$100,000/$300,000 bodily injury liabilityAdditional $1,000,000+ umbrella liability policy Property Values $50,000-$100,000 suggested for property damage liability8-*Motor Vehicle Insurance Premium FactorsVehicle TypeYear, make, model, and theft rateRating TerritoryAccident, auto theft, and vandalism rates in the area where you liveDriver ClassificationAge, sex, marital status, credit history, driving record, driving habitsAssigned risk pool for those unable to obtain insuranceReducing Automobile Insurance PremiumsCompare Companies Premium DiscountsEstablish and maintain a good driving recordNon-smokerInstall security devices such as a car alarmIf more than one vehicle, insure with the same companyLarger deductibles8-*Wrap UpChapter QuizConcept Check 8-1- Four Methods of Avoiding Risk with ExamplesConcept Check 8-2- Complete the StatementsConcept Check 8-3- True of False? Concept Check 8-4- True or False?