Life, Fire, and Auto Insurance Chapter 20 Life, Fire, and Auto Insurance

Learning Unit Objectives #20 Life, Fire, and Auto Insurance Learning Unit Objectives LU20.1 Life Insurance Explain the types of life insurance; calculate life insurance premiums Explain and calculate cash value and other nonforfeiture options

Learning Unit Objectives #20 Life, Fire, and Auto Insurance Learning Unit Objectives LU20.2 Fire Insurance Explain and calculate premiums for fire insurance of buildings and their contents Calculate refunds when the insured and the insurance company cancel fire insurance Explain and calculate insurance loss when coinsurance is not met

Learning Unit Objectives #20 Life, Fire, and Auto Insurance Learning Unit Objectives LU20.3 Auto Insurance Explain and calculate the cost of auto insurance

Life Insurance Premium - Periodic payments you make for the cost of the insurance (determined by actuaries) Insured - The policyholder receiving coverage Face amount - The amount received (proceeds) upon the death of the insured Beneficiary - The person receiving the insurance proceeds at the death of the insured

Steps in Calculating Annual Life Insurance Premiums Step 2. Divide the amount of coverage by $1,000 and multiply the answer by the premium cost per $1,000 Step 1. Look up the age of the insured and the type of insurance in Table 20-1 (for females subtract 3 years). This gives the premium cost per $1,000

Table 20.1 - Life Insurance Rates

Calculating Insurance Premiums Mike Monts, age 40, wants to purchase a 5 year $200,000 insurance policy. Determine her annual premium Step 1 $200,000 (Coverage) = 200 1,000 Term Insurance -- Pays face amount only if you die within the period of the the insurance. The cheapest coverage. $200 x $3.52 = $704 Step 2 Straight Life (Ordinary Life) -- Provides permanent protection. The insured pays the same premium each year or until death. Has a built in cash savings feature. $200 x $14.54 = $2,908 Step 2

Calculating Insurance Premiums Twenty-Payment Life -- Similar to straight life but insurer pays premiums for only the first 20 years. $200 x $18.61 = $3,722 Step 2 Twenty-Year Endowment -- Most expensive. Combination of term and cash value. After 20 years your protection ends and you receive the face value of the policy. $200 x $33.36 = $6,672 Step 2 Universal Life - A whole life insurance plan with flexible premium schedules and death benefits. Greater risk to the holder because premiums are subject to interest rate fluctuations

Nonforfeiture Options - Figure 20.1 The value of an insurance policy that has built up cash value and provides an opportunity for insurance coverage without additional premiums. Option 1: Cash value (cash surrender value) a. Receive cash value of policy. b. Policy is terminated. The longer the policy has been in effect the higher the cash value because more premiums have been paid in. Option 2: Reduced paid-up insurance a. Cash value buys protection without paying new premiums. b. Face amount of policy is related to cash value buildup and age of insured. The face amount is less than original policy. c. Policy continues for life (at a reduced face amount). Option 3: Extended term insurance a. Original face amount of policy continues for a certain period of time. b. Length of policy depends on cash value built up and on insured’s age. c. This option results automatically if policyholder doesn’t pay premiums and fails to elect another option.

Table 20.2 - Nonforfeiture Options based on $1,000 Face Value

Nonforfeiture Options Assume Mike Monts purchased a 20-payment life policy and decided to stop the policy after it was in force for 10 years. What would be her options? 1. Cash Value $200,000 = 200 x $148 = $29,600 $1,000 2. Reduce paid-up insurance $200,000 = 200 x $371 = $74,200 $1,000 3. Extended term insurance Continue this $200,000 policy for 20 years and 165 days

Fire Insurance Table 20.3 - Fire insurance rates per $100 of coverage Classification of building Class A Class B Rating of area Building Contents Building Contents 1 .28 .35 .41 .54 2 .33 .47 .50 .60 3 .41 .50 .61 .65

Calculating Fire Insurance Premiums Premium = Insured value x Rate $100 Calculate the premium of a building with an insured value of $190,000 and a Class B, Area No. 2 rating. Insured contents are $80,000. Premium = $190,000 = 1,900 x $.50 = $950 $100 Premium = $80,000 = 800 x $.60 = $480 Total Premium = $950 + 480 = 1,430

Table 20.4 - Fire Insurance short-rate and cancellation table Time policy is Percent of annual rate Time policy is Percent of annual rate in force to be charged in force to be charged Days 5 8% Months 5 52% 10 10 6 61 20 15 7 67 25 17 8 74 Months 1 19 9 81 2 27 10 87 3 35 11 96 4 44 12 100

Canceling Fire Insurance (Refunds) Short-rate premium = Annual premium x Short rate Refund = Annual premium - Short rate premium Calculate the refund if the policy is canceled after 7 months Policyholder Cancels Short rate Premium = $1430 x .67 = $958.10 Refund = $1430 - $958.10 = $471.90 Insurer Cancels Charge = $1,430 x 7 = $834.17 12 Refund = $1,430 - $834.17 = $595.83 Months Elapsed

Calculating What Insurance Company Pays with Coinsurance Clause The insured and the insurer share the risk. Encourages property owners to purchase adequate coverage Step 2. Multiply the fraction by the amount of loss (up to the face value of the policy) Step 1. Set up a fraction. The numerator is the actual amount of the insurance carried on the property. The denominator is the amount of insurance you should be carrying on the property to meet coinsurance (80% times the replacement value)

What you should have carried Coinsurance Suppose we carry $60,000 of fire insurance on property that will cost $100,000 to replace. The coinsurance clause is 80%. If we suffer a loss of $20,000, how much will the insurance company pay? Coverage $60,000 x $20,000 = $15,000 $80,000 What you should have carried $100,000 x .80 Loss

Auto Insurance Liability Insurance (Compulsory Insurance) - Covers any physical damages that you inflict on others or their property. (Mandatory) Bodily injury - injury or death to people in passenger car or other cars, etc. Property damage - injury to other someone else’s property, i.e. autos, trees, buildings, hydrants, etc.

Auto Insurance Collision - provides protection against damages to your car caused by a moving vehicle. Covers the cost of repairs less the deductible. Comprehensive - covers damages resulting from theft, fire, falling objects, etc.

Problem Calculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Julie wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible Comprehensive, $200 deductible Substitute transportation Towing & Labor

Table 20.5 - Compulsory insurance Bodily injury to others Damage to someone else’s property Class 10/20 Class 5M* 10 $ 55 10 $129 17 98 17 160 18 80 18 160 20 116 20 186 Explanation of 10/20 and 5 10 20 5 Maximum paid to Maximum paid for Maximum paid for one person per total bodily property damage accident for injury per per accident bodily injury accident *M means thousands.

Calculating Premium and Optional Insurance Coverage Table 20.6 Bodily injury Table 20.7 Damage to someone else’s property

Calculating Premium: Collision - Table 20.8

Calculating Premium: Comprehensive – Table 20.9 Table 20.10 Transportation and Towing Substitute transportation $16 Towing and labor 4

Problem Compulsory Options ($52 + 4) Calculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Julie wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible Comprehensive, $200 deductible Substitute transportation Towing & Labor Compulsory Bodily $ 98 (Table 20.5) Property $160 (Table 20.5) Options Bodily $228 (Table 20.6) Property $168 (Table 20.7) Collision $191 (Table 20.8) ($148 + $43) Comprehensive $ 56 (Table 20.9) ($52 + 4) Substitute trans. 16 Towing & Labor 4 Total annual premium - $921

Problem 20-14: Annual rate Short term rate Short term premium $1,038.00 x 74% = $768.12 $1,038.00 768.12 $ 269.88 refund

Problem 20-17: $300,000 $1,000 = 300 x $2.67 = $801 No cash value for term insurance.

Problem 20-21: Class 18 operator Compulsory, 10/20/5 $ 240 ($80 + $160) Optional Bodily injury, 500/1,000 251 Property damage, 50M 168 Collision, $200 deductible 280 ($264 + $16) Comprehensive,$200 deductible 161 ($157 + $4) Total Annual Premium $1,100

Problem 20-22: $100,000 $100 = 1,000 x $.66 = $660 Cost of premium = .96 x $660 = $633.60 Refund = .04 x $660 = $26.40

Problem 20-23: $95,000 $100 = 950 x .59 = $560.50 8/12 = 2/3 x $560.50 = $373.67

Problem 20-26: Insurance company pays Rusty pays Property damage $ 3,600 $ 300 deductible Collision ($900 - $300) 600 5,000 bodily Bodily 10,000 7,000 $21,200 $5,300