Foundations In Financial PlanningSM Professional Education Program Module 8 Introduction to Insurance

Learning Objectives 8–1: Describe types of personal risk. 8–2: Identify risk management techniques used in a situation. 8–3: Analyze a situation to determine the method of risk management used. 8–4: Describe rules of risk management. 8–5: Define components of an insurance policy or an insurance term. 8–6: Distinguish between the functions of insurance agents and insurance brokers. 8–7: Describe characteristics of various forms and coverages in the homeowners series. 8–8: Describe terms or characteristics of a Personal Automobile Policy (PAP). 8–9: Describe characteristics of umbrella liability coverage.

Questions To Get Us Warmed Up

Types of Personal Risk Loss of income Unemployment Disability Death Divorce Catastrophic losses

Risk Management Techniques Risk retention Risk avoidance Risk reduction Risk sharing Risk transfer

Rules of Risk Management Don’t risk more than you can afford to lose. Consider the odds. Don’t risk a lot for a little.

Four Types of Pure Risk Personal Property Liability Failure of others

Criteria for an Insurable Risk Law of large numbers Accidental loss Definite and measurable loss Loss must not be catastrophic

The Insurance Contract Four legal requirements Legal activity Offer & acceptance Consideration/payment Competent parties Contract terms Insurable interest Aleatory Unilateral vs. bilateral Indemnity Contract of Adhesion

Insurance Policy Components Declaration Insuring agreements Exclusions Conditions Riders Endorsements

Types of Insurance Companies Mutual Owned by policyholders Stock Owned by stockholders

Agents & Brokers Agent Brokers Legal representative of the insurance company Can bind coverage Telling agent = telling company Brokers Represent the buyer Cannot bind coverage

Types of Insurance Life Medical Disability Long-term care Property Liability

Homeowners Perils Covered Basic coverage 11 perils Broad form coverage same as basic + additional perils Open perils coverage (formerly all risks) all perils unless specifically excluded

Types of Policies Policy Type Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use HO 02 (Broad) Broad Form HO 03 (Special) Open Peril HO 04 (Renters) Not covered HO 05 (Special) HO 06 (Condo Owners) Minimal Included in A HO 08 (ACV) Basic

Automobile Insurance Policies Part A: liability coverage Part B: medical payments Part C: uninsured motorist coverage Part D: coverage for damage to your automobile Part E: duties after an accident or loss Part F: general provisions

Umbrella Liability Coverage Protects against both automobile and general liability Is coupled with a minimum amount of liability coverage in both as a base amount homeowners and automobile policies

Question 1 A worker wearing a hard hat on a construction site represents which of the following methods of risk management? risk tolerance risk avoidance risk reduction risk transfer d. Since XYZ, Inc. has taxable income of $200,000, that is the amount subject to tax. Dividends are not deductible.

Question 2 Which of the following are considered to be rules of risk management? Don’t risk a lot for a little. The loss must not be catastrophic. Don’t risk more than you can afford to lose. Consider the odds of the event occurring. I only I and III only II and IV only I, III, and IV only c. A profit sharing plan is a defined contribution plan. With a profit sharing plan, the employer may contribute up to 25% of covered payroll. One advantage of a profit sharing plan for the employer is that the employer need not make contributions each year.

Question 3 Charlie Bucket is interested in insuring against a number of risks he sees around him that cause him concern. Which one of the following would be considered an insurable risk? his neighbor’s house his fiancé’s life his boss’s automobile his son’s second grade teacher b. S corporations do not pay tax, so there is no benefit in receiving dividends from preferred stocks. Preferred stocks are attractive to C corporations because C corporations can exclude 70% of the dividend income if they own less than 20% of the other corporation. A partnership receives no particular benefits from owning preferred stocks.

Question 4 JoAnna Jett has asked you to explain the different types of life insurance companies and life insurance policies. As JoAnna’s insurance advisor, which of the following will you tell her? A mutual company can never sell a non-participating policy. A stock company can never sell a participating policy. A mutual company can sell a non-participating policy. A stock company is owned solely by the policy holders. c. Life insurance death benefits can be used to provide funds for a transfer of a business upon the death of the owner. The cash value in a life insurance policy can be a source of retirement funds. Life insurance is a poor choice for providing operating funds for a business because operating funds are needed on an ongoing basis and the cash value of any policy will eventually be depleted. Life insurance can be used to pay the outstanding liabilities of an estate.

Question 5 Sam Smith has an insurance policy that he took out when he bought his home for $100,000 five years ago. At the time, Sam purchased enough property insurance coverage to meet the 80% coinsurance requirement with a $1,000 deductible. Today, with the original amount of insurance still in force, his home is valued at $150,000. This morning Sam had a kitchen fire that caused $15,000 worth of damage. As the adjuster, what are you able to tell Sam when he asks how much he will be paid? $9,000 $10,000 $12,000 $14,000 b. $200,000 ÷ $950,000 = .2105 (the cap rate); $150,000 ÷ .2105 = $712,500.

Question 6 Which one of the following ISO policy forms increases the coverage on personal property from broad coverage to open-perils coverage on an HO 00 03 policy? HO 00 04 HO 00 06 HO 00 07 HO 00 15 b. $200,000 ÷ $950,000 = .2105 (the cap rate); $150,000 ÷ .2105 = $712,500.

Question 7 Your client, John Jones, has an auto policy with a 100/300 split limit of liability. John caused an accident with another vehicle in which four other people were riding. Each of the four were injured and acted to bring suit against John for $100,000 each. John’s insurer defended the suit at a cost of $18,000. What is the maximum amount that Jon’s policy will pay for this claim? $100,000 $300,000 $318,000 $418,000 b. $200,000 ÷ $950,000 = .2105 (the cap rate); $150,000 ÷ .2105 = $712,500.

Foundations In Financial PlanningSM Professional Education Program Module 8 End of Slides