Risk Management and Insurance

What is risk? The chance of loss from some type of disaster

Risk as a teenager Getting hurt in a car accident or while riding their bike Having their bike, phone, backpack, etc. stole Getting jumped by a gang

Risk as an adult Getting a deadly disease Getting laid off from a job Having a fire or flood ruin their home Having a spouse die or get very ill.

How do you manage the risk? Avoid the risk. – For example, don’t ride in a car if the driver has been drinking Reduce the risk. – Since many risks cannot be avoided altogether, the more practical choice is trying to reduce the risk. Risk-reducing behaviors could include always wearing your seatbelt, locking up your bike, or avoiding walking around dangerous parts of the neighborhood after midnight. Accept the risk. – This is good if the likelihood of danger or loss is very small or the loss itself will not have major consequences in your life. For example, it might be very inconvenient to go without a backpack, so you use one even though there is some chance of it being stolen. Share the risk. – This is what insurance and investments do, especially insurance. You pay the insurance companies a sum of money a little, and if disaster occurs, they help you handle the loss. Risk management – how you deal with the potential of personal or financial loss.

HOW DO WE HANDLE RISK? Insurance

What is insurance? Insurance is protection against large-scale financial loss – For a relatively small payment called a premium, you’re protected against the chance of a large loss or financial setback

What is Insurance? INSURANCE 101

Types of Insurance Auto Insurance Homeowners/Condominium Insurance Renters Insurance Life Insurance Insurance Health Insurance Supplemental Insurance – “Umbrella Policy” Other Insurances: – Disability Insurance – Long term care Insurance – Others

Homeowners and Condominium Insurance Protects a dwelling, personal possessions and personal liability. Typically protects against fire, theft, collapse, explosion, falling objects, and other perils. Coverage for additional perils, such as earthquakes, can be added, if needed. Condominium unit owners insurance is similar, but specifically designed for a unit in a building that is owned and insured by a Condominium Association or similar organization.

Renter’s Insurance For people who do not own a home but instead rent a house or an apartment. Protects personal property against fire, theft, vandalism, and other perils similar to homeowner’s coverage. Like the Homeowners policy, it also protects the renter if they are held legally liable for bodily injury or damage to the property of another person.

Life Insurance Protect families when a spouse or parent dies. Term life insurance provides death protection for a stated time period (term), generally from 5 to 30 years. Whole life insurance provides permanent coverage for as long as the insured lives and continues to make timely premium payments.

Health Insurance Covers a variety of medical expenses for individuals and family members. Employers often offer health insurance as a benefit, paying the entire cost or asking the employee to pay part of the monthly fee. Health coverage can include doctor visits, tests and hospital stays. Coverage varies. Dental and eye care insurance may also be offered.

Supplemental For “special” or expensive items – jewelry, collections, musical instruments, etc. Umbrella Policy – a policy that is in addition to all of your other policies. Covers you for liability – damage you cause to others

Auto Insurance Liability coverage – for damage you cause or are liable for Collision coverage – for damage to your vehicle in an accident Comprehensive coverage – for damage to your vehicle not occurring in an accident PIP – Personal Injury Protection for injuries in an auto accident Other coverages – Rental and towing

Supplemental Insurance Policies that provide additional coverage not included in standard policies. Examples: – Personal Articles, for protection of valuables not fully covered under a standard home or renters policy. collections – Personal Liability Umbrella, to provide additional liability protection over and above homeowner, automobile, boat, and other standard policies (for example, if someone is injured in your home or in an auto accident). – Flood, for flood damage.

ACTIVITY 6 Corner Game What type of insurance is needed in each scenario?

Insurance Terms The Insured: An individual covered by an insurance policy The Insurer: The company that provides insurance coverage Policyholder: The owner of an insurance policy

Insurance Terms Policy: A contract of insurance, describing the term, coverage, premiums and deductibles Premium: The payment you make to an insurance company in exchange for its promise of protection and help – Can be paid monthly, quarterly, semi annually or annually

How does insurance work, exactly? You recognize your risk You choose type of insurance for your risk Choose an insurance company Choose best type of policy Pay premium to purchase your insurance NO LOSS LOSS Continue paying your premium Report a claim Insurer determines if there is coverage Pay your deductible and/or copay Receive a payment for your loss

Deductibles and Copays Deductible – The amount the insured pays on a claim before the insurer pays Copay – The percentage of your loss that you pay. (The insurer pays the other percentage)

How much is your loss? Replacement Cost – the cost to replace the item You can pay a higher premium to be paid the replacement cost. Choose a policy with guaranteed replacement cost Depreciation - decrease in value due to use, wear and tear, decay, etc. Actual Cash Value – the Replacement Cost of the object, less Depreciation Actual Cash Value vs. Replacement Cost

The Math: Deductibles Amount of your loss: (After depreciation, Actual Cash value) $3,000 Less your deductible: (What the insured pays “out of pocket”) - $500 Payment from the insurer:2,500 Sometimes there is a “limit” or a maximum that your insurer will pay

The Math: Co-Insurance Health insurance may have co-insurance Amount of your loss: (After depreciation, Actual Cash value) $3,000 Less your deductible: (What the insured pays “out of pocket”) - $500 Subtotal:2,500 Sometimes there is a “limit” or a maximum that your insurer will pay 80/20 Co-Insurance: (80% is paid by the insurer, 20% is paid by the insured) Payment from the insured (20%)500 Payment from the insurer (80%)2,000

PRACTICE Complete the worksheet to calculate how much the insured will receive in various scenarios.