Chapter 8

 Protection against possible financial loss  Property loss  Illness  Injury  Insurance company (insurer): a risk- sharing business that agrees to pay for losses that may happen to someone it insures

 Policy: written contract for insurance  Policyholder: person who owns an insurance policy  Premium: amount of money a policyholder is charged for an insurance policy  Coverage: the protection provided by the terms of an insurance policy  Insured: a person covered by an insurance policy

 Risk: the chance of loss or injury  No one can predict trouble  Peril: anything that may cause a loss  Fire, windstorms, explosions, robbery, accidents  Hazard: anything that increases the likelihood of loss through some peril  Defective wiring, etc.

 Most common risks:  Personal  Loss of income or life due to illness, disability, old age, or unemployment  Property  Loss of property caused by perils, such as fire or theft, and hazards  Liability  Losses caused by negligence that leads to property damage or injury  Negligence—failure to take ordinary or reasonable care to prevent accidents from happening

 Risk Avoidance  Avoiding risk by not doing something  Examples: taking precautions in high crime areas, not driving  Risk Reduction  Decrease the likelihood that you will be harmed  Examples: wearing your seat belt, not smoking, eating right and exercising, installing fire extinguishers and smoke detectors

 Risk Assumption  Taking on responsibility for the negative results of a risk  Makes sense if you know that the possible loss is small  Makes sense if you have taken all the necessary precautions you can to avoid or reduce the risk  Example: not buying collision insurance on an old car

 Risk Shifting  Transferring risk to an insurance company  In exchange for a fee, the insurance company agrees to pay for your losses  Most insurance policies include a deductible  Deductible: set amount that the policyholder must pay per loss on an insurance policy  Example: a falling tree damages your car, you may have to pay $200 toward repairs and the insurance company will pay the rest

 Set Insurance Goals  Reduce possible loss of income caused by premature death, illness, accident, or unemployment  Reduce possible loss of property caused by perils such as fire or theft, or hazards  Reduce possible loss of income, savings, and property because of personal negligence

 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  Purchase additional insurance if necessary  Adjust your budget to cover costs of additional insurance  Expand savings and investment programs  Respond to changing life situations  Birth  Death  College  Teenage drivers  Buying a house

 Check your results  Review plan every 2-3 years  Adjust plan for changing needs  Adjust budget for changing needs

 Each year in the United States home owners and renters lose billions of dollars from:  More than 3 million burglaries  500,00 fires  200,000 cases of damages from other perils

 Potential Property Loss  Two basic types of risk:  Physical damage caused by perils such as fire, wind, water, and smoke  Loss or damage caused by criminal behavior such as robbery, burglary, vandalism, and arson

 Liability Protection  Legal responsibility for the financial cost of another person’s losses or injury  If you are found liable, it’s because of negligence on your part  Examples: letting young children swim without supervision, cluttering a staircase with things that could make someone slip and fall

 Homeowner’s Insurance Coverage  Building in which you live and any other structures on the property  Detached garage  Tool shed  Additional living expenses  Motel or apartment while your home is being repaired  Personal property  Furniture, appliances, clothing up to a portion of the insured value of your home (usually 55, 70, or 75%)  Create a household inventory with purchase dates and cost information

 Homeowner’s Insurance Coverage  Personal liability and related coverage  Most homeowner’s policies provide for basic personal liability insurance coverage of $100,000  Umbrella policy: supplements your basic personal liability coverage  Medical payments coverage  Specialized coverage  Floods, earthquake  Renter’s Insurance  Provides protection for your personal belongings

 Home Insurance Property Forms  Provide different combinations of coverage  May be different based on where you live  Range from basic to expanded  If you have a home based business you may need additional coverage

 How much coverage do you need?  Should be based on the amount of money you would need to rebuild or repair your house, not the amount you paid for it  Actual cash value (ACV): claim settlement method in which the insured receives payment based on the current replacement cost of the damaged or lost item, less depreciation  Replacement Value: claim settlement method in which the insured receives the full cost of replacing or repairing a damaged or lost item

 Location of Home  Type of Structure  Coverage amount and policy type  Home insurance discounts  Reductions for smoke detectors and fire extinguishers, dead bolt locks and alarm systems  Company Differences  Comparing several companies

 If you hurt someone while driving, there is no limit to the amount he/she can sue you for  Premiums are based on the type of coverage you choose and the track record of other drivers

 Factors that raise or lower your premium:  Age  Gender  Type of car  How often you use your car  Location  Driving record  Claim history  Credit history

 Main types of automobile insurance coverage:  General liability: covers damage to other people’s property and bodily injuries  Medical payments: cover immediate compensation for bodily injury to you and your passengers regardless of fault  Collision: repairs for damage you cause to your car caused by an accident

 Main types of automobile insurance coverage:  Comprehensive: covers fire damage, break-ins, vandalism, or theft, as well as natural disasters  Uninsured motorist: covers lost wages and medical expenses if you are in an accident with someone who doesn’t have auto insurance  Underinsured motorist: covers you when the cost of repairs from an accident caused by another driver exceeds his/her coverage

 Popular add-ons:  Towing expenses  Renting a car while yours is being repaired  Conditions: define your and the insurance company’s rights, duties, and responsibilities  Actions in the event of loss:  Notification  Honest information  Change in circumstances  When is loss not covered  Cancellation procedures

 Higher deductible  Shop around  Ask about discounts:  Good grades  Multiple vehicles  Safety features on car  Drive less  Move to a safer zip code  Get married  Keep your driving record clean

 Work with an insurance agent  Buy insurance directly from the company  Information you need:  SS#  Length of time you’ve had your license  address  How you pay for your car  Vehicle ID #  Make, model, body style, and safety equipment on car  # of moving violations  # of claims (accidents, theft)  Current insurance company  Current liability coverage limits  Policy expiration date

 Call insurance agent right away  Fill out a claim form  Have damage evaluated  Work with the claims adjuster—he/she investigates claim and works with you to fix the damage

 Health Insurance  Property Insurance  Life Insurance  Disability Insurance  Liability Insurance  Special Insurance:  Boat  Travel  Wedding  Malpractice  Errors and omissions  Pet health  Kidnap and ransom