Personal Finance

 The Concept of Risk Management  Planning an Insurance Program  General Insurance Terms  Homeowners Insurance  What’s covered?  Different policy forms  How much coverage do you need?  Factors that affect cost

 Risk Management: An organized plan for protecting yourself, your family and your property. ▪ Reduces financial losses caused by destructive events ▪ Long-range planning process ▪ Needs will change at various points in your life

 Risk Avoidance – I’m not going to do it  Ex: Not driving as to avoid traffic accidents  Risk Reduction – I’ll do/won’t do this to lower my risk  Ex: Not smoking to reduce chances of cancer

 Risk Assumption – I understand there’s a risk, but I got this  Ex: Not using comprehensive coverage on an old car.  Risk Shifting – Take/Share my risk!  Ex: Insurance

 Step 1: Set Insurance Goals  What’s important to me?  Step 2: Develop a Plan  Four Questions to ask in this stage ▪ What do I need to insure? ▪ For how much? ▪ What kind of insurance do I need to buy? ▪ Which insurance company should I choose?

 Step 3: Put Your Plan into Action  Just do it!  Best risk management plans will be flexible, able to grow or shrink as needed  Step 4: Review the Results  Check every 2-3 years or whenever family circumstances change  Is it working? Is it meeting my goals and protecting my plan?

 Peril: Anything that may possibly cause a loss  Ex: Fire, windstorms, robbery  Hazard: Anything that increases the likelihood of loss through peril.  Ex: Defective electrical wiring in house (fire)  Negligence: Failure to take ordinary or reasonable care to prevent accidents from happening  Ex: Not clearing ice from front steps

 Absolutely necessary (not legally) to protect your investment!  Required by lenders when taking out a mortgage  The 5 basic areas of coverage offered by homeowners insurance are:  Building & Other Structures  Additional Living Expenses  Personal Property  Liability  Specialized Events

 Building & Other Structures  House  Garage/Shed  Landscaping  Additional Living Expenses  Place to stay if home is uninhabitable insurance can pay for a place to stay!  Time/Money typically limited

 Personal Property  Portion of the homeowner’s policy to cover loss of personal property.  Typically a percentage of the insured value of the home itself  Usually will limit coverage in the event of theft of particular items, i.e. $1,000 limit on jewelry ▪ Example: Devin’s home is insured for $125,000. His personal property coverage is 60% of the value of his home. How much personal property loss is he insured for?  Personal Property = 60% of $125,000  $125,000 X.60 = $75,000

 Household Inventories  List or other documentation of personal belongings. Include purchase dates/cost  Paper forms are available from Insurance Agents  Video/Photos work as well  Keep inventory list in a secure location!  Don’t forget, there’s an app for that! Don’t forget, there’s an app for that!

 Have extra valuable items? Need extra coverage?  Get a personal property floater!  Covers damage or loss of a specific item of high value  Item will need to get appraised from time to time to ensure value has not changed.  DOCUMENTATION!

 Protection against the possible financial loss due to injuries to other people that occurs on your property  Ex: Neighbor falls out of your tree, breaks arm  Coverage includes the cost of legal defense  Most basic coverages start at $100,000  Extra coverage can be purchased. This is an referred to as an umbrella policy.

 Medical Payments Coverage: Pays the cost of minor accidental injuries to visitors on your property.  Settlements do not require determining who was at fault  Typically limits payment up to $5,000

 Not all natural disasters are covered by regular homeowners insurance  Ex: Floods and Earthquakes  You may need to purchase additional coverage. This additional coverage is known as an endorsement  Government may be able to provide coverage or emergency relief (FEMA)

 There is a common misconception that renters are covered under their landlord’s policy. They are not!  Renter’s Insurance includes the following coverages:  Personal Property  Additional Living Expenses  Liability  Most important coverage for renters is personal property  Inexpensive and provides protection similar to homeowners insurance

 Home insurance policies are available in several forms  Each form provides a different combination of coverage  HO-1 = “Bare Bones” coverage  HO-2 = Basic coverage  HO-3 = Most widely used, protects from all perils except those specifically indicated  HO-4 = Renter’s Insurance  HO-6 = Condo & Co-Op Owners

 When insurance companies pay approved claims they use two methods:  Actual Cash Value  Replacement Value Actual Cash Value: The payment you receive is based on the replacement cost of an item minus deprecation. Payment = Replacement Cost - Depreciation

 Deprecation: The loss of value of an item as it gets older. (Ex: You would receive less for a five-year-old bicycle than you originally paid for it)  Replacement Value: Payment you receive is the full cost of repairing or replacing the item ▪ Depreciation not factored in  Replacement Value coverage is typically 10% more expensive than Actual Cash Value

 Knowing that insurance is based on shifting risk and statistic probability loss will occur, it is not a surprise there are identifiable factors that will affect how much your home insurance costs  There are factors that increase the cost of your insurance premium  There are factors that decrease the cost of your insurance premium

 Location of Home  Ex: Close to water supply or fire hydrant? ▪ CHEAPER PREMIUM!  Ex: Severe weather common in your area? ▪ HIGHER PREMIUM!  Type of Structure  Ex: Brick houses vs. Wood houses  Brick is typically cheaper premium, yet wood houses are more likely to survive an earthquake. This makes wood houses cheaper to insure in these areas

 The financials of the house & policy  Considerations in this factor include ▪ Cost of house ▪ More it cost, more insurance cost ▪ Type of policy ▪ i.e. HO-1 vs. HO-3 ▪ Amount of coverage selected ▪ More insurance = More $$$ ▪ Amount of deductible ▪ Higher Deductible = Less $$$

 Home insurance discounts: Homeowner takes action to reduce risks at home  Ex: Smoke Detectors, Dead-Bolt Locks  Company Differences  Save money by shopping around!  Do not select a provider based on price alone  Consider service and coverage

 An organized plan for protecting yourself, your family and your property is:  Risk Management  The 4 Steps in planning an insurance program 1. Set Goals 2. Develop a Plan 3. Put Plan into Action! 4. Review Results

 Homeowners Insurance covers 5 basic areas:  Building & Other Structures  Additional Living Expenses  Personal Property  Liability  Specialized Events  There are factors that can cause your premium to increase in price as well as those that can cause your premium to decrease in price.