1. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Personal Finance SIXTH EDITION Chapter 11 Auto and Homeowner’s Insurance

2. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Chapter Objectives (1 of 2) 11.1 Explain insurance and risk management 11.2 Describe the role of insurance companies 11.3 Provide a background on auto insurance 11.4 Identify the factors that affect your auto insurance premium 11.5 Explain how to respond if you are in an auto accident

3. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Chapter Objectives (2 of 2) 11.6 Describe the key provisions of homeowner’s insurance 11.7 Describe financial coverage provided by homeowner’s insurance 11.8 Describe the use of renter’s insurance 11.9 Describe the use of umbrella personal liability insurance policies 11.10 Explain how insurance fits within your financial plan

4. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Background on Insurance Property insurance ensures that damages to your auto and home are covered Also protects your personal assets from liability Liability: the amount that you may be required to pay someone for damages that you caused Its primary function is to maintain your existing level of wealth

5. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Managing Risk (1 of 3) Risk: exposure to events or perils that can cause financial loss Risk management: decisions about whether and how to protect against risk Avoid risk –Do not own any assets Reduce risk –Limit the dollar value of assets

6. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Managing Risk (2 of 3) Accept risk –Feasible when likelihood of financial loss is low –Buying insurance differs from other purchases in that there is no immediate benefit –Remember that you do not have control over adverse events Insure against risk –Premium: the cost of obtaining insurance

7. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Managing Risk (2 of 3) Economic impact on the decision to insure against risk –When economic conditions are favorable, people are willing to purchase or increase insurance coverage –When economic conditions are weak, they tend to reduce insurance –Consider the possible danger in reducing insurance coverage

8. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Role of Insurance Companies (1 of 4) Types of insurance –Many types of insurance available  Most popular forms are property and casualty insurance, life insurance and health insurance Insurance company operations –Relationship between insurance companies and premiums

9. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Role of Insurance Companies (2 of 4) EXHIBIT 11.1 Common Events That Could Cause a Financial Loss EventFinancial LossProtection You have a car accident and damage your carCar repairsAuto insurance You have a car accident in which another person in your car is injuredMedical bills and liabilityAuto insurance You have a car accident in which another person in the other driver’s car is injuredMedical bills and liabilityAuto insurance Your home is damaged by a fireHome repairsHomeowner’s insurance Your neighbor is injured while in your homeMedical bills and liabilityHomeowner’s insurance You become ill and need medical attentionMedical billsHealth insurance You develop an illness that requires long-term careMedical billsLong-term care insurance You become disabledLoss of incomeDisability insurance You die while family members rely on your incomeLoss of incomeLife insurance

10. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Role of Insurance Companies (3 of 4) –Underwriters: from an insurance perspective, underwriters are hired to calculate the risk of specific insurance policies, decide what policies to offer, and what premiums to charge –Group insurance company policies for employers  Allows a company’s employees to obtain discounts

11. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Role of Insurance Companies (4 of 4) Role of insurance agents and brokers –Insurance agent: recommends insurance policies for customers –Captive (or exclusive) insurance agent: works for one particular insurance company –Independent insurance agent: represent many different insurance companies

12. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Financial Planning Online (1 of 3) Go to www.ambest.comwww.ambest.com This Web site provides information on how insurance companies are rated.

13. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (1 of 12) Auto insurance protects you from financial loss from damage or liability resulting from automobile accidents Cost has increased in recent years –Personal injury attorneys –No-fault insurance programs: do not hold a specific driver liable for causing the accident  Idea is to reduce costs

14. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (2 of 12)

15. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (3 of 12) Auto insurance policy provisions –Insurance policy: contract between an insurance company and policyholder –Auto insurance policy: specifies the coverage provided by the insurance company for a particular individual and vehicle

16. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (4 of 12) Coverage A: Liability Coverage –Bodily injury liability coverage: protects against liability associated with injuries caused by the policyholder –Property damage liability coverage: protects against losses that result when the policyholder damages another person’s property with his car

17. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (5 of 12) –Policy limits  often described as 100/300/50 –$100,000 per person injured in an accident –$300,000 for all people combined –$50,000 for property damage –Financial responsibility laws: laws that require individuals who drive cars to purchase a minimum amount of liability insurance

18. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (6 of 12) Coverage B: Medical Payments Coverage: insures against the cost of medical care for you and other passengers in your car when you are at fault in an accident –Applies only to insured car

19. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (7 of 12) EXHIBIT 11.3 Minimum Auto Insurance Liability Limits StateLiability LimitsStateLiability LimitsStateLiability Limits Alabama25/50/25Kentucky25/50/10North Dakota25/50/25 Alaska50/100/25Louisiana15/30/25Ohio25/50/25 Arizona15/30/10Maine50/100/25Oklahoma25/50/25 Arkansas25/50/25Maryland30/60/15Oregon25/50/20 California15/30/05Massachusetts20/40/5Pennsylvania15/30/5 Colorado25/50/15Michigan20/40/10Rhode Island25/50/25 Connecticut20/40/10Minnesota30/60/10South Carolina25/50/25 Delaware15/30/5Mississippi25/50/25South Dakota25/50/25 D.C.25/50/10Missouri25/50/10Tennessee25/50/15

20. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (8 of 12) EXHIBIT 11.3 Minimum Auto Insurance Liability Limits StateLiability LimitsStateLiability LimitsStateLiability Limits Florida10/20/10Montana25/50/10Texas30/60/25 Georgia25/50/25Nebraska25/50/25Utah25/65/15 Hawaii20/40/10Nevada15/30/10Vermont25/50/10 Idaho25/50/15New Hampshire25/50/25Virginia25/50/20 Illinois20/40/15New Jersey15/30/5Washington25/50/10 Indiana25/50/10New Mexico25/50/10West Virginia20/40/10 Iowa20/40/15New York25/50/10Wisconsin25/50/10 Kansas25/50/10North Carolina30/60/25Wyoming25/50/20 Source: Data from Insurance Information Institute.

21. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (9 of 12) Coverage C: Uninsured or Underinsured Motorist Coverage –Uninsured motorist coverage: insures against the cost of bodily injury when an accident is caused by another driver who is not insured –Underinsured motorist coverage: insures against bodily injury and drivers who have insufficient coverage

22. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (10 of 12) Coverage D: Collision and Comprehensive Coverage –Collision insurance: insures against costs of damage to your car resulting from an accident in which the policy holder is at fault –Comprehensive coverage: insures you against damage to your car that results from floods, theft, fire, hail, explosions, riots and various other events

23. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (11 of 12) –Deductible: a set dollar amount that you are responsible for paying before any coverage is provided by your insurer Other provisions are available for an additional premium Summary of auto insurance provisions –Contained in standard insurance policy –Expenses incurred by auto insurance companies cover claims and lawyers’ fees

24. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance (12 of 12) EXHIBIT 11.4 Summary of Auto Insurance Provisions Financial Damages Related to Your Car in an AccidentAuto Insurance Provision Liability due to passengers in your car when you are at faultBodily injury liability Liability due to passengers in your car when you are not at fault but driver of other car is uninsured or underinsuredUninsured/Underinsured Motorist Damage to your own carCollision Treatment of injuries to driver and passengers of your carMedical Financial Damages Related to the Other Car or Other Property in an Accident Liability due to passengers in the other carBodily injury liability Liability due to damage to the other carProperty damage liability Liability due to damage to other propertyProperty damage liability Financial Damages Related to Your Car When Not in an Accident Damage to your car as a result of theft, fire, vandalism, or other non-accident eventsComprehensive

25. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance Premiums (1 of 3) Characteristics of your car –Value of car –Repair record of your car Your personal characteristics –Your age –Your mileage –Your driving record

26. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance Premiums (2 of 3) –Your location –Your driver training –Your school performance Your insurance company –Always obtain several different quotes –Several Web sites offer quotations –Compare prices at renewal time

27. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Financial Planning Online (2 of 3) Go to www.insweb.comwww.insweb.com This Web site provides a recommendation on the amount of car insurance coverage that is appropriate for you.

28. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Auto Insurance Premiums (3 of 3)

29. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved If You Are in an Auto Accident (1 of 2) Contact police immediately Request information from the other driver(s), including insurance information Obtain contact information from witnesses Take pictures of any evidence

30. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved If You Are in an Auto Accident (2 of 2) Write down details of accident Ask for a copy of police report File a claim with your insurance company immediately Save receipts for any expenses and submit to insurance company

31. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Exhibit 11.6 Stephanie Spratt’s Auto Insurance Policy EXHIBIT 11.6 Stephanie Spratt’s Auto Insurance Policy Insured Policyholder: Stephanie Spratt Policy Number: WW77-QG22-999 Coverage Begins On: April 6 for one year Insured Car: Honda Civic Due Date: April 6 License Number: ZZ QQZZ Amount Due: $1,100 Drivers of Car in Your Household: One driver, age 25. Ordinary Use of Car: Less than 10,000 miles per year. COVERAGE Liability Bodily Injury ($100,000/$300,000 limit) Property Damage ($50,000 limit) Total Liability$480 Medical Expenses and Income Loss$170 Uninsured/Underinsured Motorist ($100,000/$300,000 limit)$210 Collision ($400 Deductible)$270 Comprehensive ($400 Deductible) $86 Emergency Road Service $4 Total $1,220 Discounts in the Premium Antilock Brakes$30 Accident-free last seven years$90 Total Discounts $120 Amount Due $1,100

32. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (1 of 6) Homeowner’s insurance: provides insurance in the event of property damage, theft, or personal liability relating to your home Covers events from fire to burglary Homeowner’s insurance structured in six packages, each covering different perils in different amounts

33. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (2 of 6) EXHIBIT 11.7 Types of Perils Protected by Homeowner’s (HO) Insurance Policies HO-1:Protects against fire, lightning, explosions, hail, riots, vehicles, aircraft, smoke, vandalism, theft, malicious mischief, glass breakage. HO-2: Protects against the events identified in HO-1, along with falling objects, the weight of ice, snow, or sleet, the collapse of buildings, overflow of water or steam, power surges, and the explosion of steam or hot-water systems, frozen plumbing, heating units, air-conditioning systems, and domestic appliances. HO-3: Protects the home and any other structures on the property against all events except those that are specifically excluded by the homeowner’s policy. The events that are typically not covered by this insurance are earthquakes, floods, termites, war, and nuclear accidents. It may be possible to obtain additional insurance to protect against floods or earthquakes. This policy also protects personal assets against the events that are listed in HO-2. HO-4: Renter’s insurance. Protects personal assets from events such as theft, fire, vandalism, and smoke. HO-5: Protects the home, other structures on the property, and personal assets against all events except those that are excluded by the specific homeowner’s policy. This policy provides coverage of the home similar to that provided by HO-3, but slightly more coverage of personal assets. HO-6: Condominium owner’s insurance. Protects personal assets from events such as theft, fire, vandalism, and smoke (review the specific policy to determine which events are covered). HO-7: Is intended to cover mobile homes and house trailers. HO-8: Protects the home from the same events identified in HO-1, except that it is based on repairs or cash values, not replacement costs.

34. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (3 of 6) Property damage –Cash-value policy: pays you for the value of the damaged property after considering depreciation –Replacement-cost policy: pays you for the actual cost of replacing the damaged property  Minimum limit—many insurers require at least 80% of replacement cost  Financial institutions may require enough insurance to cover your mortgage

35. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (4 of 6) Other structures on property may also be covered Personal property is covered up to a specified amount –Home inventory: contains detailed information about your personal property that can be used when filing a claim

36. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (5 of 6) –Personal property replacement cost coverage is available –Personal property floater: an extension of the homeowner’s insurance policy that allows you to itemize your valuables –Home office provision may be requested or you could purchase a separate policy

37. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance (6 of 6) Liability –Included to cover any lawsuits resulting from an event occurring in your home or on your property Other types of provisions –Additional living expenses –Loss of use provisions

38. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance Premiums (1 of 3) Factors that affect homeowner’s insurance premiums –Value of insured home –Deductible –Location –Degree of protection –Discounts

39. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance Premiums (2 of 3)

40. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Homeowner’s Insurance Premiums (3 of 3) Strategies to reduce your homeowner’s insurance premium –Increase your deductible –Improve protection –Use one insurer for all types of insurance –Stay with the same insurance company –Shop around

41. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Financial Planning Online: Purchasing Homeowner’s Insurance (3 of 3) Go to http://www.insurance.comhttp://www.insurance.com This Web site provides answers to many important questions concerning homeowner insurance.

42. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Filing a Claim Contact insurance company immediately if damage occurs Claims adjuster estimates damage Present your home inventory Get an independent estimate Appeal low estimates by insurance company

43. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Exhibit 11.9 Stephanie Spratt’s Homeowner’s Insurance Policy EXHIBIT 11.9 Stephanie Spratt’s Homeowner’s Insurance Policy Coverages and Limits Dwelling$110,000 Personal Property ($1,000 deductible) $25,000 Personal Liability$100,000 Damage to Property of Others $500 Medical Payments to Others (per person) $1,000 Discounts $25 for House Alarm Annual Premium $600

44. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Renter’s Insurance Renter’s insurance: an insurance policy that covers your possessions within a house, condo, or apartment that you are renting Renter’s insurance policy provisions –Specifies maximum coverage for personal assets –Also covers liability from damages to a person on your property

45. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved Umbrella Personal Liability Policy Umbrella personal liability policy: a supplement to auto and homeowner’s insurance that provides additional personal liability coverage –Especially important for wealthy people –Must show proof of existing coverage

46. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Home and Auto Insurance Fits Within Your Financial Plan (1 of 4) Key decisions about car and homeowner’s insurance for your financial plan are: –Do you have adequate insurance to protect your wealth? –How much insurance should you plan to have in the future?

47. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Home and Auto Insurance Fits Within Your Financial Plan (2 of 4) EXHIBIT 11.10 How Auto and Homeowner’s Insurance Fit Within Stephanie Spratt’s Financial Plan GOALS FOR AUTO AND HOMEOWNER’S INSURANCE PLANNING 1. Maintain adequate insurance for my car and my home. 2. Determine whether I should increase my auto and homeowner’s insurance levels in the future. ANALYSIS Type of InsuranceProtectionStatus AutoProtects one of my main assets and limits my potential liabilities. Already have insurance, but I’m considering more liability coverage. Homeowner’sProtects my largest asset and limits my potential liabilities. Recently purchased homeowner’s insurance as a result of buying a home.

48. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Home and Auto Insurance Fits Within Your Financial Plan (3 of 4) EXHIBIT 11.10 How Auto and Homeowner’s Insurance Fit Within Stephanie Spratt’s Financial Plan DECISIONS Decision on Whether My Present Insurance Coverage Is Adequate: I may increase my auto insurance liability coverage to 100/300/40. While more costly, the increased liability coverage could be worthwhile. I will also consider raising my deductible, which would reduce the insurance premium. I currently have sufficient homeowner’s insurance, but I will consider switching my policy over to my auto insurance company when the present policy expires. I will receive a discount on the insurance premium as a result of having multiple insurance contracts with the same insurance company. I will create a home inventory. I might also consider increasing my deductible on my home in order to pay a lower insurance premium.

49. Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved How Home and Auto Insurance Fits Within Your Financial Plan (4 of 4) EXHIBIT 11.10 How Auto and Homeowner’s Insurance Fit Within Stephanie Spratt’s Financial Plan Decision on Insurance Coverage in the Future: If I buy a more expensive car, I will need additional insurance. However, I will not be buying a new car in the near future. If I buy a more expensive home or if the value of my existing home rises substantially, I will need to increase my homeowner's coverage.