CH-10 Property and Motor Vehicle Insurance – Personal Finance : Chapter Notes

10 PROPERTY AND MOTOR VEHICLE INSURANCE CHAPTER OVERVIEW Adequate financial protection from risks is a vital component of financial planning. This chapter starts with an introduction to insurance and covers the fundamental aspects of home and auto insurance. Discussed are coverages available to homeowners and renters, along with information on the types of policies and the factors that affect the cost of home insurance. The second major aspect of the chapter involves a presentation of the importance, types of coverages, and cost factors of automobile insurance. LEARNING OBJECTIVES CHAPTER SUMMARY After studying this chapter, students will be able to: LO 10-1 Develop a risk management plan using insurance. The four general risk management techniques are risk avoidance, risk reduction, risk assumption, and risk shifting. In planning a personal insurance program, set your goals, make a plan to reach your goals, put your plan into action, and check your results. LO 10-2 Discuss the importance of property and liability insurance. Owners of homes and automobiles face the risks of (1) property damage or loss, and (2) the risks of legal actions by others for the costs of injuries or property damage. Property and liability insurance offers protection from financial losses that may arise from a wide variety of situations faced by owners of homes and users of automobiles. LO 10-3 Explain the insurance coverages and policy types available to homeowners and renters. Homeowners insurance includes protection for the building and other structures, additional living expenses, personal property, and personal liability. Renter’s insurance includes the same coverages except protection for the building and other structures, which is the concern of the building owner, not the tenant. The main types of home insurance policies are the basic, broad, special, and tenants forms. These policies differ in the risks and property they cover. LO 10-4 Analyze factors that influence the coverage amount and cost of home insurance. The amount of home insurance coverage is determined by the replacement cost of your dwelling and your personal belongings. The cost of home insurance is influenced by the location of the home, the coverage amount, the policy type, discounts, and company differences. 10-1 LEARNING OBJECTIVES CHAPTER SUMMARY LO 10-5 Identify the important types of automobile insurance coverages. Automobile insurance is used to meet state financial responsibility laws and to protect drivers against financial losses associated with bodily injury and property damage. The major types of automobile insurance coverages are bodily injury liability, medical payments, uninsured motorists, property damage liability, collision, and comprehensive physical damage. LO 10-6 Evaluate factors that affect the cost of automobile insurance. The cost of automobile insurance is affected by the amount of coverage, the automobile type, the rating territory, the driver classification, company differences, and premium discounts. INTRODUCTORY ACTIVITIES • Ask students to comment on their responses to the “My Life” chapter opening exercise (p. 335). • Point out the learning objectives (p. 335) in an effort to highlight the key points in the chapter. • Ask students to give examples of situations when property and liability insurance situations might affect a person’s overall financial planning. • Point out the basic coverages associated with home and automobile insurance. WHAT'S NEW TO THIS EDITION Topics, Features Benefits for the Teaching-Learning Environment New content: "Disaster Blaster" Describes the simulator created by the Institute for Business and Home Safety to test the wind-resistance of structural modifications for homes. Updated exhibit: Automobile insurance minimum limits Lists the minimum limits by state for bodily injury and property damage liability coverages. New example: Deductible Presents specific a numeric example for determining the amount paid for a claim for comprehensive and collision insurance. New content: Crash damage Provides a comparison of the safety and damage caused by larger and smaller vehicles in a crash. CHAPTER 10 OUTLINE I. Insurance and Risk Management: An Introduction A. What is Insurance? B. Types of Risk C. Risk Management Methods 1. Risk Avoidance 10-2 2. Risk Reduction 3. Risk Assumption 4. Risk Shifting D. Planning an Insurance Program 1. Step 1: Set Insurance Goals 2. Step 2: Develop a Plan to Reach Your Goals 3. Step 3: Put Your Plan into Action 4. Step 4: Review Your Results II. Property and Liability Insurance A. Potential Property Losses B. Liability Protection III. Home and Property Insurance A. Homeowners Insurance Coverage 1. House and Other Structures 2. Additional Living Expenses 3. Personal Property 4. Personal Liability and Related Coverages 5. Specialized Coverages B. Renter’s insurance C. Home Insurance Policy Forms IV. Home Insurance Cost Factors A. How Much Coverage Do You Need? B. Factors that Affect Home Insurance Costs 1. Location of Home 2. Type of Structure 3. Coverage Amount and Policy Type C. Reducing Home Insurance Costs 1. Home Insurance Discounts 2. Company Differences V. Automobile Insurance Coverages A. Motor Vehicle Bodily Injury Coverages 1. Bodily Injury Liability 2. Medical Payments 3. Uninsured Motorists Protection 4. No-Fault Insurance B. Motor Vehicle Property Damage Coverages 1. Property Damage Liability 2. Collision 3. Comprehensive Physical Damage 10-3 C. Other Automobile Insurance Coverages VI. Automobile Insurance Costs A. The Amount of Coverage 1. Legal Concerns 2. Property Values B. Automobile Insurance Premium Factors 1. Automobile Type 2. Rating Territory 3. Driver Classification C. Reducing Automobile Insurance Premiums 1. Comparing Companies 2. Premium Discounts CHAPTER 10 LECTURE OUTLINE Instructional Suggestions I. INSURANCE AND RISK MANAGEMENT: AN INTRODUCTION (p. 336) • The purpose of insurance is to protect you and your family against financial hardship due to hazard, accident, death, and the like. • To select the right insurance, you must know your risks. • How much insurance you buy depends largely on what you can afford. What is Insurance (p. 336) • Insurance is protection; it protects people against possible financial loss. • An insurance company is a risk-sharing firm that agrees to assume financial responsibility for losses that may result from an insured risk. • The financial trade-offs of not obtaining the right amount and type of insurance can be disastrous. • Use PPT slides 10-2 and 10-3. • Discussion Question: Do most people have too much or not enough insurance? • Assignment: Have students survey others about the types of insurance they have and other coverages they are considering. • Supplementary Resource: Have a local insurance agent point out the areas of protection that many people tend to overlook. 10-4 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions Types of Risks (p. 336) • Risk, peril, and hazard are important terms in insurance. • Risk refers to the uncertainty as to loss that faces a person or property covered by insurance. • Peril is the cause of a possible risk. • Hazard increases the likelihood of loss through some peril. • The most common risks are classified as personal risks, property risks, and liability risks. • Personal risks are the uncertainties surrounding the loss of income or life due to premature death, illness, disability, old age, and unemployment. • Property risks are the uncertainties of direct or indirect losses to personal or real property due to fire, wind, accident, theft, and other hazards. • Liability risks are possible losses due to negligence resulting in bodily harm or property damage to others. • Personal risks, property risks, and liability risks are types of pure risks. • A speculative risk is one in which there is a chance of either loss or gain. Speculative risks are legally defined as uninsurable. • Use PPT slides 10-4 to 10-6. • Exercise: Discuss the concepts of risk, peril, hazard, and types of risks. Ask students to provide additional examples. • Discussion Question: Why are speculative risks not usually covered by insurance? Risk Management Methods (p. 337) • Risk management is an organized strategy for protecting and conserving assets and people. • Risk avoidance: You can avoid the risk of automobile accident by not riding in a car. There are, however, situations in which risk avoidance is a practical technique. • Risk reduction: You can reduce the risk of injury in an auto accident by wearing a seat belt. • Risk assumption: Risk assumption is the act of taking on responsibility for the loss or injury that may result from a risk. • Self-insurance is the process of establishing a monetary fund that can be used to cover the cost of a loss. • Risk shifting: The most common method of dealing with risk is to shift, or transfer, it to an insurance company or some other organization. • Use PPT slide 10-7. • Text Highlight: Exhibit 10-1 (p. 338) summarizes various risks and appropriate strategies for managing them. Planning an Insurance Program (p. 338) • Because each individual has unique needs and goals—many of which change over the years—a financial security insurance program should be • Use PPT slides 10-8, 10-9, 10- 10 for an overview of the steps involved in planning an insurance program. • Text Highlight: Discuss the 10-5 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions tailored to those needs and goals and to the changes they undergo. Step 1: Set Insurance Goals (p. 339) • Your insurance goals should define what you expect to do about covering the basic risks present in your life situation. Each individual has unique goals. Step 2: Develop a Plan to Reach Your Goals (p. 340) • Planning is a sign of maturity, a way of taking control of life instead of letting life happen to you. Step 3: Put Your Plan into Action (p. 340) • The best insurance plan is flexible enough to respond to changing life situations. Your goal should be an insurance program that expands or contracts with the changing size of your protection needs. Step 4: Review Your Results (p. 341) • Evaluate your insurance plan periodically. points to consider when planning an insurance program in “Financial Planning for Life’s Situations” on p. 339. • Exercise: Have students suggest methods of determining plans for an insurance program. Also, ask for actions that can be taken to achieve the goals. • Discussion Question: What is the relationship between planning an insurance program and other components of financial planning? • Discussion Question: When does an individual or family know they have enough insurance? • Practice Quiz 10-1 (p. 341) II. PROPERTY AND LIABILITY INSURANCE (p. 341) • Although the cost of home and automobile insurance may seem high, the financial losses from which that insurance protects you are much higher. Potential Property Losses (p. 342) • Property owners face two basic types of risks. • Physical damage may be caused by such hazards as fire, wind, water, and smoke. • The other threat is property loss due to robbery, burglary, vandalism, and arson. Liability Protection (p. 342) • Liability is legal responsibility for the financial cost of another person’s losses or injuries. • Negligence is the failure to take ordinary or reasonable care. • Strict liability is present when a person is held responsible for intentional or unintentional actions. • Vicarious liability involves a situation in which a person is held responsible for the actions of another person. • Discussion Question: What type of insurance coverage is more important, property or liability? Explain. • Assignment: Have students research special types of property and liability insurance such as personal computer insurance, trip cancellation insurance, and liability insurance for people who have certain professions. • Use PPT slides 10-11 to 10-13. • Discussion Question: What actions could be taken to reduce the high costs of liability insurance for various types of small business owners, such as daycare centers? • Practice Quiz 10-2 (p. 343) 10-6 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions III. HOME AND PROPERTY INSURANCE (p. 343) • Homeowners insurance is coverage for your place of residence and its associated financial risks, such as damage to personal property and injuries to others. Homeowners Insurance Coverages (p. 343) • The main component of homeowners insurance is protection against financial loss due to damage or destruction to a house or other structures. • If fire or other damage prevents the use of your home, additional living expense coverage pays for the cost of living elsewhere. • Your household belongings, such as furniture, appliances, and clothing, are covered for damage or loss up to a portion of the insured value of the home, usually 55, 70, or 75 percent • A personal property floater covers the damage or loss of a specific item of high value not covered by the personal property policy limits. • In case of damage or loss of property, you must be able to prove both ownership and value. A household inventory is a list or other documentation of personal belongings, with purchase dates and cost information. • The personal liability component of a homeowners policy protects you from financial losses resulting from legal action or claims against you or family members due to damages to the property of others. This coverage includes the cost of your legal defense. • An umbrella policy, also called a personal catastrophe policy, supplements your basic personal liability coverage. • Medical payments coverage pays the cost of minor accidental injuries on your property and minor injuries caused by you, family members, or pets away from home. • Use PPT slides 10-14 to 10-16. • Text Highlight: Exhibit 10-3 provides an overview of the major home insurance coverages. • Assignment: Have students talk to an insurance agent or claim adjuster to determine the type of documentation required for a claim settlement. • Class Exercise: Have students create a system for starting and updating a home inventory. • Current Example: Although nearly half of renters think chances are good that they will lose some of their possessions due to fire or theft, less than 30 percent carry renter’s insurance. The reasons most commonly given by renters for not having insurance are:  It costs too much.  I don’t have anything valuable.  I didn’t know renters could buy insurance.  I’m covered by my landlord’s policy.  I’m careful about protecting my belongings.  I have enough money to replace anything. Renter’s Insurance (p. 346) • For people who rent, home insurance coverages include personal property protection, additional living expenses, and personal liability and related coverages. • Protection against financial loss due to damage or loss of personal property is the main component of renter’s insurance. • Use PPT slide 10-17. 10-7 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions Home Insurance Policy Forms (p. 347) • The special form (HO-3) covers the building for all causes of loss or damage except those specifically excluded by the policy. • The tenants (HO-4) protects the personal property of renters against specific risks listed in the policy. • Comprehensive Form (HO-5) expands coverage of HO-3 to include endorsements for items such as replacement cost coverage on contents and guaranteed replacement cost coverage on buildings. • Condominium owners insurance (HO-6) protects the personal property of condominium owners and any additions or improvements made to the living unit, such as bookshelves, electrical fixtures, and wall or floor coverings. • Text Highlight: Exhibit 10-5 (p. 347) provides an overview of the main types of home insurance policies. • Use PPT slide 10-18. • Text Highlight: Exhibit 10-6 (p. 348), present property not usually covered by a home insurance policy. • Practice Quiz 10-3 (p. 348) IV. HOME INSURANCE COST FACTORS (p. 349) • When purchasing insurance, you can get the best value for each premium dollar by selecting the appropriate amount of coverage and by being aware of the factors that affect insurance costs. How Much Coverage Do You Need? (p. 349) • Your insurance protection should be based on the amount of money you need to rebuild your house, not on the amount you paid for it. • In the past, most homeowners policies contained a provision requiring that the building be insured for at least 80% of the replacement value. Under this coinsurance clause, the homeowner would have to pay for part of the losses if the property was not insured for the specified percentage of the replacement value. While a few companies may still use a coinsurance clause, today most companies suggest full coverage. • With the actual cash value (ACV) method of claim settlements, the payment you receive is based on the current replacement cost of a damaged or lost item less depreciation. • Under the replacement value method for settling claims, you receive the full cost of repairing or replacing a damaged or lost item; depreciation is not considered. Factors That Affect Home Insurance Costs (p. 350) • The location of the residence affects insurance rates along with the construction materials of the building. • The policy type you select and the financial limits of coverage also affect the premium you pay. • Use PPT slides 10-19 to 10-21. • Current Example: If your property is damaged in an apartment by a fire caused by electrical wiring for which the landlord is responsible, the loss could be the responsibility of the building owner. In this situation, a renter who doesn’t have property insurance may still be able to collect for the damage to the property. • Supplementary Resource: Obtain additional information on home insurance from the Insurance Information Institute at www.iii.org. • Current Example: About one in ten insured American homeowners report an insured loss each year. However, in Milwaukee only one in 11 insured homeowners have a claim each year (with an average claim of about $2,000). Los Angeles has the highest average payment per claim of over $4,000. These findings are based on data from the Insurance Research Council. • Use PPT slides 10-22 and 10- 23. 10-8 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions Reducing Home Insurance Costs (p. 350) • Most companies offer reduced insurance premiums if you have smoke detectors, a fire extinguisher, dead bolt locks, and a burglar alarm system. • Studies have shown that you can save up to 25 percent on homeowners insurance by comparing companies. • Practice Quiz 10-4 (p. 351) V. AUTOMOBILE INSURANCE COVERAGES (p. 351) • A financial responsibility law is state legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident. • The main coverages of automobile insurance can be grouped into two categories—bodily injury coverages and property damage coverages. Motor Vehicle Bodily Injury Coverages (p. 352) • Bodily injury liability is for the risk of financial loss due to legal expenses, medical expenses, lost wages, and other expenses associated with injuries caused by an automobile accident for which you were responsible. • With 100/300 bodily injury coverage, for example, a driver would have a limit of $100,000 that could be paid to one person in an accident for claims. In addition, there would be a $300,000 limit for all bodily injury claims in a single accident. • Medical payments cover the costs of health care for people who were injured in your automobile, including yourself. • If you are in an accident caused by a person without insurance, uninsured motorists protection covers the cost of injuries to you and your family but, in most states, not property damage. • Underinsured coverage provides financial protection when another driver has insurance but less coverage than needed to cover the financial damages brought upon you. • A no-fault insurance system provides for drivers in an accident to collect medical expenses, lost wages, and related injury costs from their own insurance company. • Text Highlight: Exhibit 10-8 (p. 352) lists the financial responsibility/compulsory insurance minimum limits by state. • Text highlight: Exhibit 10-9 provides an overview of the major types of automobile insurance. • Use PPT slides 10-24, 10-25. • Discussion Question: What are some arguments in favor of and against mandatory auto insurance? • Use PPT slides 10-26, 10-27. 10-9 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions Motor Vehicle Property Damage Coverages (p. 354) • When you damage the property of others, property damage liability protects you against financial loss including vehicles, street signs, lampposts, and buildings. • When your automobile is involved in an accident, collision insurance pays for the damage to the automobile regardless of who is at fault. But if another driver caused the accident, your insurance company would try to recover the repair costs for your vehicle from the other driver’s property damage liability coverage. • Use PPT slides 10-28 to 10-30. • Comprehensive physical damage covers you for such risks as fire, theft, glass breakage, falling objects, vandalism, wind, hail, or damage caused by hitting an animal. • Text Highlight/Class Exercise: Use the “Financial Planning for Life’s Situations” feature (p. 355) to discuss various home and auto insurance coverages. Other Automobile Insurance Coverages (p. 356) • Wage loss insurance will reimburse you for any salary or income lost due to injury in an automobile accident. • Towing and emergency road service pays for the cost of breakdowns and mechanical assistance. • Practice Quiz 10-5 (p. 356) 10-10 CHAPTER 10 LECTURE OUTLINE Instructional Suggestions VI. AUTOMOBILE INSURANCE COSTS (p. 356) • Your automobile insurance cost is directly related to coverage amounts and such factors as the vehicle, your place of residence, and your driving record. The Amount of Coverage (p. 356) • Every state has laws that require or encourage automobile liability insurance coverage. • Just as medical expenses and legal settlements have increased, so too has the cost of automobiles, making higher property damage coverage necessary. Automobile Insurance Premium Factors (p. 357) • The year, make, and model of your automobile have a strong impact on your automobile insurance costs. • In most states, your rating territory is the place of residence that is used to determine your automobile insurance premium. • Driver classification is a category based on the driver’s age, sex, marital status, driving record, and driving habits; the driver’s category is used to determine his or her automobile insurance rates. • An assigned risk pool consists of people who are unable to obtain automobile insurance with some of these individuals assigned to companies operating in a state. • Use PPT slides 10-31 to 10-34. • Assignment: Have students talk to consumers and insurance agents to determine methods of reducing the cost of auto insurance. • Discussion Question: What should be the main factors used to determine the amount a person pays for auto insurance? • Text Highlight: The “How To…” feature on page 358 offers suggestions about filing an auto insurance claim and actions to take when a person is in an auto accident. • Current Example: Every 22 seconds, a motor vehicle is stolen in the United States. Motor vehicle theft cost the nation over $7 billion a year. Reducing Automobile Insurance Premiums (p. 358) • Rates and service vary among automobile insurance companies. Among companies in the same area, premiums can vary as much as 100 percent. • The best way to keep your rates down is to establish and maintain a safe driving record. • Drivers under 25 can qualify for reduced rates by completing a driver training program and maintaining good grades in school. • Installing devices such as a fuel shutoff switch, a second ignition switch, or an alarm system will decrease your chances of theft and thus lower your comprehensive insurance costs. • Discounts may be offered for participating in a car pool and insuring two or more vehicles with the same company. • Use PPT slide 10-35. • Increasing the deductible amount results in a lower premium. When going from full-coverage comprehensive insurance to a $100 deductible may reduce the premium cost by as much as 40 percent. • Practice Quiz 10-6 (p. 359) 10-11 CONCLUDING ACTIVITIES • Point out the chapter summary (p. 361) and key terms in the text margin. • Use the “My Life Stage” feature (p. 360) to highlight the main financial planning activities from the chapter for various ages and life situations. • Discuss selected end-of-chapter Financial Planning Problems, Financial Planning Activities, and Life Situation Case. • Use the Chapter Quiz in the Instructor’s Manual. WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH CHAPTER 10 Use the “Personal Financial Planner in Action” (p. 364) activities to encourage students to plan and implement various personal financial decisions. Sheet 46 Current insurance policies and needs Sheet 47 Home Inventory Sheet 48 Determining Needed Property Insurance Sheet 49 Apartment/Home Insurance Comparison Sheet 50 Automobile Insurance Costs Comparison CHAPTER 10 QUIZ ANSWERS True-False Multiple Choice 1. F (pp. 337, 342) 6. B (p. 342) 2. T (p. 343) 7. A (p. 346) 3. F (p. 347) 8. A (p. 349) 4. F (p. 353) 9. C (p. 354) 5. T (pp. 354-355) 10. C (p. 357) 10-12 Name ________________________________________ Date____________________________ CHAPTER 10 QUIZ TRUE-FALSE _____1. Every liability lawsuit involves an act of negligence. _____2. Homeowners insurance covers the cost of living elsewhere while your home is being repaired from a fire. _____3. The special form of homeowners insurance includes all risks such as loss or damage from floods or earthquakes. _____4. In the event of an accident, bodily injury liability coverage protects both individuals in the driver’s car and people in other cars for medical expenses. _____5. A higher deductible will reduce the amount paid for collision and comprehensive physical damage coverage. MULTIPLE CHOICE _____6. A situation in which a person is held responsible for the actions of another person is a. negligence. b. vicarious liability. c. property damage liability. d. comprehensive coverage. _____7. Renter’s property insurance would include coverage for a. personal belongings. b. structures attached to the main building. c. damages caused by a flood. d. business-related property. _____8. Coverage that pays for the current replacement cost of a stolen or damaged item is called a. replacement value coverage. b. endorsement coverage. c. umbrella coverage. d. actual cash value coverage. _____9. Losses caused by damage to your car by another person who is at fault in the accident are covered by a. collision coverage. b. comprehensive physical damage. c. property damage liability. d. assigned risk coverage. _____10. Driver classification includes information on a person’s __________ and is used to set auto insurance rates. a. type of automobile b. place of residence c. driving habits d. credit rating 10-13 SUPPLEMENTARY ACTIVITY Do You Face Risks?* None of us can escape the possibility of risks in our everyday life. Let us consider how we, individually, may be involved in economic risk—risks that may result in loss of things of value or that may affect our personal health and well-being. A. Divide a sheet of paper into two parts and then print the following headings: Risks that I face Ways to avoid or reduce the seriousness of each risk B. On the left side of your sheet, list the risks that might face you during a full week, covering time you spend at school, at home, at work, and during your recreational hours. C. On the right side of your sheet, indicate how you might be able to prevent these risks or reduce the seriousness of their effects. And indicate in each instance if it would be worthwhile to be protected by insurance. Do You Agree or Disagree With the Following Statements: After each statement, place a check mark in the column you feel is correct. Agree Disagree 1. Insurance is made possible because large numbers of people are willing to share the cost of the same kind of risk. _____ _____ 2. Some of our risks are shared by paying taxes for protection that is provided by local fire and police departments. _____ _____ 3. Most of us can afford to buy insurance to protect us against every possible loss. _____ _____ 4. Well-planned income replacement will provide a family with adequate protection as their needs change. _____ _____ 5. Protection against the loss of income because of illness, accident, or death is obtained by purchasing property and casualty insurance. _____ _____ 6. It is easier to decide how much life and health insurance you need than it is to determine the amount of auto or fire insurance you should carry. _____ _____ 7. If a family is covered by enough insurance, it can prevent or avoid economic risks. _____ _____ 8. Without the responsibility of a family you never have to worry about income replacement. _____ _____ * Source: American Council of Life Insurance. 10-14 SUPPLEMENTARY ACTIVITY For each of the following types of property and liability insurance, describe a specific situation in which a person would be protected by this coverage. Type of Coverage Situation Additional living expenses An umbrella policy Personal property floater Bodily injury liability Medical payments Uninsured motorists protection Property damage liability Collision Comprehensive physical damage 10-15 ANSWERS TO PRACTICE QUIZZES, FINANCIAL PLANNING PROBLEMS, FINANCIAL PLANNING ACTIVITIES, PERSONAL FINANCIAL CASE, AND CONTINUING CASE PRACTICE QUIZZES Practice Quiz 10-1 (p. 341) 1. What is the purpose of insurance? Insurance is protection. Its purpose is to protect against possible financial loss. (p. 336) 2. How are the most common risks classified? The most common risks are classified as personal risk, property risk, and liability risks. (pp. 336-337) 3. What is the difference between pure risk and speculative risk? Pure risks are accidental and unintentional risks for which the nature and financial cost of the loss can be predicted. Such risks are insurable. Speculative risks entail a chance of either loss or gain. Speculative risks are legally defined as uninsurable. (p. 337) 4. What are the methods of managing risk? Four methods of managing risks are risk avoidance, risk reduction, risk assumption, and risk shifting. Each method has merits, but the most common and most effective method of dealing with risk is to shift, or transfer, it to an insurance company or some other organization. (pp. 337-338) 5. What are the steps in planning your personal insurance coverage? Set your goals, plan to reach your goals, put your plan into action, and check your results. To put your risk management plan to work, you must answer four basic questions: What should be insured, and for how much? What kind of insurance should be bought, and from whom? (pp. 339-341) Practice Quiz 10-2 (p. 343) 1. What property and liability risks might some people overlook? Many people do not realize the many financial risks associated with homes and automobile ownership. A person could be held responsible for various situations making liability coverage an important financial planning choice. Damage or loss of personal property is another factor to consider. 2. How could a person’s life situation influence the need for certain types of property and liability insurance? A person with various financial responsibilities (such as dependents or owning a business) can increase the need for property and liability coverage. 10-16 Practice Quiz 10-3 (p. 348) 1. What main coverages are included in home insurance policies? Home insurance includes coverage for the building and other structures, additional living expenses, personal property, and personal liability. (pp. 343-345) 2. What is the purpose of personal liability coverage? Personal liability coverage protects a person from financial loss due to injuries to others or damage to property for which the person is responsible. (pp. 344-345) 3. How does renter’s insurance differ from other home insurance policies? Renter’s insurance includes coverage for personal property, additional living expenses, and personal liability. It does not cover the building or other structures. (pp. 346-347) Practice Quiz 10-4 (p. 351) 1. What major factors influence the cost of home insurance? The main items that affect the cost of home insurance are the location, value, and construction material; the amount of coverage and policy type; discounts for which a person may qualify; and the insurance company’s reputation and service. (pp. 349-350) 2. What actions can a person take to reduce the cost of home insurance? A higher deductible can reduce insurance costs. Also, companies offer insurance discounts to homeowners who have smoke detectors, a fire extinguisher, dead bolt locks, and a burglary alarm system. (p. 350-351) Practice Quiz 10-5 (p. 356) 1. What is the purpose of financial responsibility laws? Financial responsibility laws are designed to protect the public from physical harm and property damage caused by drivers. (p. 351) 2. What are the main coverages included in most automobile insurance policies? The main automobile insurance coverages are bodily injury liability, medical payments, uninsured motorist’s protection, property damage liability, collision, and comprehensive physical damage. 3. What is no-fault insurance? No-fault insurance is a system in which drivers involved in an accident collect medical expenses, lost wages, and related injury costs from their own insurance company. (p. 354) 4. How does collision coverage differ from comprehensive physical damage coverage? Collision pays for damage to your automobile when it is involved in an accident, regardless of who is at fault. Comprehensive physical damage covers you for such risks as theft, glass breakage, falling objects, vandalism, wind, hail, or damage caused by hitting an animal. (pp. 354-355) 10-17 Practice Quiz 10-6 (p. 359) 1. What factors influence how much a person pays for automobile insurance? The cost of auto insurance is affected by state financial responsibility laws, type of automobile, location, driving record, amount of coverage, age, sex, marital status, credit rating, and driving habits. (p. 357) 2. What actions can a person take to reduce the cost of automobile insurance? The amount paid for auto insurance can be reduced by comparing companies, maintaining a good driving record, completing a driver training program, using anti-theft devices, increasing deductibles, not using your car to go to work, and insuring several cars with the same company. (pp. 358-359) FINANCIAL PLANNING PROBLEMS (p. 362) 1. Calculating Property Loss Claim Coverage. Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered with additional insurance. If $3,800 worth of jewelry and $2,800 worth of silverware were stolen from a family, what amount of the claim would not be covered by insurance? Solution: ($3,800 - $1,000) + ($2,800 - $2,500) = $3,100 LO: 10-2 Topic: Calculating Property Loss Claim Coverage LOD: Easy Bloom’s tag: Application 2. Computing Actual Cash Value Coverage. What amount would a person with actual cash value (ACV) coverage receive for two-year-old furniture destroyed by a fire? The furniture would cost $1,000 to replace today and had an estimated life of five years. Solution: $1,000 - [($1,000 ÷ 5)  2] = $600 LO: 10-3 Topic: Computing Actual Cash Value Coverage LOD: Medium Bloom’s tag: Application 3. Determining Replacement Cost. What would it cost an insurance company to replace a family’s personal property that originally cost $42,000? The replacement costs for the items have increased 15 percent. Solution: $42,000  1.15 = $48,300 LO: 10-3 Topic: Determining Replacement Cost LOD: Easy Bloom’s tag: Application 4. Calculating a Coinsurance Claim. If Carissa Dalton has a $130,000 home insured for $100,000, based on the 80 percent coinsurance provision, how much would the insurance company pay on a $5,000 claim? 10-18 Solution: $4,807.96 = ($100,000/$104,000  $5,000) LO: 10-4 Topic: Calculating a Coinsurance Claim LOD: Medium Bloom’s tag: Application 5. Determining the Claim Amount (with Deductibles). For each of the following situations, what amount would the insurance company pay? a. Wind damage of $835; the insured has a $500 deductible. b. Theft of a home entertainment system worth $1,150; the insured has a $250 deductible. c. Vandalism that does $425 of damage to a home; the insured has a $500 deductible. Solution: a. $335 = $835 - $500 b. $900 = $1,150 - $250 c. Zero; deductible exceeds loss. LO: 10-3 Topic: Determining the Claim Amount (with Deductibles) LOD: Medium Bloom’s tag: Application 6. Computing Claims. When Carolina’s house burned down, she lost household items worth a total of $50,000. Her house was insured for $160,000 and her homeowner’s policy provided coverage for personal belongings up to 55 percent of the insured value of the house. Calculate how much insurance coverage Carolina’s policy provides for her personal possessions and whether she will receive payment for all of the items destroyed in the fire. Solution: Multiply the insured value of the house ($160,000) by the percentage of the coverage (55 percent) that is: $80,000 × .55 = $88,000. Because the value of the lost items was $50,000, Carolina will receive payment for all of the items destroyed by fire. LO: 10-3 Topic: Calculating a Home Claim Coverage LOD: Medium Bloom’s tag: Application 7. Calculating Insurance Discounts. Matt and Kristin are newly married and living in their first house. The yearly premium on their homeowner’s insurance policy is $450 for the coverage they need. Their insurance company offers a 5 percent discount if they install dead-bolt locks on all exterior doors. The couple can also receive a 2 percent discount if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install dead-bolt locks on the two exterior doors for $60 each. At the local hardware store, smoke detectors cost $8 each, and the new house has two floors. Kristin and Matt can install them themselves. What discount will Matt and Kristin receive if they install the dead-bolt locks? If they install smoke detectors? Solution: $450 × .05 = $22.50 for the deadbolts $450 × .02 = $9 for the smoke detectors LO: 10-3 Topic: Calculating Home Insurance Discount LOD: Easy Bloom’s tag: Application 10-19 8. Computing Discount Payback. In the preceding problem, assuming their insurance rates remain the same, how many years will it take Matt and Kristin to earn back in discounts the cost of the dead-bolts? The cost of the smoke detectors? Solution: $120 ÷ $22.50 = 5.33 years for the dead-bolt locks $16 ÷ $9 = 1.77 years for the cost of the smoke detectors LO: 10-3 Topic: Determining the Payback for Home Insurance Discounts LOD: Medium Bloom’s tag: Application 9. Calculating Auto Liability Claim Coverage. Becky Fenton has 25/50/10 automobile insurance coverage. If two other people are awarded $35,000 each for injuries in an auto accident in which Becky was judged at fault, how much of this judgment would the insurance cover? Solution: The maximum amount the insurance company would pay is $50,000 for all claims in an accident. LO: 10-5 Topic: Calculating Auto Liability Claim Coverage LOD: Easy Bloom’s tag: Application 10. Determining a Property Damage Liability Claim. Kurt Simmons has 50/100/15 auto insurance coverage. One evening he lost control of his vehicle, hitting a parked car and damaging a storefront along the street. Damage to the parked car was $5,400, and damage to the store was $12,650. What amount will the insurance company pay for the damages? What amount will Kurt have to pay? Solution: The insurance company will pay $15,000 (policy limit); Kurt will be liable for $3,050. LO: 10-5 Topic: Determining a Property Damage Liability Claim LOD: Medium Bloom’s tag: Application 11. Calculating Future Value of Insurance Savings. Beverly and Kyle Nelson currently insure their cars with separate companies, paying $650 and $575 a year. If they insured both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over 10 years based on an annual interest rate of 6 percent? Solution: ($650 + $575)  .10 = $122.50  13.181 (FVA 6%, 10 years) = $1,614.67 LO: 10-6 Topic: Calculating Future Value of Insurance Savings. LOD: Medium Bloom’s tag: Application FINANCIAL PLANNING ACTIVITIES (p. 362) 1. Determining Insurance Coverages. Survey friends and relatives to determine the types of insurance coverages they have. Also, ask them about the process they followed when selecting and comparing various insurance coverages. Students will most likely find that friends and relatives have reasons for purchasing various kinds of insurance coverages that are fairly similar. 10-20 2. Analyzing Insurance Coverages. Talk to a financial planner or an insurance agent about the financial difficulties faced by people who lack adequate home and auto insurance. What common coverages do many people overlook? This activity can help to reinforce the importance of home and auto insurance. The trade-off between the relatively low cost of these coverages and potential financial losses is quite extreme. 3. Maintaining a Household Inventory. Survey several people about their household inventory methods. In the event of damage or loss, would they be able to prove the value of their personal property and other belongings? Maintaining a personal inventory (as described on pages 344-345 of the text) is strongly recommended. Since very few people take the effort to do so, people should at least keep receipts and other proofs of ownership in a safe location. Photos or videos of valuable items can serve as documentation. 4. Comparing Homeowner’s Insurance Costs. Contact two or three insurance agents to obtain information about home or renter’s insurance. Use Sheet 49 in the Personal Financial Planner to compare the coverages and costs. Encourage students to use various sources to obtain comparative information for homeowner's or renter's insurance 5. Reducing Homeowner’s Insurance Costs. Talk to several homeowners about the actions they take to reduce the cost of their home insurance. Locate websites that offer information about reducing home insurance costs. Prepare a video or other visual presentation to communicate your findings. Students will discover to what extent people are aware of home insurance costs and available discounts (see p. 350-351). 6. Assessing Property Risks. Conduct Web research or contact an insurance agent to determine the natural disasters that occur most frequently in your geographic area. What actions could a renter or homeowner take to reduce the financial risk of these natural disasters? This activity will allow students to become aware of various property damage risks that might be encountered in your area. 7. Comparing Auto Insurance Costs. Contact two or three insurance agents to obtain information about automobile insurance. Use Sheet 50 in the Personal Financial Planner to compare costs and coverages for various insurance companies. It may not be practical to have all students do this activity. Select a few students for this research and have them report their findings to the class. FINANCIAL PLANNING CASE We Rent, So Why Do We Need Insurance? (p. 363) 1. Why is it important for people who rent to have insurance? 10-21 The building owner’s insurance will not cover the tenant’s personal property. Depending on a renter’s personal possessions, their losses can be high. 2. Does the building owner’s property insurance ever cover the tenant’s personal property? The building owner’s property insurance does not cover tenants’ personal property unless the building owner can be proven negligent. 3. What is the difference between cash value and replacement value? Cash value means the insurance company will pay what the current value of the item is. Replacement value means that the tenant is covered for the cost of replacing the item at today’s prices. 4. When shopping for renter’s insurance, what coverage features should you look for? Most experts recommend that the policy cover your personal belongings and provide funds for living expenses if you’re dispossessed by fire or other disaster. CONTINUING CASE Property Insurance (p. 364) 1. When obtaining homeowners insurance for their condo, what factors should the Lawrences consider in determining the amount of home insurance coverage they will need? Although student responses may vary, some good answers to this question are: • They should base their home insurance coverage on the amount needed to rebuild or repair their condo and not the amount they paid for it. • Since their condo is financed, the lender will require an amount of home insurance that at least equals the loan/mortgage amount. • They will have to add up the value of the contents of their condo. The insurance company will provide coverage for personal belongings based on the coverage of the condo (usually 55 to 75 percent of the condo insurance amount). • They will have to decide if replacement value or actual cash value would serve their needs in the event a claim is made. Replacement Value will result in their receiving the full cost of repairing or replacing a damaged or lost item whereas Actual Cash Value will result in their receiving the current replacement cost less depreciation for a damaged or lost item. • They will have to determine if they need special coverage for specific items such as jewelry, furs, cameras, silverware, or antiques. 2. What are the two categories of automobile insurance coverage that Shelby and Mark should consider when purchasing automobile insurance and what do they include? Although student responses may vary, possible answers to this question are: • One category of automobile insurance is Bodily Injury Coverage and it includes: a) Bodily Injury Liability pays for legal expenses, medical expenses, lost wages, and other expenses associated with injured parties (not in your vehicle) from an accident in which you are at fault. b) Medical Payments Coverage pays for injuries to persons (including yourself) that were in your vehicle during an accident. It also covers you or your family if you were injured while riding in another person’s vehicle. 10-22 c) Uninsured Motorist’s Protection pays for the cost of injuries to you and your family if an accident was caused by a person without insurance. • Another major category of automobile insurance is Property Damage Coverage and it includes: a) Property Damage Liability pays when you damage another person’s vehicle, street signs, lampposts, buildings, other property, and when you are driving another person’s vehicle with permission. b) Collision pays for damage to “your automobile” regardless of who is at fault. However, if the other driver is at fault, then your insurance company will seek reimbursement from the other driver’s insurance company. c) Comprehensive Physical Damage pays if other risks occur to “your automobile” such as fire, theft, glass breakage, falling objects, vandalism, wind, hail, flood, tornado, lightning, earthquake, avalanche, or damage from an animal. 3. Explain how Shelby and Mark might use the following Personal Financial Planner sheets (Determining Needed Property Insurance and Automobile Insurance Cost Comparison). Although student responses may vary, some good answers to this question are: a. Determining Needed Property Insurance They can use this form to determine the property insurance needed for their condo and personal belongings. b. Automobile Insurance Cost Comparison They can use this form to research and compare companies, coverage for each category of automobile insurance, and the total premium costs. DAILY SPENDING DIARY (p. 365) Often budgeting for property and liability insurance may be overlooked. The use of a daily spending record can help a person better prepare for the cost of purchasing these coverages. 10-23 Name ______________________________________ Cha pt er 10 : P r o p e r t y a n d M o t o r V e h i c l e I n s u r a n c e 3. Protection against possible financial loss. 5. The cause of a possible loss. 6. A risk in which there is only a chance of loss; also called "insurable risk." 11. A policy provision that requires a homeowner to pay for part of the losses if the property is not insured for the specified percentage of the replacement value. 12. Coverage for the risk of financial loss due to legal expenses, medical costs, lost wages, and other expenses associated with injuries caused by an automobile accident for which the insured was responsible. 14. A risk in which there is a chance of either loss or gain. 16. Legal responsibility for the financial cost of another person's losses or injuries. 20. A written contract for insurance. 22. Automobile insurance coverage for the cost of injuries to a person and members of his or her family caused by a driver with inadequate insurance or by a hit-and-run driver. 26. A factor that increases the likelihood of loss through some peril. 29. A claim settlement method in which the insured receives the full cost of repairing or replacing a damaged or lost item. 30. A risk-sharing firm that assumes financial responsibility for losses that may result from an insured risk. 31. A person covred by an insurance policy. 32. A situation in which a person is held legally responsible for the actions of another person. 34. Automobile insurance that pays for damage to the insured's car when it is involved in an accident. 1. An insurance company. 2. Failure to take ordinary or reasonable care in a situation. 4. Chance or uncertainty of loss; also used to mean "the insured." 7. A person who owns an insurance policy. 8. Additional property insurance to cover the damage or loss of a specific item of high value. 9. Automobile insurance that covers financial loss from damage to a vehicle caused by a risk other than a collision, such as fire, theft, glass breakage, hail, or vandalism. 10. A situation in which a person is held responsible for intentional or unintentional actions. 13. State legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident. 15. The process of establishing a monetary fund to cover the cost of a loss. 17. Coverage for a place of residence and its associated financial risks. 18. Home or automobile insurance that pays the cost of medical expenses for people injured on one's property on in one's car. 19. A list or other documentation of personal belongings, with purchase dates a cost information. 20. Automobile insurance coverage that protects a person against financial loss when that person damages the property of others. 21. A category based on the driver's age, sex, marital status, driving record, and driving habits; used to determine automobile insurance rates. 22. Supplementary personal liability coverage; also called a "personal catastrophe policy." 23. An automobile insurance program in which dirvers involved in accidents collect medical expenses, lost wages, and related injury costs from their own insurance companies. 24. The place of residence used to determine a person's automobile insurance premium. 25. An addition of coverage to a standard insurance policy. 27. Consists of people who are unable to obtain automobile insurance due to poor driving or accident records and must obtain coverage at high rates through a state program that requires insurance companies to accept some of them. 28. The amount of money a policyholder is charged for an insurance policy. 33. A claim settlement in which the insured receives payment based on the current replacement cost of a damaged or lost item, less depreciation. (abbreviation) Across Down C O M P R E H E N S I V E P H Y S I C A L D A M A G E U N I N S U R E D M O T O R I S T S P R O T E C T I O N F I N A N C I A L R E S P O N S I B I L I T Y L A W P R O P E R T Y D A M A G E L I A B I L I T Y P E R S O N A L P R O P E R T Y F L O A T E R M E D I C A L P A Y M E N T S C O V E R A G E B O D I L Y I N J U R Y L I A B I L I T Y D R I V E R C L A S S I F I C A T I O N H O M E O W N E R S I N S U R A N C E V I C A R I O U S L I A B I L I T Y H O U S E H O L D I N V E N T O R Y C O I N S U R A N C E C L A U S E R E P L A C E M E N T V A L U E I N S U R A N C E C O M P A N Y A S S I G N E D R I S K P O O L S T R I C T L I A B I L I T Y S P E C U L A T I V E R I S K R A T I N G T E R R I T O R Y U M B R E L L A P O L I C Y S E L F I N S U R A N C E N O F A U L T S Y S T E M P O L I C Y H O L D E R E N D O R S E M E N T N E G L I G E N C E L I A B I L I T Y I N S U R A N C E C O L L I S I O N P U R E R I S K P R E M I U M I N S U R E R I N S U R E D P O L I C Y H A Z A R D P E R I L R I S K A C V 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Instructor Manual for Personal Finance Jack R. Kapoor, Les R. Dlabay , Robert J. Hughes, Melissa M. Hart 9780077861643, 9781260013993