Insurance - Lawrence P. Schrenk
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Transcript Insurance - Lawrence P. Schrenk
FIN 200:
Personal Finance
Topic 12-Auto and Homeowner’s Insurance
Lawrence Schrenk, Instructor
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Learning Objectives
1.
2.
3.
4.
Discuss the general types of insurance. ▪
Explain the general features of auto
insurance.
Explain the general features of home
owners insurance.
Calculate annuities with non-annual
payments.▪
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Insurance in General
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Selected Types of Insurance
Insurance
Government
Social Security
Unemployment
Private
Life
Non-Life
Life
Fire
Annuity
Casualty
Medical
Automobile
Liability
Crime
Don’t Forget: Expatriate Insurance, Pet Insurance, Kidnap
and Ransom Insurance, Terrorist Insurance, etc...
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Terminology
Risk Management
Insurance–Financial Contract...
That redistributes costs of financial losses, or
in which one party compensates another party for
losses
Insurer versus Insured
Premium
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The Insurer
Profit
Revenue
Costs
Earned Premium
Investment Income
Incurred Loss
Underwriting Expenses
Diversification of Risk
Captive versus Independent Agents
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Insurer Issues
Moral Hazard–Possibility that someone
insured will act differently, i.e., to the
detriment of the insurer, than when
uninsured.
If your apartment is insured against theft then
there is less incentive to be security conscious.
Insurance changes our behavior.
Insurance Fraud
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The Insured
The Psychological Bases of Finance
Income Patterns
$100,000
$90,000
$80,000
B
A
C
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
Year 4
Year 3
Year 2
Year 1
Year 4
Year 3
Year 2
$0
Year 1
Income
Smoothing
Can’t insure
against
everything.
Year 4
Year 3
Greed
Risk Aversion
Year 2
Year 1
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The Effect of Insurance
The Effect of Insurance
$60,000
$50,000
$40,000
Expected
$30,000
Actual
Insured
$20,000
$10,000
$0
Year Year Year Year Year Year Year Year Year Year
1
2
3
4
5
6
7
8
9
10
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Auto Insurance
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Policy
Who’s Covered
Coverage
People
Vehicle
Dollar limits
Dates
Policy/Binder Number
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Coverage: Liability
Bodily Injury
Caused by Insured Parties
Medical and Lost Wages
Limits
Property Damage
Individual (recommended minimum $100,000)
Total (recommended minimum $400,000)
You are liable above limits
Recommended minimum $50,000
State Requirements
DC 25/50/10
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Coverage: Medical Payments
Bodily Injury
To Those in Insured Vehicle
Recommended minimum $10,000
Distinguish from Regular Health Insurance
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Coverage: Un-/Underinsured
Uninsured Driver
Underinsured Driver
No Insurance
Bankrupt Insurance Company
Insufficient Insurance
Applies if You are Not at Fault
Recommended minimum $300,000
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Coverage: Collision and
Comprehensive
Collision
Damage to your car when you are at fault
Comprehensive
Various damages to you car
Optional
Flood, fire, theft
May be required by lender
Kelley Blue Book Value Normally Maximum
Deductable
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Homeowner’s Insurance
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Coverage Types
Coverage A–Residence
Coverage B–Detached Structures
Coverage C–Personal Property
Coverage D–Added Living Costs
Coverage E–Personal Liability
Coverage F–Medical Payments
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Coverage A–Residence
Repair/Replacement of Home
Possible Causes or Loss
Fire, Tornado, etc.
Land not included
Two Suggestions
Insure for 100% of full replacement cost
Don’t be underinsured.
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Coverage B–Detached Structures
Generally 10% of coverage A
Possible Applications
Garage
Barn
In-Ground
Excludes structures used for business.
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Coverage C–Personal Property
Payout Values
‘Cash Value Policy’–After Depreciation
‘Replacement Cost Policy’–Actual Cost to
Replace (in theory)
Coverage is normally 50-75% of coverage A.
Do you need additional coverage?
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Coverage D–Added Living Costs
Home Unlivable due to Covered Loss
Additional Living Expenses
New Costs
Less Old Costs not Incurred
Motels
Take-Out Meals
Utilities
Possible Time Limits
12 Month
Unlimited
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Coverage E–Personal Liability
Personal Liability for injuries and property
damage you cause.
Two Important Points
This is general liability insurance
Not restricted to your property
Does not cover vehicular incidents
Covers Lawsuits and your Defense
Usually $100,000 included.
Do you need more?
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Coverage F–Medical Payments
Covers a guest hurt on your property.
Can duplicate guests own health insurance.
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Typical ‘Causes-of-Loss’
Included
Fire, lightning, explosion, windstorm or hail,
smoke, aircraft or vehicle damage, riot or civil
commotion, vandalism, sprinkler leakage, sinkhole
collapse, and volcanic action
Excluded
Earthquake, Flood, Faulty maintenance, Damage
from insects or vermin, Wear and tear, gradual
damage or deterioration
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Other Issues
Deductible
Estimating Coverage
Documentation
Photos
House-Interior and Exterior, Special Features
Personal Property
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Project Notes I
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Project Notes II
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Project Notes III
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Annuities: Non Annual
Payments
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Non-Annual Payments
We need to incorporate the possibility of nonannual payments into our financial calculations.
Fortunately this is simple...
You need to change the payments per year (P/Y) to
12 for monthly payments.
NOTE: HP users, your calculator is set to 12 by
default.
Then do the problem just as you would for
annual payments.
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Changing P/Y (TI)
1.
2.
3.
4.
[2nd ] [I/Y]
12 (monthly or 4 quarterly, or 52 weekly)
[Enter]
[2nd ] [CPT]
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Future Value with a Calculator
How much do we have after 3 years if we
save $200 per month beginning next month
and the interest rate is 12%?
Input 36, Press N (3 x 12 = 36)
2.
Input 12, Press I/Y
3.
Input 200, press +/-, press PMT (you get -200)
4.
Press CPT, FV to get $8,615.38
NOTE: N is the number of periods, so if you save
weekly for 2 years, N = 2 x 52 = 104.
1.
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Non-Annual Practice Problems
How much will you have if you save $100.00
per month for 25 years at 8%?
How much can you borrow if you pay $50.00
per week for 5 years at 7%?
$95,102.64
$10,962.57
How much do you need to save per month to
have $10,000 in 5 years at 10%? ▪
$129.14 ▪
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Ethical Dilemma
You teach personal finance at a local community college. The
state in which you teach requires proof of liability insurance in
order to renew your license plates. During the discussion of this
topic in class, several students admit that they obtain a liability
policy just prior to the renewal of their license plates and then
cancel it immediately thereafter. They do this because they know
that the state has no system for is a following up on the
cancellation of the liability policies once the license plates are
issued. These students, who are out of work as a result of a local
plant shutdown, indicate that they cannot afford to maintain the
insurance, but they must have access to cars for transportation.
a. Discuss whether you consider the conduct of the students to be
unethical.
b. How does the conduct of these students potentially impact other
members of the class who maintain liability insurance on their
vehicles?
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