Pesonal finance 6th madura chapter 11 aut and homeowner insurance

Personal Finance SIXTH EDITION Chapter 11 Auto and Homeowner’s Insurance 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 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 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 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 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 not have control over adverse events Insure against risk – Premium: the cost of obtaining insurance 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 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 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 Event Financial Loss Protection You have a car accident and damage your car Car repairs Auto insurance You have a car accident in which another person in your car is injured Medical bills and liability Auto insurance injured Medical bills and liability Auto insurance Your home is damaged by a fire Home repairs Homeowner’s insurance Your neighbor is injured while in your home Medical bills and liability Homeowner’s insurance You become ill and need medical attention Medical bills Health insurance You develop an illness that requires long-term care Medical bills Long-term care insurance You become disabled Loss of income Disability insurance You die while family members rely on your income Loss of income Life insurance You have a car accident in which another person in the other driver’s car is 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 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 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 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 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 Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved Homeowner’s Insurance Premiums (2 of 3) 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 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.com • This Web site provides answers to many important questions concerning homeowner insurance 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 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 Personal Property ($1,000 deductible) Personal Liability Damage to Property of Others Medical Payments to Others (per person) Discounts Annual Premium Copyright © 2017, 2014, 2011 Pearson Education, Inc All Rights Reserved $110,000 $25,000 $100,000 $500 $1,000 $25 for House Alarm $600 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 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 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? 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 Maintain adequate insurance for my car and my home Determine whether I should increase my auto and homeowner’s insurance levels in the future ANALYSIS Type of Insurance Protection Status Auto Protects one of my main assets Already have insurance, but I’m and limits my potential liabilities considering more liability coverage Protects my largest asset and limits my potential liabilities Recently purchased homeowner’s Homeowner’s insurance as a result of buying a home 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 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 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... 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. .. 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