Chapter 20 - Life, fire, and auto insurance. In this chapter, the learning objectives are: Explain the types of life insurance; calculate life insurance premiums; explain and calculate cash value and other nonforfeiture options; explain and calculate premiums for fire insurance of buildings and their contents; calculate refunds when the insured and the insurance company cancel fire insurance; explain and calculate insurance loss when coinsurance is not met.
Chapter 20 Life, Fire, and Auto Insurance McGrawHill/Irwin ©2011 The McGrawHill Companies, All Rights Reserved #20 Life, Fire, and Auto Insurance Learning Unit Objectives LU20.1 Life Insurance Explain the types of life insurance; calculate life insurance premiums Explain and calculate cash value and other nonforfeiture options 202 #20 LU20.2 Life, Fire, and Auto Insurance Learning Unit Objectives Fire Insurance Explain and calculate premiums for fire insurance of buildings and their contents Calculate refunds when the insured and the insurance company cancel fire insurance Explain and calculate insurance loss when coinsurance is not met 203 #20 Life, Fire, and Auto Insurance Learning Unit Objectives LU20.3 Auto Insurance Explain and calculate the cost of auto insurance 204 Life Insurance Insured The policyholder receiving coverage Beneficiary The person receiving the insurance proceeds at the death of the insured 205 Premium Periodic payments you make for the cost of the insurance (determined by actuaries) Face amount The amount received (proceeds) upon the death of the insured Steps in Calculating Annual Life Insurance Premiums Step 2. Divide the amount of coverage by $1,000 and multiply the answer by the premium cost per $1,000 Step 1. Look up the age of the insured and the type of insurance in Table 201 (for females subtract 3 years). This gives the premium cost per $1,000 206 Table 20.1 Life Insurance Rates Age 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 207 Five-year term 1.85 1.85 1.85 1.85 1.85 1.85 1.85 1.86 1.86 1.87 1.87 1.87 1.88 1.95 2.08 2.23 2.44 2.67 2.95 3.24 3.52 Age 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Straight life 5.90 6.13 6.35 6.60 6.85 7.13 7.43 7.75 8.08 8.46 8.85 9.27 9.71 10.20 10.71 11.26 11.84 12.46 13.12 13.81 14.54 Age 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Twentypayment life 8.28 8.61 8.91 9.23 9.56 9.91 10.29 10.70 11.12 11.58 12.05 12.57 13.10 13.67 14.28 14.92 15.60 16.30 17.04 17.81 18.61 Age 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Twenty-year endowment 13.85 14.35 14.92 15.54 16.05 17.55 17.66 18.33 19.12 20.00 20.90 21.88 22.89 23.98 25.13 26.35 27.64 28.97 30.38 31.84 33.36 Calculating Insurance Premiums Bob Brady, age 40, wants to purchase a 5 year $200,000 insurance policy. Determine her annual premium $200,000 (Coverage) = 200 1,000 208 Step 1 Term Insurance Pays face amount only if you die within the period of the the insurance. The cheapest coverage. $200 x $3.52 = $704 Step 2 Straight Life (Ordinary Life) Provides permanent protection. The insured pays the same premium each year or until death. Has a built in cash savings feature. $200 x $14.54 = $2,908 Step 2 Calculating Insurance Premiums TwentyPayment Life Similar to straight life but insurer pays premiums for only the first 20 years. $200 x $18.61 = $3,722 Step 2 TwentyYear Endowment Most expensive. Combination of term and cash value. After 20 years your protection ends and you receive the face value of the policy. $200 x $33.36 = $6,672 Step 2 Universal Life A whole life insurance plan with flexible premium schedules and death benefits. Greater risk to the holder because premiums are subject to interest rate fluctuations 209 Nonforfeiture Options Figure 20.1 The value of an insurance policy that has built up cash value and provides an opportunity for insurance coverage without additional premiums Option 1: Cash value (cash surrender value) a. Receive cash value of policy b. Policy is terminated The longer the policy has been in effect the higher the cash value because more premiums have been paid in Option 2: Reduced paidup insurance a. Cash value buys protection without paying new premiums b. Face amount of policy is related to cash value buildup and age of insured. The face amount is less than original policy c. Policy continues for life (at a reduced face amount) Option 3: Extended term insurance a. Original face amount of policy continues for a certain period of time b. Length of policy depends on cash value built up and on insured’s age c. This option results automatically if policyholder doesn’t pay premiums and fails to elect another option 2010 Table 20.2 Nonforfeiture Options based on $1,000 Face Value Years insurance policy in force 10 15 20 2011 Cash value 29 96 148 265 Straight life Amount of Extended paid-up term Insurance Years Day 86 91 259 18 76 371 20 165 550 21 300 Cash value 71 186 317 475 20-payment life Amount of Extended paid-up term insurance Years Day 220 19 190 521 28 195 781 32 176 1,000 Life Cash value 92 319 619 1,000 20-year endowment Amount of Extended paid-up term insurance Years Day 229 23 140 520 30 160 790 35 300 1,000 Life Nonforfeiture Options Assume Bob Brady purchased a 20payment life policy and decided to stop the policy after it was in force for 10 years. What would be his options? 1. Cash Value $200,000 = 200 x $148 = $29,600 $1,000 2. Reduce paidup insurance 3. Extended term insurance Continue this $200,000 policy for 20 years and 165 days 2012 $200,000 = 200 x $371 = $74,200 $1,000 Fire Insurance Table 20.3 Fire insurance rates per $100 of coverage Classification of building Class A Class B Rating of area Building Contents Building 1 .28 .35 .41 2 .33 .47 .50 3 .41 .50 .61 2013 Contents .54 .60 .65 Calculating Fire Insurance Premiums Premium = Insured value x Rate $100 Calculate the premium of a building with an insured value of $190,000 and a Class B, Area No. 2 rating. Insured contents are $80,000 Premium = $190,000 = 1,900 x $.50 = $950 $100 Premium = $80,000 = 800 x $.60 = $480 $100 Total Premium = $950 + 480 = 1,430 2014 Table 20.4 Fire Insurance shortrate and cancellation table Time policy is Percent of annual rate Time policy is Percent of annual rate in force to be charged in force to be charged Days 5 8% Months 5 52% 10 10 6 61 20 15 7 67 25 17 8 74 Months 1 19 9 81 2 27 10 87 3 35 11 96 4 44 12 100 2015 Calculating What Insurance Company Pays with Coinsurance Clause The insured and the insurer share the risk. Encourages property owners to purchase adequate coverage Step 2. Multiply the fraction by the amount of loss (up to the face value of the policy) Step 1. Set up a fraction. The numerator is the actual amount of the insurance carried on the property. The denominator is the amount of insurance you should be carrying on the property to meet coinsurance (80% times the replacement value) 2016 Coinsurance Suppose we carry $60,000 of fire insurance on property that will cost $100,000 to replace. The coinsurance clause is 80%. If we suffer a loss of $20,000, how much will the insurance company pay? Coverage What you should have carried $100,000 x .80 2017 $60,000 x $20,000 = $15,000 $80,000 Loss Auto Insurance Liability Insurance (Compulsory Insurance) Covers any physical damages that you inflict on others or their property. (Mandatory) Bodily injury injury or death to people in passenger car or other cars, etc Property damage injury to other someone else’s property, i.e. autos, trees, buildings, hydrants, etc 2018 Problem Calculate the annual auto premium for Shirley who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Shirley wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible 2019 Comprehensive, $200 deductible Substitute transportation Towing & Labor Problem Calculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age 3 and symbol 4. Her state has compulsory insurance, and Julie wants to add the following options: 1. Bodily injury, 250/500 2. Property damage 5M 3. Collision, $200 deductible Compulsory Bodily Property $ 98 $160 (Table 20.5) (Table 20.5) $228 $168 $191 (Table 20.6) (Table 20.7) (Table 20.8) ($148 + $43) (Table 20.9) Options Bodily Property Collision Comprehensive $ 56 ($52 + 4) Comprehensive, $200 deductible Substitute trans 16 Substitute transportation Towing & Labor 4 Towing & Labor Total annual premium $921 2020 ... 371 20 165 550 21 300 Cash value 71 186 317 475 2 0- payment life Amount of Extended paid-up term insurance Years Day 220 19 190 521 28 195 781 32 176 1,000 Life Cash value 92 319 619 1,000 2 0- year... $200 ,000 = 200 x $148 = $29,600 $1,000 2. Reduce paidup insurance 3. Extended term insurance Continue this $200 ,000 policy for 20 years and 165 days 20 12 $200 ,000 = 200 x $371 = $74 ,200 ... 2. Property damage 5M 3. Collision, $200 deductible Compulsory Bodily Property $ 98 $160 (Table 20. 5) (Table 20. 5) $228 $168 $191 (Table 20. 6) (Table 20. 7) (Table 20. 8) ($148 + $43) (Table 20. 9) Options Bodily