After studying this chapter you will be able to: 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;...
LIFE, FIRE, AND AUTO INSURANCE Chapter Twenty McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved Learning unit objectives LU 20-1: Life Insurance Explain the types of life insurance; calculate life insurance premiums Explain and calculate cash value and other nonforfeiture options LU 20-2: 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 LU 20-3: Fire Insurance Explain and calculate the cost of auto insurance 202 Life Insurance Insured – Premium – The policyholder receiving coverage Periodic payments you make for the cost of the insurance (determined by actuaries) Beneficiary – Face amount – The person receiving the insurance proceeds at the death of the insured The amount received (proceeds) upon the death of the insured 203 Calculating Annual Life Insurance Premiums Step Look up the age of the insured and the type of insurance in Table 20-1 (for females subtract years) This gives the premium cost per $1,000 Step Divide the amount of coverage by $1,000, and multiply the answer by the premium cost per $1,000 204 Life Insurance Rates (Table 20.1) 205 Calculating Insurance Premiums Bob Brady, age 40, wants to purchase a year $200,000 insurance policy Determine her annual premium $200,000 (Coverage) 1,000 = 200 Step Term Insurance Pays face amount only if you die within the period of the insurance The cheapest coverage $200 x $3.52 = $704 Step 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 206 Calculating Insurance Premiums Twenty-Payment Life Similar to straight life but insurer pays premiums for only the first 20 years $200 x $18.61 = $3,722 Step Twenty-Year 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 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 207 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 208 Nonforfeiture Options based on $1,000 Face Value (Table 20.2) 209 Nonforfeiture Options Assume Bob Brady purchased a 20-payment life policy and decided to stop the policy after it was in force for 10 years What would be his options? Cash value Reduce paid-up insurance Extended term insurance $200,000 $1,000 = 200 x $148 = $29,600 $200,000 $1,000 = 200 x $371 = $74,200 Continue this $200,000 policy for 20 years and 165 days 2010 Fire Insurance Table 20.3 - Fire insurance rates per $100 of coverage 2011 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 rating Insured contents are $80,000 Premium = $190,000 $100 Premium = $80,000 $100 = 1,900 x $.50 = $950 = 800 x $.60 = $480 Total premium = $950 + 480 = 1,430 2012 Fire Insurance short-rate and cancellation table (Table 20.4) 2013 Canceling Fire Insurance (Refunds) Short-rate premium = Annual premium x Shortrate Refund = Annual premium – Short-rate premium Short-rate premium = $1,430 Annual premium x 67 Short-rate = $958.10 Refund = $1,430 Annual Premium $958.10 Short-rate premium = $471.90 Calculate the refund if the policy is canceled after months elapsed = $834.17 Charge Insurer Cancels = $1,430 Annual premium x months 12 = $1,430 Annual premium $834.17 Charge = $595.83 Refund 2014 Calculating Coinsurance Clause Payment for Insurance Company Coinsurance the insured and the insurer share the risk Encourages property owners to purchase adequate coverage Step 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) Step Multiply the fraction by the amount of loss (up to the face value of the policy) 2015 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 _ (Replacement value x Coinsurance clause %) Coverage What you should have carried _ x Loss = Insurance company payment $60,000 x $20,000 = $15,000 $100,000 X 80 2016 Auto Insurance Liability Insurance (compulsory insurance) - Covers any physical damages that you inflict on others or their property (Mandatory) Bodily Injury – Covers injury or death to people in passenger car or other cars, etc Property Damage – Covers injury to someone else’s property, i.e., autos, trees, buildings, hydrants, etc Comprehensive - Covers damages resulting from theft, fire, falling objects, etc Collision - Provides protection against damages to your car caused by a moving vehicle Covers the cost of repairs less the deductible 2017 Auto Insurance Example Calculate the annual auto premium for Shirley who lives in Territory 5, is a driver classified 17, and has a car with age and symbol Her state has compulsory insurance, and Shirley wants to add the following options: Bodily injury, 250/500 Property damage, 5M Collision, $200 deductible Comprehensive, $200 deductible Substitute transportation Towing & labor 2018 Compulsory insurance (Table 20.5) 2019 Calculating Premium and Optional Insurance Coverage Table 20.6 Bodily injury Table 20.7 Damage to someone else’s property 2020 Calculating Premium: Collision (Table 20.8) 2021 Calculating Premium (Tables 20.9 and 20.10) 2022 Calculating Auto Premium (Table 20.11) Calculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age and symbol Her state has compulsory insurance, and Julie wants to add the following options: Bodily injury, 250/500 Property damage 5M Compulsory Bodily Property Options Bodily Property Collision $ 98 $160 (Table 20.5) (Table 20.5) $228 $168 $191 ($148 + $43) Comprehensive $ 56 (Table 20.6) (Table 20.7) (Table 20.8) Collision, $200 deductible Comprehensive, $200 deductible Substitute transportation Towing & labor (Table 20.9) ($52 + 4) Substitute trans 16 Towing & labor Total annual premium $921 2023 ... 2 0-1 : Life Insurance Explain the types of life insurance; calculate life insurance premiums Explain and calculate cash value and other nonforfeiture options LU 2 0-2 : Fire Insurance Explain and. .. 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... calculate insurance loss when coinsurance is not met LU 2 0-3 : Fire Insurance Explain and calculate the cost of auto insurance 202 Life Insurance Insured – Premium – The policyholder receiving