This homework for Adrian Monroe so please do not send me MSG

CHAPTER OVERVIEW

LEARNING OBJECTIVES

CHAPTER SUMMARY

Obj. 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.

Obj. 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.

Obj. 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.

Obj. 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.

LEARNING OBJECTIVES

CHAPTER SUMMARY

Obj. 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.

Obj. 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.

Obj. 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.

Obj. 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

CHAPTER 10 OUTLINE

I. INSURANCE AND RISK MANAGEMENT: AN INTRODUCTION (p. 317)

• 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. 317)

• 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, 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.

Types of Risks (p. 317)

• 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. 318)

• 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. 319) summarizes various risks and appropriate strategies for managing them.

Planning an Insurance Program (p. 319)

• Because each individual has unique needs and goals—many of which change over the years—a financial security insurance program should be tailored to those needs and goals and to the changes they undergo.

Step 1: Set Insurance Goals (p. 320)

• 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. 321)

• 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. 321)

• 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. 322)

• Evaluate your insurance plan periodically.
  

• 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 points to consider when planning an insurance program in “Financial Planning for Life’s Situations” on p. 321.

• 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?

• Concept Check 10-1 (p. 322)

II. PROPERTY AND LIABILITY INSURANCE (p. 322)

• 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. 323)

• 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. 323)

• 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?

• Concept Check 10-2 (p. 324)

III. HOME AND PROPERTY INSURANCE (p. 324)

• 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 Coverage (p. 324)

• 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.

• Transparency Master 10-2 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. 327)

• 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.

Home Insurance Policy Forms (p. 3287)

• 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. 328) provides an overview of the main types of home insurance policies.

• Use PPT slide 10-18.

• Text Highlight: Exhibit 10-6 (p. 329), present property not usually covered by a home insurance policy.

• Concept Check 10-3 (p. 329)

IV. HOME INSURANCE COST FACTORS (p. 330)

• 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. 330)

• 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. 331)

• 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.

Reducing Home Insurance Costs (p. 331)

• 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.

• 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, ATT: Education Dept., 110 William St., New York, NY 10038 (www.iii.org).

• Current Example: One in 10 insured American homeowners reported an insured loss annually. However, in Milwaukee only one in 11 insured homeowners have a claim each year, and the average $2,036 claim is half that of Los Angeles. Los Angeles had the highest average payment per claim—$4,052. These findings are based on data from the Insurance Research Council.

• Use PPT slides 10-22 and 10-23.

• Concept Check 10-4 (p. 332)

V. AUTOMOBILE INSURANCE COVERAGES (p. 332)

• 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. 333)

• 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.

• Transparency Master 10-3 provides an overview of the major types of automobile insurance.

• Text Highlight: Exhibit 10-8 (p. 333) lists the financial responsibility/compulsory insurance minimum limits by state.

• 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.

Motor Vehicle Property Damage Coverages (p. 335)

• 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. 336) to discuss various home and auto insurance coverage.

Other Automobile Insurance Coverages (p. 336)

• 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.

• Concept Check 10-5 (p. 337)

VI. AUTOMOBILE INSURANCE COSTS (p. 337)

• 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. 337)

• 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. 338)

• 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 339 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. 339)

• 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.

• Concept Check 10-6 (p. 340)

CONCLUDING ACTIVITIES

WORKSHEETS FROM PERSONAL FINANCIAL PLANNER FOR USE WITH

CHAPTER 10

CHAPTER 10 QUIZ

Every liability lawsuit involves an act of negligence.

Homeowners insurance covers the cost of living elsewhere while your home is being repaired from a fire.

The special form of homeowners insurance includes all risks such as loss or damage from floods or earthquakes.

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.

A higher deductible will reduce the amount paid for collision and comprehensive physical damage coverage.

A situation in which a person is held responsible for the actions of another person is

1. negligence.

2. vicarious liability.

3. property damage liability.

4. comprehensive coverage.

Renter’s property insurance would include coverage for

1. personal belongings.

2. structures attached to the main building.

3. damages caused by a flood.

4. business-related property.

Coverage that pays for the current replacement cost of a stolen or damaged item is called

1. replacement value coverage.

2. endorsement coverage.

3. umbrella coverage.

4. actual cash value coverage.

Losses caused by damage to your car by another person who is at fault in the accident are covered by

1. collision coverage.

2. comprehensive physical damage.

3. property damage liability.

4. assigned risk coverage.

Driver classification includes information on a person’s __________ and is used to set auto insurance rates.

1. type of automobile

2. place of residence

3. driving habits

4. credit rating

SUPPLEMENTARY ACTIVITY

Agree

Disagree

1. Insurance is made possible because large numbers of people are willing to share the cost of the same kind of risk.

_____

_____

1. Some of our risks are shared by paying taxes for protection that is provided by local fire and police departments.

_____

_____

1. Most of us can afford to buy insurance to protect us against every possible loss.

_____

_____

1. Well-planned income replacement will provide a family with adequate protection as their needs change.

_____

_____

1. Protection against the loss of income because of illness, accident, or death is obtained by purchasing property and casualty insurance.

_____

_____

1. 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.

_____

_____

1. If a family is covered by enough insurance, it can prevent or avoid economic risks.

_____

_____

1. Without the responsibility of a family you never have to worry about income replacement.

_____

_____

SUPPLEMENTARY ACTIVITY

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

ANSWERS TO CONCEPT QUESTIONS, PROBLEMS,

FINANCIAL PLANNING ACTIVITIES, FINANCIAL PLANNING CASE,

AND CONTINUING CASE