Home and Automobile Insurance

Chapter 8 Home and Automobile Insurance

1. Chapter Learning Objectives

• LO 8.1: Identify types of risks and risk management methods and develop a risk management plan.

• LO 8.2: Assess the insurance coverage and policy types available to homeowners and renters.

• LO 8.3: Analyze the factors that influence the amount of coverage and cost of home insurance.

• LO 8.4: Identify the important types of automobile insurance coverage.

• LO 8.5: Evaluate factors that affect the cost of automobile insurance.

2. Insurance and Risk Management

2.1 What is Insurance?

• Definition: Insurance is a protection against possible financial loss that provides peace of mind.

• Insurance Company (Insurer): A risk-sharing firm that assumes financial responsibility for losses from an insured risk.

• Procedure:
    - Purchase a policy known as coverage.
    - The insurance firm assumes a risk for a fee.
    - The insured policyholder pays a periodic premium.

3. Risk Terminology

• Risk: The chance of loss or injury; characterized by uncertainty or lack of predictability.

• Peril: Anything that may cause a loss, including events like fire, windstorm, robbery, or accidents.

• Hazard: Any condition that increases the likelihood of a loss, such as driving under the influence or defective house wiring.

4. Most Common Types of Risk

• Personal Risks: Risks leading to loss of income or life due to illness, old age, or unemployment.

• Property Risks: Risks of losses to property from perils such as fire or theft.

• Liability Risks: Risks resulting from negligence that cause injury or property damage.
    - All types of risk are classified as pure (insurable) risk.

5. Risk Categories

• Pure Risk:
    - Insurable: Characterized by accidental, unintentional events where the nature and financial loss can be predicted.

• Speculative Risk:
    - Uninsurable: Involves the chance of loss or gain, like starting a small business or gambling.

6. Risk Management Methods

• Definition: Risk management is an organized plan to protect yourself, your family, and your property.

6.1 Methods of Risk Management

• Risk Avoidance: Taking precautions to avoid risk.

• Risk Reduction: Taking actions to reduce potential risk.

• Risk Assumption:
    - Self-insurance or relying on an insurance company to cover losses.

• Risk Shifting:
    - Purchasing insurance shifts the financial burden to the insurer and includes deductibles, the set amount the policyholder must pay.

7. Risk Management Strategies

7.1 Examples of Risks and Strategies

• Disability:
    - Financial impact: Loss of income and increased expenses.
    - Strategy: Savings, investments, and disability insurance.

• Illness:
    - Financial impact: Loss of income and hospital expenses.
    - Strategy: Health insurance and health-enhancing behaviors.

• Death:
    - Financial impact: Loss of income and final expenses.
    - Strategy: Life insurance and estate planning.

• Property Loss:
    - Financial impact: Repair or replacement costs from catastrophes like storms.
    - Strategy: Homeowner’s insurance and flood insurance.

8. Planning an Insurance Program

8.1 Set Insurance Goals

• Goals include reducing possible losses related to:
    - Income (due to premature death, illness, etc.).
    - Property (damage caused by perils).
    - Savings and property (due to personal negligence).

8.2 Develop a Plan to Reach Goals

• Questions to answer:
    - What needs insurance?
    - How much coverage is necessary?
    - What type of insurance is appropriate?
    - Who should you buy insurance from?

8.3 Implement the Plan

• Execute your insurance plan and periodically check results as needs and goals may change.

9. Property and Liability Insurance in Your Financial Plan

9.1 Major Recent Losses

• Economic impact from natural disasters:
    - Early 2011: Over $350 billion in losses.
    - 2016: 15 disasters led to over $46 billion in damages.
    - Superstorm Sandy (2012): $18 billion in damages.
    - Hurricanes Katrina, Rita, Wilma (2005): $50 billion in damages.
    - Hurricane Andrew (1992): $22.3 billion in damages.

9.2 Claims

• A claim is a request for payment to cover financial losses.

• Potential property losses can be related to homes, automobiles, furniture, and personal belongings.

10. Home and Property Insurance

10.1 Homeowner’s Insurance

• Coverage includes residence and financial risks such as damage to personal property and injury to others.

10.2 Renter’s Insurance

• Broad Form: Covers specified personal property loss or damage.

• Comprehensive Form: Protects property against all perils.

• Renter’s insurance tends to be inexpensive; replacement value coverage is costlier.

10.3 Homeowner's Insurance Coverages

• Building and Other Structures: Covers damage to the main residence and other structures like garages and sheds.

• Additional Living Expenses: Coverage may be limited (10-20% of property value; 6-9 months maximum).

• Personal Property: Includes furniture and household items; coverage typically ranges from 55% to 75% of property value but may have limits on certain items.

11. Home Insurance Policy Forms

11.1 Types of Policies

• ujhjn Basic Form (HO-1): Covers fire, lightning, windstorms, hail, smoke, theft, and riots.

• Broad Form (HO-2): Includes falling objects and ice/snow damage.

• Special Form (HO-3): Basic + Broad form + all other risks except specific exclusions.

• Tenant’s Form (HO-4): Covers personal property against listed risks.

• Comprehensive Form (HO-5): Expands HO-3 coverage to replacement cost.

• Condominium Owner (HO-6): Covers personal property and additions.

12. Home Insurance Cost Factors

• Determining Coverage Amount:
    - Replacement value of home and contents.
    - Need for specific coverage for valuables like jewelry or art.

• Claim Settlement Methods:
    - Actual Cash Value (ACV): Replacement cost minus depreciation.
    - Replacement Value: The full cost to repair or replace.

• Factors Influencing Costs:
    - Location, structure type, coverage amount, discounts, and choice of insurer.

13. Automobile Insurance Coverages

13.1 Legal Mandates

• Financial Responsibility Law: Requires proof of financial ability to cover damage/injury from accidents; compulsory for all states.

13.2 Bodily Injury Coverages

• Bodily Injury Liability: Covers costs associated with accidents for which the policyholder is responsible, expressed as three numbers (e.g., 100/300/50).

13.3 Medical Payments Coverage

• Covers healthcare costs for persons injured in the policyholder’s automobile.

13.4 Uninsured/Underinsured Motorist Protection

• Covers accidents involving uninsured or inadequately insured drivers.

14. Types of Automobile Coverage

14.1 Property Damage Liability

• Applies when damaging others' property, such as structurally damaging mailboxes.

14.2 Collision Coverage

• Pays for damage to the policyholder's vehicle, regardless of fault, up to the actual cash value of the vehicle.

14.3 Comprehensive Coverage

• Covers vehicle damage from non-accident situations such as fire, theft, vandalism, and natural disasters.

14.4 No-Fault Insurance

• Allows drivers to collect insurance from their own provider for medical expenses without regards to fault.

14.5 Other Coverages

• Additional available coverages include wage loss insurance, towing coverage, and rental reimbursement.

15. Automobile Insurance Costs

15.1 Coverage Requirements

• Recommendations include:
    - Bodily Injury Liability: $100,000/$300,000.
    - Property Damage Liability: $50,000-$100,000.

15.2 Premium Factors

• Factors influencing insurance rates include vehicle type, driver classification, and local crime rates.

15.3 Reducing Premiums

• Strategies include comparing companies, maintaining a clean driving record, and maintaining good credit history.

16. Chapter Summaries

16.1 Summary LO 8.1

• Main types of risk: Personal, property, and liability.

• Risk management includes avoidance, reduction, assumption, and shifting; effective planning is essential.

16.2 Summary LO 8.2

• Homeowner’s policies cover buildings, personal property, and liability; renter’s insurance parallels these protections.

16.3 Summary LO 8.3

• Factors affecting home insurance coverage include location, structure, and policy specifics.

16.4 Summary LO 8.4

• Key auto coverages: Bodily injury liability, medical payments, uninsured motorist protection, and property damage coverage.

16.5 Summary LO 8.5

• Automobile insurance costs depend on coverage amount, vehicle type, and driver classification factors.