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Chapter 20Chapter 20

Life, Fire, and Life, Fire, and Auto InsuranceAuto Insurance

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved.

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• Explain the types of life insurance; calculate life insurance premiums

• Explain and calculate cash value and other nonforfeiture options

Life, Fire, and Auto Insurance#20#20Learning Unit ObjectivesLife InsuranceLU20.1LU20.1

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• 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#20#20Learning Unit ObjectivesFire InsuranceLU20.2LU20.2

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• Explain and calculate the cost of auto insurance

Life, Fire, and Auto Insurance#20#20Learning Unit ObjectivesAuto InsuranceLU20.3LU20.3

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Face amount - The amount received (proceeds) upon the death of the insured

Insured - The policyholder receiving coverage

Premium - Periodic payments you make for the cost of the insurance (determined by actuaries)

Life Insurance

Beneficiary - The person receiving the insurance proceeds at the death of the insured

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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 20-1 (for females subtract 3 years). This gives the premium cost per $1,000

Steps in Calculating Annual Life Insurance Premiums

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Table 20.1 - Life Insurance RatesFive-year Straight Twenty- Twenty-year

Age term Age life Age payment life Age endowment20 1.85 20 5.90 20 8.28 20 13.8521 1.85 21 6.13 21 8.61 21 14.3522 1.85 22 6.35 22 8.91 22 14.9223 1.85 23 6.60 23 9.23 23 15.5424 1.85 24 6.85 24 9.56 24 16.0525 1.85 25 7.13 25 9.91 25 17.5526 1.85 26 7.43 26 10.29 26 17.6627 1.86 27 7.75 27 10.70 27 18.3328 1.86 28 8.08 28 11.12 28 19.1229 1.87 29 8.46 29 11.58 29 20.0030 1.87 30 8.85 30 12.05 30 20.9031 1.87 31 9.27 31 12.57 31 21.8832 1.88 32 9.71 32 13.10 32 22.8933 1.95 33 10.20 33 13.67 33 23.9834 2.08 34 10.71 34 14.28 34 25.1335 2.23 35 11.26 35 14.92 35 26.3536 2.44 36 11.84 36 15.60 36 27.6437 2.67 37 12.46 37 16.30 37 28.9738 2.95 38 13.12 38 17.04 38 30.3839 3.24 39 13.81 39 17.81 39 31.8440 3.52 40 14.54 40 18.61 40 33.36

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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

Term Insurance -- Pays face amount only if you die within the period of the the insurance. The cheapest coverage. $200 x $3.52 = $704

Calculating Insurance Premiums

Mike Monts, age 40, wants to purchase a 5 year $200,000 insurance policy. Determine her annual premium

$200,000 (Coverage) = 200 1,000

Step 1

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Universal Life - A whole life insurance plan with flexible premium schedules and death benefits. Great risk because premiums are subject to interest rate fluctuations

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

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

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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 paid-up 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.

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Table 20.2 - Nonforfeiture Options based on $1,000 Face Value

Yearsinsurance Amount of Amount of Amount ofpolicy in Cash paid-up Cash paid-up Cash paid-up

force value Insurance Years Day value insurance Years Day value insurance Years Day5 29 86 9 91 71 220 19 190 92 229 23 14010 96 259 18 76 186 521 28 195 319 520 30 16015 148 371 20 165 317 781 32 176 619 790 35 30020 265 550 21 300 475 1,000 1,000 1,000

Straight life 20-payment life 20-year endowmentExtended

Life Life

Extendedtermterm

Extendedterm

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Nonforfeiture Options

Assume Mike Monts purchased a 20-payment life policy and decided to stop the policy after it was in

force for 10 years. What would be her options?

1. Cash Value

$200,000 = 200 x $148 = $29,600 $1,000

3. Extended term insurance

Continue this $200,000 policy for 20 years and 165 days

2. Reduce paid-up insurance

$200,000 = 200 x $371 = $74,200 $1,000

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Fire Insurance

Table 20.3 - Fire insurance rates per $100 of coverage

Classification of building

Class A Class BRating of area Building Contents Building Contents 1 .28 .35 .41 .54 2 .33 .47 .50 .60 3 .41 .50 .61 .65

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Calculating Fire Insurance Premiums

Premium = Insured value x Rate$100

Calculate the premium of a building with an insured value of $100,000 and a Class A, Area

No. 1 rating. Insured contents are $40,000.

Premium = $100,000 = 1,000 x $.28 = $280$100

Premium = $40,000 = 400 x $.35 = $140$100

Total Premium = $420

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Table 20.4 - Fire Insurance short-rate 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 74Months 1 19 9 81

2 27 10 87 3 35 11 96

4 44 12 100

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Canceling Fire Insurance (Refunds)

Short-rate premium = Annual premium x Short rate

Calculate the refund if the

policy is canceled after 6

months

Policyholder Cancels

Short rate Premium = $420 x .61 = $256.20

Refund = $420 - $256.20 = $163.80

Refund = Annual premium - Short rate premium

Insurer Cancels

Charge = $420 x 6 = $210 12

Refund = $420 - $210 = $210

Months Elapsed

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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)

Calculating What Insurance Company Pays with Coinsurance Clause

The insured and the insurer share the risk. Encourages property owners to purchase adequate coverage

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$100,000 x $30,000 = $25,000$120,000

CoinsuranceSuppose we carry $100,000 of fire insurance on property that will cost $150,000 to replace. The coinsurance clause is 80%. If we suffer a loss of $30,000, how much will the insurance company pay?

What you should have

carried

$150,000 x .80

Coverage

Loss

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Auto InsuranceLiability 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.

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Auto Insurance

Collision - provides protection against damages to your car caused by a moving vehicle. Covers the cost of repairs less the deductible. Comprehensive - covers

damages resulting from theft, fire, falling objects, etc.

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Table 20.5 - Compulsory insurance

Bodily injury to others Damage to someone else’s propertyClass 10/20 Class 5M*

10 $ 55 10 $12917 98 17 16018 80 18 16020 116 20 186

Explanation of 10/20 and 5

10 20 5

Maximum paid to Maximum paid for Maximum paid forone person per total bodily property damageaccident for injury per per accidentbodily injury accident

*M means thousands.

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Calculating Premium and Optional Insurance Coverage

Table 20.6 Bodily injury

Class 15/30 20/40 20/50 25/50 25/60 50/100 100/300 250/500 500/100010 27 37 40 44 47 69 94 144 18717 37 52 58 63 69 104 146 228 29818 33 46 50 55 60 89 124 193 25120 41 59 65 72 78 119 168 263 344

Table 20.7 Damage to someone else’s propertyClass 10M 25M 50M 100M

10 132 134 135 13617 164 166 168 16918 164 166 168 16920 191 193 195 197

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Classes group $300 ded. $300 ded. $300 ded. $300 ded. $300 ded. $300 ded. $300 ded.10-20 1 180 180 187 194 214 264 279

2 160 160 166 172 190 233 2463 148 148 154 166 183 221 2334 136 136 142 160 176 208 2215 124 124 130 154 169 196 208

Class10171820

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Additional cost to reduce deductible

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From $300 to $200 From $300 to $10027433355

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Calculating Premium: Collision - Table 20.8

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Calculating Premium: Comprehensive – Table 20.9

Age Symbols 1-3 Symbol 4 Symbol 5 Symbol 6 Symbol 7 Symbol 8 Symbol 10Classes group $300 ded. $300 ded. $300 ded. $300 ded. $300 ded. $300 ded. $300 ded.

10-25 1 61 61 65 85 123 157 2112 55 55 58 75 108 138 1853 52 52 55 73 104 131 1784 49 49 52 70 99 124 1705 47 47 49 67 94 116 163

Additional cost to reduce deductible: From $300 to $200 add $4

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ProblemCalculate the annual auto premium for Julie Fox who lives in Territory 5, is a driver classified 17, and has a car with age 2 and symbol 6. Her state has compulsory insurance, and Julie wants to add the following options:

1. Bodily injury, 250/500

2. Property damage 10M

3. Collision, $200 deductible

4. Comprehensive, $200 deductible

CompulsoryBodily $ 98 (Table 20.5)

Property $160 (Table 20.5)

OptionsBodily $228 (Table 20.6)

Property $164 (Table 20.7)

Collision $192 (Table 20.8)

($172 + $20)

Comprehensive $ 79 (Table 20.9)

($75 + 4)

Total annual premium - $921