life, fire, and auto insurance chapter twenty copyright © 2014 by the mcgraw-hill companies, inc....
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LIFE, FIRE, AND AUTO INSURANCE Chapter
Twenty
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
20-2
1. Explain the types of life insurance; calculate life insurance premiums.
2. Explain and calculate cash value and other nonforfeiture options.
LU 20-1: Life Insurance
LEARNING UNIT OBJECTIVES
LU 20-2: Fire Insurance1. Explain and calculate premiums for fire insurance of
buildings and their contents.2. Calculate refunds when the insured and the insurance
company cancel fire insurance.3. Explain and calculate insurance loss when coinsurance is
not met.
1. Explain and calculate the cost of auto insurance.
LU 20-3: Fire Insurance
20-3
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
20-4
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.
CALCULATING ANNUAL LIFE INSURANCE PREMIUMS
20-5
LIFE INSURANCE RATES(TABLE 20.1)
20-6
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 insurance. The cheapest coverage.
$200 x $3.52 = $704
CALCULATING INSURANCE PREMIUMS
Bob Brady, age 40, wants to purchase a 5 year $200,000 insurance policy. Determine her annual premium.
$200,000 (Coverage) 1,000
Step 2
Step 2
= 200 Step 1
20-7
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.
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 Step 2
Step 2
20-8
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.
20-9
NONFORFEITURE OPTIONS BASED ON $1,000 FACE VALUE (TABLE 20.2)
20-10
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?
1. Cash value
3. Extended term insurance
2. Reduce paid-up insurance
= 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
$200,000 $1,000
20-11
FIRE INSURANCE
Table 20.3 - Fire insurance rates per $100 of coverage
20-12
CALCULATING FIRE INSURANCE PREMIUMS
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 =
Premium = Insured value$100 x Rate
Premium =
Total premium = $950 + 480 = 1,430
= 1,900 x $.50 = $950
= 800 x $.60 = $480
$190,000 $100
$80,000 $100
20-13
FIRE INSURANCE SHORT-RATE AND CANCELLATION TABLE (TABLE 20.4)
20-14
CANCELING FIRE INSURANCE (REFUNDS)
Short-rate premium = Annual premium x Short-rate
Calculate the refund if the policy is canceled after 7 months.
Short-rate premium = $1,430 Annual premium x .67 Short-rate = $958.10
Refund = Annual premium – Short-rate premium
Insurer Cancels = $1,430 Annual premium x 7 months elapsed 12 = $834.17 Charge
Refund = $1,430 Annual Premium -- $958.10 Short-rate premium = $471.90
= $1,430 Annual premium -- $834.17 Charge = $595.83 Refund
20-15
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 COINSURANCE CLAUSE PAYMENT FOR INSURANCE
COMPANYCoinsurance -- the insured and the insurer share the risk. Encourages property owners to purchase adequate coverage.
20-16
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
$60,000 $100,000 X .80
x $20,000 =
Coverage _ (Replacement value x Coinsurance clause %)
x Loss = Insurance company payment
$15,000
20-17
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.
20-18
AUTO INSURANCE EXAMPLE
1. Bodily injury, 250/500
2. Property damage, 5M
3. Collision, $200 deductible
4. Comprehensive, $200 deductible
5. Substitute transportation
6. Towing & labor
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:
20-19
COMPULSORY INSURANCE(TABLE 20.5)
20-20
CALCULATING PREMIUM AND OPTIONAL
INSURANCE COVERAGETable 20.6 Bodily injury
Table 20.7 Damage to someone else’s property
20-21
CALCULATING PREMIUM: COLLISION (TABLE 20.8)
20-22
CALCULATING PREMIUM (TABLES 20.9 AND 20.10)
20-23
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 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
4. Comprehensive, $200 deductible
5. Substitute transportation
6. Towing & labor
CompulsoryBodily $ 98 (Table 20.5)Property $160 (Table 20.5)OptionsBodily $228 (Table 20.6)Property $168 (Table 20.7)Collision $191 (Table 20.8)
($148 + $43)Comprehensive $ 56 (Table 20.9)
($52 + 4)
Substitute trans. 16
Towing & labor 4
Total annual premium $921