Insurance is protection against possible financial loss. Although
many types of insurance exist, they all have one thing in common: They
give you the peace of mind that comes from knowing that money will be
available to meet the needs of your survivors, pay medical expenses, protect
your home and belongings, and cover personal or property damage caused
by you when driving. and injuries to others.
An insurance company, or insurer, is a risk-sharing firm
that agrees to assume financial responsibility for losses that may result
from an insured risk. A person joins the risk-sharing group (the insurance
company) by purchasing a policy (a contract). Under the policy,
the insurance company agrees to assume the risk for a fee (the premium)
that the person (the insured, or the policyholder) pays
periodically.
Risk, peril, and hazard are important terms in insurance. While in popular
use these terms tend to be interchangeable, each has a distinct, technical
meaning in insurance terminology.
Risk is uncertainty or lack of predictability. In this instance,
it refers to the uncertainty as to loss that a person or a property covered
by insurance faces. Insurance companies frequently refer to the insured
person or property as the risk.
Peril is the cause of a possible loss. It is the contingency
that causes someone to take out insurance. People buy policies for financial
protection against perils such as fire, windstorms, explosions, robbery,
accidents, and premature death.
Hazard increases the likelihood of loss through some peril. For
example, defective house wiring is a hazard that increases the likelihood
of the peril of fire.
A speculative risk is a risk that carries a chance of either
loss or gain. Starting a small business that may or may not succeed is
an example of speculative risk. So is gambling. Speculative risks are
legally defined as uninsurable.
Risk management is an organized strategy for protecting assets and people.
It helps reduce financial losses caused by destructive events. Risk management
is a long-range planning process.
Most people think of risk management as buying insurance. However, insurance
is not the only method of dealing with risk; in certain situations, other
methods may be less costly. Four general risk management techniques are
commonly used.
Risk Avoidance You can avoid the risk of an automobile accident
by not driving to work. In some situations, however, risk avoidance is
practical. Obviously, no person or business can avoid all risks.
Risk Reduction While avoiding risks completely may not be
possible, reducing risks may be a cause of action.
Risk Assumption Risk assumption means taking on responsibility
for the loss or injury that may result from a risk. Self-insurance
is the process of establishing a monetary fund to cover the cost of a
loss. Self-insurance does not eliminate risks; it only provides means
for covering losses.
Risk Shifting The most common method of dealing with risk
is to shift, or transfer, it to an insurance company or some other organization.
Insurance is the protection against loss afforded by the purchase of an
insurance policy from an insurance company.
Step 1: Set Insurance Goals-in managing risks, your goals are to minimize personal, property, and liability risks. Your insurance goals should define what to do to cover the basic risks present in your life situation.
Step 2: Develop a Plan to Reach Your Goals-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-as you carry out your plan, obtain financial and personal resources, budget them, and use them to reach risk management goals.
Since most people invest large amounts of money in their homes and motor vehicles, protecting these assets from loss is a great concern. Each year, homeowners and renters lose billions of dollars from more than 3 million burglaries, 500,000 fires, and 200,000 instances of damage from other hazards.
The main types of risks related to a home and an automobile are (1) property damage or loss and (2) your responsibility for injuries to others or damage to the property of others.
Potential Property Losses
Houses, automobiles, furniture, clothing, and other personal belongings are a substantial financial commitment. Property owners face two basic types of risks. The first is physical damage caused by hazards such as fire, wind, water, and smoke. These hazards can cause destruction of your property or temporary loss of its use.
Building and Other Structures-the main component of homeowner's
insurance is protection against financial loss due to damage or
destruction to a house or other structures.
Additional Living Expenses-if damage from a fire or other event
prevents the use of your home, additional living expense coverage
pays for the cost of living in a temporary location while your home
is being repaired.
Personal Liability and Related Coverages-each day, you face the
risk of financial loss due to injuries to others or damage to property
for which you are responsible. The following are examples of this
risk:
A neighbor or guest falls on your property, resulting in permanent
disability.
A spark from burning leaves on your property starts a fire that
damages a neighbor's roof.
A member of your family accidentally breaks an expensive glass
statue while at another person's house.
For people who rent, home insurance coverages include personal property
protection, additional living expenses coverage, 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.
The basic form (HO-1) and the broad form (HO-2) were the first such
policies; they provided the primary coverages shown in Exhibit 10-5.
The special form (HO-3) of a homeowner's policy covers the building
for all causes of loss or damage except those specifically excluded
by the policy. Common exclusions are flood, earthquake, war, and nuclear
accidents. Personal property is covered for the risks listed in the
policy.
The tenants form (HO-4) protects the personal property of renters
against the specific risks listed in the policy. As mentioned, renter's
insurance does not include coverage on the building or other structures.
Condominium owner's insurance (HO-6) protects 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.
Insurance on the building and other structures is purchased by the condominium
association.
The modified coverage form (HO-8), or older-home policy, provides
the same coverages as the basic form at a more reasonable cost because
the homes are older and more difficult to replace.
In addition to the property and liability risks previously discussed,
home insurance policies include coverage for
Credit card fraud, check forgery, and counterfeit money.
The cost of removing damaged property.
Emergency removal of property to protect it from damage.
Temporary repairs after a loss to prevent further damage.
Several factors affect the insurance coverage needed for your home
and property.
Your insurance protection should be based on the amount needed to
rebuild or repair your house, not the amount you paid for it.
Insurance companies base claim settlements on one of two methods.
Under the actual cash value (ACV) method, 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.
Bodily injury liability is usually expressed as a split limit,
such as 50/100 or 100/300. These amounts represent thousands of
dollars of coverage. The first number is the limit for claims that
can be paid to one person; the second number is the limit for each
accident; the third number is discussed in the section on property
damage coverages. 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 from a single accident.
Medical Payments Coverage. While bodily injury liability
pays for the costs of injuries to persons who were not in your automobile,
medical payments coverage covers the costs of health care
for people who were injured in your automobile, including yourself.
This protection covers friends, carpool members, and others who
ride in your vehicle.
Underinsured motorist's coverage provides financial protection
when another driver has insurance but less coverage than needed
to cover the financial damages brought on you.
Property Damage Liability. When you damage the property
of others, property damage liability protects you against
financial loss. This coverage applies mainly to other vehicles;
however, it also includes damage to street signs, lampposts, buildings,
and other property. Property damage liability protects you and others
covered by your policy when driving another person's automobile
with permission. The policy limit for property damage liability
is commonly stated with your bodily injury coverages. The last number
in 50/100/25 and 100/300/50, for example, is for property damage
liability ($25,000 and $50,000, respectively).
The amount you can collect with collision insurance is limited
to the retail value of the automobile at the time of the accident.
This amount is usually based on the figures provided by some appraisal
service such as the Official Used Car Guide of the National Association
of Automobile Dealers.
Certain articles in your vehicle, such as some radios and stereo
equipment, may be excluded from this insurance. These articles may
be protected by the personal property coverage of your home insurance.
Like collision insurance, comprehensive coverage applies only to
your car, and claims are paid without considering fault.
Other Automobile Insurance Coverages
Wage loss insurance will reimburse you for any salary or income lost due to injury in an automobile accident.
Towing and emergency road service coverage pays for the cost of breakdowns and mechanical assistance.
Legal Concerns. As discussed earlier, every state
has laws that require or encourage automobile liability insurance
coverage. Since very few people can afford to pay an expensive
court settlement with personal assets, most drivers buy automobile
liability insurance. In the past, bodily injury liability coverage
of 10/20 was considered adequate. In fact, some states still
use these amounts as their minimum limits for financial responsibility.
However, in recent injury cases, some people have been awarded
millions of dollars; thus, legal and insurance advisers now
recommend 100/300. An umbrella policy can provide additional
liability coverage of $1 million or more.
Property Values. Just as medical expenses and legal
settlements have increased, so has the cost of automobiles.
Therefore, a policy limit of more than $10,000 for property
damage liability is appropriate; $50,000 or $100,000 is usually
suggested.
Automobile Type. The year, make, and model of your
motor vehicle strongly influence automobile insurance costs.
Expensive replacement parts and complicated repairs due to body
style contribute to higher rates. Also, certain makes and models
are stolen more often than others.
Rating Territory. In most states, your rating
territory is the place of residence used to determine your
automobile insurance premium. Various geographic locations have
different costs due to differences in the number of claims made.
For example, fewer accidents and less vandalism occur in rural
areas than in large cities. New York City, Los Angeles, and
Chicago have the highest incidence of automobile theft.
Driver Classification. You are compared with other
drivers to set your automobile insurance premium. Driver
classification is a category based on the driver's age,
sex, marital status, driving record, and driving habits; drivers'
categories are used to determine automobile insurance rates.
In general, young drivers (under 25) and those over 70 have
more frequent and severe accidents. As a result, they pay higher
premiums.
Comparing Companies Rates and service vary among
automobile insurance companies. Among companies in the same
area, premiums can vary as much as 100 percent. If you relocate,
don't assume your present company will offer the best rates
in your new living area. Rates may be
compared online at www.insuremarket.com.
Also consider the service the local insurance agent provides.
Will this company representative be available to answer questions,
change coverages, and handle claims as needed?
You can check a company's reputation for handling automobile
insurance claims and other matters with sources such as Consumer
Reports (www.consumerreports.org)
or your state insurance department. Most states publish information
with sample auto insurance rates for different companies to
help consumers save money.
Premium Discounts. The best way to keep your rates
down is to establish and maintain a safe driving record. Taking
steps to avoid accidents and traffic violations will mean lower
automobile insurance premiums.
In addition, most insurance companies offer various discounts.
Drivers under 25 can qualify for reduced rates by completing
a driver training program or maintaining good grades in school.
Installing security devices such as a fuel shutoff switch,
a second ignition switch, or an alarm system will decrease your
chances of theft and lower your insurance costs. Being a nonsmoker
can qualify you for lower automobile insurance premiums.
Discounts are also offered for participating in a carpool
and insuring two or more vehicles with the same company. Ask
your insurance agent about other methods for lowering your automobile
insurance rates. Increasing the amount of deductibles will result
in a lower premium.
Also, some people believe an old car is not worth the amount
paid for collision and comprehensive coverages and therefore
dispense with them. However, before doing this, be sure to compare
the value of your car for getting you to school or work with
the cost of these coverages.
If you change your driving habits, get married, or alter your
driving status in other ways, be sure to notify the insurance
company. Premium savings can result.
