Chapter 11

Question 0

Home Insurance

Answer 0

• Risk of damage of home and related outbuildings
• Content of home (furniture, appliance, clothing)
• Liability to third parties for injuries occurring on property
• Policies differ in specific risk coverage (swim pool)

Question 1

Basic Principle of property insurance

Answer 1

• Insure against large expenses but not small expenses

- Premium paid with certainty to avoid large uncertain loss

Question 2

How much home insurance is needed?

Answer 2

-Estimate value of content as some % (20%) of value of home, exclude value of land.

Question 3

Basis for Home Insurance: Depreciated value: (2)

Answer 3

• Replaces or repairs item to condition when it was lost/damaged
• Cost of item reduced by allowance for deprec. based on age

Question 4

Basis for Home Insurance: Replacement Value: (3)

Answer 4

• Cost of buying new item of same quality
• Lost or destroyed items must be replaced with new items of comparable quality
• Premiums are higher for replacement value insurance

Question 5

Replacement Value of House: (4)

Answer 5

• uses cost approach of valuation to determine replacement cost of home structure
• Value of land and foundation shouldn’t be included
• Most insurance policies won’t pay full loss on partial damage unless home is insured to 80% of replacement value.
• Replacement value changes over time, coverage needs update

Question 6

Replacement Value of House: Inflation protection provisions: (1)

Answer 6

-Automatically increase coverage amount each year by change in CPI

Question 7

Deductibles: (3) Higher the deductible the lower the premium:

Answer 7

• Insured shares part of damage or losses
• Insured will have incentive to avoid damage or loss
• Administrative cost of small claims is avoided

Question 8

Selecting Optimal Deductible: (3)

Answer 8

• Possible to use utility theory
• In practice: select higher deductibles with lower premiums
• Rule of thumb: set deductible at 3% of net worth

Question 9

Liability Insurance: (4)

Answer 9

-Liability to other people for injuries suffered on insured's property
Factors include:
-Non-household activities in home
-Swim pool
-Pets

Question 10

Types of Home Insurance: (3)

Answer 10

• Comprehensive home insurance: structure, contents and liability
• Fire Insurance
• Tenants insurance: contents and liability

Question 11

Automobile Insurance: (3)

Answer 11

• Risk of injury or death to owner and passengers
• Risk of damage and theft
• Their party liability: insupportable risk

Question 12

Types of Automobile Insurance: (2)

Answer 12

• Bodily injury coverage: Coverage for owner and persons using car with permission
• Property damage coverage: damage by car to property in event that you caused accident

Question 13

Types of Automobile Insurance: (5)

Answer 13

• Collision coverage
• Comprehensive coverage
• Medical payment coverage
• Uninsurable motorists coverage
• No-fault insurance

Question 14

Collision coverage: (1)

Answer 14

-Damage to your car from an accident which you caused (should be reduced over time)

Question 15

Comprehensive coverage: (1)

Answer 15

-Damage from theft, fire, etc.

Question 16

Deductibles in Automobile insurance: (1)

Answer 16

-Increase amount of deductible to buy more coverage for big losses (ex. liability, uninsured motorists coverage, etc.)

Question 17

Rental Car Insurance: (4)

Answer 17

• Rental fee includes liability insurance
• Insurance policy on your own car can be extended to provide collision and theft insurance for rental cars
• Coverage is provided by some premium credit cards
• Optional insurance coverage is available from rental agency for collision and life but very expensive.