INSURANCE

UEH - School of Banking - Nguyễn Thị Hồng Nhung

 Contents

1 Insurance and Risk Management

2 Property and Motor vehicle Insurance

3 Health, disability Insurance

4 Life Insurance
 Chapter 10

Property and Motor Vehicle

Insurance

10-3
Insurance and Risk Management:
An Introduction
Objective 1: Develop a risk management plan
using insurance
WHAT IS INSURANCE?
• Insurance is protection against possible financial
loss; it gives you peace of mind
• An insurance company, or insurer, is a risk-sharing
firm that assumes financial responsibility for losses
from an insured risk
• People purchase a policy. The firm assumes a risk
for a fee called the premium, which the insured
policyholder pays periodically
10-4
Insurance and Risk Management: An
Introduction
1. Insurance and Risk Management
(continued)

Types of Risk

Pure risk
-Personal risks, property Speculative Risk
risks, and liability risks. - Chance of loss or
-Insurable, since there gain, such as
is a chance of loss only starting a business.
if the specified events - Uninsurable,
occurred. They are since it is gambling
accidential and
unintentional risks for
which the nature and
financial cost of the lost
can be predicted
 Risk
Avoidance

Risk Risk
Shifting Risk Reduction
Management
Techniques

Risk
Assumption

10-6
Insurance and Risk Management:
An Introduction (continued)
PLANNING AN INSURANCE PROGRAM
To put your risk management plan to work, ask
yourself…
– What should be insured?
– For how much?
– What kind of insurance?
– From whom?

10-7
10-8
 Property and Liability
Insurance
Objective 2: Discuss the importance of property
and liability insurance

***In recent years there have been major losses due

to natural disasters. Fires, hurricanes, tornadoes
and floods in various areas of the United States
have caused billions of dollars worth of damage.

10-9
 Property and Liability Insurance
(continued)

• Potential Property Losses

– Home, automobiles, furniture, clothing,
and personal belongings

– Physical damage
• Hazards such as fire, wind, water and smoke.
Destruction of property or temporary loss of use

– Loss of Use
• Due to robbery, burglary, vandalism, or arson

10-10
Property and Liability Insurance
(continued)

LIABILITY PROTECTION

• Liability: legal responsibility for cost of another

person’s losses or injuries
• Negligence
– Failure to take ordinary, reasonable care, such as
failure to supervise children in a pool

• Vicarious Liability
– When you are held responsible for the actions of
another person, such as your child throwing a ball
through a neighbor’s window

10-11
Home and Property Insurance
Objective 3: Explain the insurance coverage
and policy types available to homeowners
and renters

HOMEOWNER’S INSURANCE COVERAGES

– Damage to or destruction of your house and

other structures, plus trees, shrubs and plants
– Additional living expenses
– Personal property in or away from home
– Personal property floater - high value items
– Household inventory with documentation

10-12
 Home and Property Insurance
(continued)

PERSONAL LIABILITY AND RELATED COVERAGES

• Medical payments coverage for minor injuries

caused by you, your family members, or pets,
occurring on your property or away from home

10-13
 Property and Liability Insurance
(continued)

SPECIALIZED COVERAGE
– Endorsements add coverage for things
such as earthquake damage, or damage
from floods

10-14
 Property and Liability Insurance
(continued)

RENTER’S INSURANCE
• Personal property loss or damage
• Additional living expenses
• Personal liability
• A building owner’s insurance usually won’t
cover renter’s personal property
• Many renters do not have insurance

10-15
Home Insurance Cost Factors
Objective 4: Analyze factors that influence
the amount of coverage and cost of
home insurance
• Look for a policy with full coverage rather than
a coinsurance clause, where you have to pay
for part of a loss
• Which type of claim settlement method is
used?
– Actual cash value
• cost less depreciation

10-16
How Much Coverage do you Need?

10-17
Home Insurance Cost Factors
(continued)

FACTORS THAT AFFECT HOME INSURANCE

COSTS
• Location of home
• Type of structure
• Coverage amount and policy type

10-18
 Automobile Insurance
Coverages
Objective 5: Identify the important types of
automobile insurance coverage

• Financial responsibility law

– State legislation. Nearly all states have
compulsory automobile liability insurance laws

– Requires drivers to prove their ability to cover

the cost of damage or injury caused by them
in an automobile accident

10-19
 Automobile Insurance Coverage
(continued)

MOTOR VEHICLE BODILY INJURY COVERAGES

• Bodily Injury Liability

– Bodily injury liability covers the risk of financial
loss due to legal expenses, medical expenses,
lost wages and other expenses associated with
injuries caused by an accident for which you were
responsible

• Medical Payments Coverage

– Medical payments covers the cost of health care
for persons injured in your automobile, including
yourself
10-20
 Automobile Insurance Coverage
(continued)

• Uninsured Motorist’s Protection

– Pays for the cost of injuries to you and your
family if your vehicle is hit by a person without
insurance, however, it does not cover property
damages

• No-Fault Insurance
– System is intended to provide fast, smooth
methods of paying for damages without taking
the legal action frequently necessary to
determine fault

10-21
 Automobile Insurance Coverage
(continued)

MOTOR VEHICLE PROPERTY DAMAGE COVERAGES

• Property damage liability
– covers damage to others person’s car when you are
at fault. It also includes damage to such things as
street signs and buildings

• Collision
– When your car is in an accident, collision coverage
pays for damage to your automobile, regardless of
who is at fault
– If you are not at fault, your insurer will try and collect
from the other driver’s property damage liability first
– Coverage is limited to the retail value of your vehicle
10-22
 Automobile Insurance Coverage
(continued)

• Comprehensive Physical Damage

– Covers damage to your vehicle that is not
caused by a collision, such as...
• Fire, theft
• Glass breakage
• Hail, sand, or wind storm
• Falling objects or hitting an animal

10-23
Automobile Insurance Coverage
(continued)

OTHER AUTOMOBILE INSURANCE COVERAGES

– Wage loss insurance
• Reimburse you for any salary or income lost
due to injury in an automobile accident

– Towing and Emergency Road Service

• Pays for the breakdowns and mechanical
assistance

10-24
Automobile Insurance Costs
Objective 6: Evaluate factors that affect the
cost of automobile insurance
AMOUNT OF COVERAGE
• Legal concerns include having enough
coverage if you were sued
• Property values of vehicles have gone up

10-25
 Automobile Insurance Costs
(continued)
AUTOMOBILE INSURANCE PREMIUM FACTORS
• Automobile type
– Year, make, model, and theft rate
• Rating territory
– Accident, auto theft, and vandalism rates in the
area where you live
• Driver classification
– Age, sex, marital status, credit history, driving
record, and driving habits

10-26
 Chapter 11

Health, Disability and Long-

term Care Insurance

11-27
Health,
3.
Disability and Long-term Care
3. Health,
Health, Disability
Disability Insurance
Insurance
Insurance

What Is Health Insurance?

Types of Health Insurance Coverage

Health Insurance Trade-Offs

Disability Insurance
Health, Disability and Long-term Care
3. Health, Disability Insurance
Insurance

What Is Health Insurance?

• Health insurance is a form of protection whose

primary purpose is to alleviate the financial
burdens suffered by individuals because of illness
or injury.

• Health insurance includes both medical expense

insurance and disability income insurance.
Health, Disability and Long-term Care
3. Health, Disability Insurance
Insurance

What Is Health Insurance?

• Group Health Insurance

• Individual Health Insurance
• Supplementing Your Group Insurance
Health, Disability and Long-term Care
3. Health, Disability Insurance
Insurance
Types of Health Insurance Coverage

Hospital
Hospital
Indemnity Dental Expense
Expense
Policies

Surgical Comprehensive
Vision Care
Expense Major Medical

Physician Major Medical

Long-Term Care
Expense Expense
 Health, Disability and Long-term Care
3. Health, Disability Insurance
Insurance

Disability Insurance

• Disability income insurance benefits provide regular

cash income lost by employees as the result of an
accident, illness, or pregnancy.
• Generally disability income policies are divided into
short-term and long-term policies.
Health, Disability and Long-term Care
Insurance

• Long term care insurance

– Virtually unknown 35 years ago
– Growing faster than any other form of insurance
– In 2010, estimated that 9 million men and women
over 65 years old will need long term care
insurance
– Long term care insurance can be very expensive
– National Average: 1 year in nursing home=$72,000
– Premiums $1,000 to $16,000 per year
11-33
Health, Disability and Long-term Care
3. Health, Disability Insurance
Insurance

DISABILITY INCOME INSURANCE

• Disability is more likely than death at any age
• Young, healthy people don’t think about risks related to
all their future earning potential
• Provides regular cash income lost as the result of an
accident, illness or pregnancy
• If you become disabled your income drops but your
expenses go up
 Disability Income Insurance
(continued)

• Carefully read a policy’s definition of disability

– May only pay if you can’t work at any job
– Look for a policy that pays if you are unable to
work at your regular job
• Aim for a benefit that when added to your other
income will equal 60-70% of your gross pay

11-35
 Disability Income Insurance
(continued)

SOURCES OF DISABILITY INCOME

• Employer
– Group disability policy may be short or long term
• Social Security
– Covers total disability that lasts more than twelve
months

11-36
Chapter 12

Life Insurance

12-37
 Life Insurance: An
Introduction
Objective 1: Define life insurance and describe
its purpose and principle

WHAT IS LIFE INSURANCE?

Life insurance - Purchase policy: insurance

company promises to pay a lump sum at the time
of the policy holder’s death, or sometimes while
they are still alive

12-38
 Life Insurance: An Introduction
(continued)

• Purpose of life insurance: Protect someone who

depends on you from financial loss related to your
death.
• Other reasons are:
– Pay off a home mortgage or other debts at the time
of death

– To leave as part of your estate

– To save money for retirement or for income or

education for children

– To cover medical expenses and funeral costs

12-39
Life Insurance: An Introduction
(continued)

THE PRINCIPLE OF LIFE INSURANCE

• Mortality tables provide odds on your dying, based
on your age and sex

HOW LONG WILL YOU LIVE?

• Your premium is based on your life expectancy
and the projections for the payouts for persons
who die
12-40
 Determining Your Life
Insurance Needs
Objective 2: Determine your life insurance needs

DO YOU NEED LIFE INSURANCE?

• Do you have people you need to protect financially

• Do you have a partner who works?

12-41
 Determining Your Life
Insurance Needs
DETERMING YOUR LIFE INSURANCE OBJECTIVES

• How much money do you want to leave your

dependents should you die today?

• When do you want to retire, and what income do you

think you’ll need?

• How much will you be able to pay for your insurance

program?
12-42
 Determining Your Life Insurance
Needs (continued)
ESTIMATING YOUR LIFE INSURANCE NEEDS
• The Easy Method
– You will need 70% of your salary for seven years
while your family adjusts

• The DINK (dual income, no kids) Method

– ½ debts + funeral expenses

12-43
 Determining Your Life Insurance
Needs (continued)
ESTIMATING YOUR LIFE INSURANCE NEEDS (continued)

•The “Nonworking” Spouse Method

•Multiply the number of years until
the youngest child reaches 18 by
$10,000
•The “Family Need” Method
•More thorough than the first three
because it also considers
employer provided insurance,
Social Security benefits, and
income and assets

12-44
Types of Life Insurance Companies
and Policies
TYPES OF LIFE INSURANCE POLICIES

• Term life insurance

– Protection for a specified period of time

– If you stop paying premiums, coverage stops

– Renewability: You can renew the policy without

having a physical at the end of the term

12-45
 Types of Life Insurance Policies
(continued)

• Whole life insurance - Also called straight life

– You pay a premium as long as you live

– Amount of premium depends on your age when
you start the policy
– Provides death benefits and accumulates a cash
value
– You can borrow against the cash value or draw it
out at retirement
– Look carefully at the rate of return your money
earns
12-46
 Types of Life Insurance Policies
(continued)

• Limited payment policy

– Pay premiums for a stipulated period, usually 20 or
30 years, or until you reach a specified age (65)
– Your policy then becomes “paid up” and you
remain insured for life

• Variable life policy

– Minimum death benefit guaranteed, but the death
benefit can be greater than the minimum
depending on earnings of the dollars invested in a
separate stock or bond fund

12-47
Types of Life Insurance Policies
(continued)

• Adjustable life policy

– Whole life insurance policy, but you can change
your policy as your needs change. You can
change your premium payments to increase or
decrease coverage.

• Universal life
– Gives you more direct control
– Can pay premiums at any time in almost any
amount. Amount of insurance can be changed
more easily than a traditional policy
– The increase in the cash value of the policy reflects
the interest earned on short-term investments

12-48
 Types of Life Insurance Policies
(continued)

OTHER TYPES OF LIFE INSURANCE POLICIES

• Group life insurance

– Term insurance
– Often provided by an employer
– No physical is required

12-49
 Types of Life Insurance Policies
(continued)
OTHER TYPES OF LIFE INSURANCE POLICIES

• Endowment life Insurance

– Provides coverage from the beginning of the
contract to maturity and guarantees payment of a
specified sum to the insured
• Credit life insurance
– Debts such as car loan is paid off if you die
– Also protects lenders
– Expensive protection

12-50
Important Provisions in a Life
Insurance Contract
Objective 4: Select important provisions in life
insurance contracts
• Naming your beneficiary, and contingent beneficiaries
• Length of grace period for late payments
• Reinstatement of a lapsed policy if it has not been
turned in for cash
• Nonforfeiture: Keep accrued benefits if you drop the
policy
• Incontestability clause: After the policy has been in
force for awhile (2 years), the company can’t dispute
its validity for any reason
• Suicide clause during first two years
12-51
 Buying Life Insurance
Objective 5: Create a plan to buy the insurance
FROM WHOM TO BUY?
• SOURCES
– Examine both private and public sources
– Look up the company’s rating
– Talk to friends or colleagues

• RATING INSURANCE COMPANIES

– Research ratings on the web,
http://www.standardandpoors.com/.

12-52
 Buying Life Insurance (continued)
CHOOSING YOUR INSURANCE AGENT?
• Can friends or parents make recommendations?
• Does the agent have professional designations such
as Chartered Life Underwriter (CLU)?
• Is the agent willing to find a policy that is right for
you or does he push a certain type of policy?
• Do they ask about your financial plan?
• Do you feel pressured?

12-53
 Buying Life Insurance (continued)
COMPARING POLICY COSTS

• Compare policy costs which are affected by:

– How selective they are in whom they insure
– Their cost of doing business
– Return on their investments
– Mortality rate among policyholders
– Policy features and competition from other firms
– Takes into account the time value of money
– Helps you make cost comparisons among
insurance companies
12-54
 Buying Life Insurance (continued)

OBTAINING A POLICY
1. Apply
2. Provide medical history
3. Usually no physical for a group policy
4. Read every word of the contract
5. After you buy it, you have ten days to change your
mind
6. Give your beneficiaries and lawyer a photocopy

12-55
 Buying Life Insurance (continued)
CHOOSING SETTLEMENT OPTIONS
• Lump-sum payment is most common

• Limited installment payment

– In equal installments for a specific number of years
after your death

• Life income option

– Payments to the beneficiary for life

• Proceeds left with the company

– Pays interest to the beneficiary

12-56
 Buying Life Insurance (continued)

SWITCHING POLICIES
• Switch if benefits exceed costs of getting another
physical, and paying policy set-up costs
• The older you are the higher the premium will be
• Are you still insurable?
• Can you get all the provisions you want?

12-57
 Financial Planning with
Annuities
• People buy annuities to supplement retirement
income and to shelter income from taxes.
Annuities are tax-deferred investment plans.

– The Health Care and Education Reconciliation Act of

2010 imposes a 3.8% income tax on high income
individuals starting in 2013. The tax will be applied on
interest, dividends, and capital gains.

• Those who expect to live longer than average

benefit most from annuities

12-58