Unit 8: Insurance
Section 14.1 – Insurance Basics
Section 14.1- Insurance Basics
• Goals:
▫ Describe how insurance works to protect
consumers.
▫ Explain the basic kinds of insurance and how to
determine the amount to buy.
Understanding Insurance
• Risk- the chance of financial loss resulting from
damage, illness, injury or death.
• Risk management means limiting possible
financial losses to amounts you can handle.
• To manage this risk, you can buy insurance.
• Insurance- a risk management tool that limits
financial loss due to illness, injury or damage in
exchange for a premium.
• Premium- regular payments required to
purchase insurance.
How insurance works
• When you buy insurance, you sign a legal
contract called a policy, which makes you a
policyholder.
• The policy spells out the specific loss that it
covers and the financial compensation the
company will provide if you suffer that loss.
• If you do have a loss covered by the policy, you
file a claim, which is a formal request for
payment from the insurance company.
Shared Risk
• Insurance companies diversifies the risk by
selling policies to thousands of people.
• Each policy holder pays a premium that is small
compared to the cost of a possible loss.
• Insurance works by transferring fund from a
large group to the relatively few who suffer
losses.
• Through this method, all policyholders share the
cost of losses. This is the concept of shared
risk.
Premiums and Statistics
• Insurance companies use statistics from past events
to
▫ Predict how many losses are likely to occur within any
large group of people.
▫ Help estimate how much they will need to pay to
reimburse particular types of losses.
• Insurance companies have such statistics about all
types of losses they insure. They use this knowledge
to set premiums and by charging a little more than
the expected losses, they earn a profit.
What Insurance Protects?
• Remember the purpose of buying insurance is to
protect against the loss of something of value.
Insurance is designed to restore your financial
position to where it was before the loss, not to
allow you to profit from the loss.
• To insure something you must have an
insurable interest in the item. That means,
it must be something of value that, if lost, would
cause you financial harm.
Determining Value
• Before you can insure property, the value must be
measured in financial terms.
• To determine value of property, you or the insurance
company can have it appraised. An appraisal is an
expert’s determination of the value of a piece of
property.
• For items not automatically covered you must
purchase a rider. A rider is a special addition to an
insurance policy that covers a specific type of loss.
▫ i.e. home insurance & diamond ring
Determining the amount of Life &
Health Insurance
• Your life & health don’t carry a price tag, so they are
insured differently.
• The greater the amount of coverage you choose, the
higher the premium. Life expectancy also affect
premiums.
▫ (Life expectancy is an estimate of the average number of years
remaining in people’s lives based upon gender, current age & health).
• For example, if you are an 18 year old female, nonsmoker, in good health. From statistics, insurance
companies know that people like you live to be an
average of 78.6 years old. At 18, your life expectancy is
60.6 more years.
• Companies also use statistics of medical conditions to
determine premium costs.
Three types of insurance
• Property Insurance: insurance that protects you
form financial loss when things are stolen, damaged
or destroyed.
• Two ways of determining value:
▫ Market value: is the amount the item is worth now.
(i.e. A car that cost you $20,000 three years ago may
be worth $10,000 now. If someone stole the car the
company would pay you $10,000- not buy you a new
car.)
▫ Replacement value: the cost of replacing the item
regardless of its market value at the time of the loss.
(i.e. You spent $600 for a couch 5 years ago. If you
sold the couch today you would get $200 for it. If your
house burned down, it would cost you $800 to buy
comparable couch. Under replacement value the
insurance company would pay you $800.)
Three types of insurance
• Liability Insurance : protects you from losses
that you cause others. (also called casualty
insurance.)
• Up to a stated maximum, it will pay the cost of
damage, medical expenses and legal fees if you
are sued.
Three types of insurance
• Personal insurance : insurance that protects
you, your spouse, and your children against loss
due to illness, disability or death.
• Two common forms of personal insurance
▫ Health
▫ Life