THE FUNDAMENTALS OF
INSURANCE
Take Charge
WHAT IS RISK?
Risk: The possibility of incurring a loss
 Economic Risk—related to property liability and one’s own
personal well being
 Personal Risk—risks associated with illness, disability,
loss of income, unemployment, old age, and premature
death
 Property Risk—risks of damage to or loss of
property due to theft, wind, fire, flood, etc.
 Liability Risk—potential losses to others that occur as a
result of injury or damage that you may have caused
SHARING ECONOMIC LOSSES
 Large economic losses can be avoided by sharing the loss
with other people
 Suppose you and nine of your friends decide to form an
organization called the Golf Club Owners Insurance
Association (GCOIA). The purpose of the GCOIA is to protect
members from financial loss should one member’s clubs gets
stolen. To provide protection, each member agrees to share
the cost of any stolen clubs. Therefore, if your golf clubs are
stolen, each member (including yourself) would contribute
$30 to buy new ones for you
 If you are not a member of the GCOIA and your clubs are
stolen, you would have to pay the total cost ($300) of new
clubs. As a member new clubs would only cost you $30.
WHAT IS INSURANCE?
 Insurance —the planned protection provided by sharing
economic losses among a group of people
--You are protected from economic loss
 Insurance Companies – Businesses that provide planned
protection against economic losses
 Agree to assume certain economic risks for you and to pay you if a
loss occurs
 Insured/Policyholder – The person for whom the risk is
assumed
INSURANCE
 Policy — a contract issued by the insurance company for
coverage for the policyholder
 States the conditions to which the insurance company and the
policyholder have agreed
--Unlicensed person to drive an insured car
--Skydiving / bungee jumping
INSURANCE
 Premium – The amount the policyholder must pay for
insurance coverage
 Make payments
 Once a year
 Every 6 months
 Every month
INSURANCE
 Claim — a policyholder’s request for payment for a
loss that is covered by the insurance policy
 Deductible — an amount you must pay BEFORE the
insurance company pays a claim
 $500
 $1000
INSURED LOSSES
 Policyholders should know exactly what protection is provided
by the kinds of insurance they have
 Some people fail to tell their insurance companies about
losses they have suf fered because they did not know that
their policies covered those losses
 Other people have assumed that losses they suf fered were
covered by their insurance, only to find out by reading their
policies that the losses were not covered!
 READ THE FINE PRINT!
SELF-INSURANCE
 Self-insurance : The individual, family, or business assumes
the total risk of economic loss
 No Insurance Company Is Used
 Place money in a savings account to cover possible financial losses
 Would this cover a house destroyed by fire or catastrophic illness?
COINSURANCE
 Coinsurance : The sharing of expenses by the policyholder and
the insurance company
 Policyholder pays a deductible
 Insurance company pays the balance of the bill up to a maximum ceiling
rate
 Assume you have a claim for:
 Your deductible is:
 Remaining balance after deductible
$5,250
$250
$5,000
 Your insurance policy says that once the deductible is subtracted
from the total amount of the claim, the policyholder will pay 20%
of the remaining amount
 You will make an additional payment of :
$1 ,000
 (5,000 X 20%)
COST OF INSURANCE
 Premiums charged to a policyholder are also af fected by the
cost of replacing the insured item
 A luxury car’s premiums will be higher than they would be for a less
expensive model
 If the insurance group that you have been categorized into has
more claims for a given period of time, the premiums for
everyone in that particular group will increase!!
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Age
Occupation
Geographical Location
Family History
Gender
COST OF INSURANCE
 What can I do to help keep my premiums down?
 Secure all of your belongings
 Drive defensively (everyone else is a bad driver!)
 Take care of yourself! (Good health habits)
PURCHASING INSURANCE
 Employer provided insurance protection
 Much cheaper because employer will pay anywhere from 25%--100%
for policyholder
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Life Insurance
Health Insurance
Dental Insurance
Vision Insurance
 Insurance Agent provided insurance protection
 Type one: insurance agent works for a large insurance company and
sells only policies written by that company
 Type two: insurance agent sells many kinds of policies from a number
of different companies
 The insurance agent’s job is to help you select the proper kind
of protection from economic loss
INSURANCE FOR ECONOMIC SECURIT Y
 You decide to purchase a $100,000 home but can only make
a $10,000 down payment. You will need to borrow $90,000
and have insurance on your investment to be granted the loan.
 WHY?
VEHICLE INSURANCE
ECONOMIC RISKS OF OWNING A VEHICLE
 What are your risks?
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You
You
You
You
The
could injure yourself
could injure someone else
could cause property damage to someone else
could cause damage to your vehicle
vehicle might be stolen or vandalized
 You could be sued by someone claiming to suf fer damages as
a result of the accident involving your vehicle
ECONOMIC RISKS OF OWNING A VEHICLE
 How Do I Protect Myself From These Risks?
 Automobile Insurance Policy: protection provided for:
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Your Car
The Other Car
Injuries In Your Car
Injuries To Others
Property Damage
AUTO INSURANCE
 Automobile Liability Insurance: protects you against financial
loss if you injure someone else or damage someone else’s
property in an automobile accident
 Minimum Car Insurance Requirements in Nebraska
 $25,000 for bodily injury to one person in a crash
 $50,000 for bodily injury in a crash if more than one person is hurt
 $25,000 in property damage coverage.
 Why is it important to determine who is at fault for an
accident?
 Payment is determined by who is at fault
 Regardless of who is at fault you can still sue the other party involved
AUTO INSURANCE
 Personal Injury Coverage: deals with injuries to people (the
source of most of the money paid in claims by automobile
insurance companies)
 Bodily Injury Liability
 Medical Payments
 Uninsured Motorist Protection
AUTO INSURANCE
 Bodily Injury Liability Protection: protects the insured from
claims resulting from injuries or deaths for which the insured is
found to be at fault
 THIS COVERS
 People In Other Cars
 Passengers Riding With The Insured
 Any Pedestrians
 THE INSURED AND IMMEDIATE FAMILY ARE NOT COVERED !!!
 Dollar amounts of bodily injury coverage are expressed as two
numbers divided by a slash ($100,000 / $300,000)
 The first number refers to the limit, in thousands of dollars, that the
insurance company will pay for injuries to any one person in an accident
 The second number, refers to the limit, in thousands of dollars, that the
insurance company will pay if more than one person were injured
AUTO INSURANCE
 Medical Payments Protection: policyholders and their family
members are covered if they are injured while riding in their car
or in someone else’s car
 COVERAGE MAY INCLUDE:
 If you are a pedestrian
 Guests riding in the insured car
 Medical payments insurance also covers the costs of:
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Medical
Dental
Ambulance / Airlift
Hospital
Nursing
Funeral Services
 Payment, up to the limit stated in the policy, is made regardless
of who is at fault in the accident
AUTO INSURANCE
 Uninsured Motorist Protection: protects against injuries
caused by hit-and-run drivers or by drivers who have no
insurance or money to pay claims
 Available only to those people who carry bodily injury liability
coverage
 Covers policyholder and family members
 Covers guests riding in the policyholder’s car
 Uninsured Motorist protection covers only the insured person ONLY if the
uninsured motorist is AT FAULT!!!
 Approximately 10% of the nation’s motorists drive illegally without
automobile insurance
AUTO INSURANCE
 Proper ty Damage Coverage: designed to protect you from economic loss
due to damage to the proper ty of other s and to your car
 Property Damage Liability Coverage
 Collision Insurance Coverage
 Comprehensive Coverage
 Proper ty Damage Liability Coverage: protects the insured against
claims if the insured’s car damages someone else’s proper ty and the
insured is at fault
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Another Car
Telephone Pole
Light Pole ($2,250)
Fire Hydrants ($1,000 + installation)
Houses / Buildings
Trees / Landscaping ($750 Per Tree x 3 Trees)
THIS DOES NOT COVER DAMAGE TO THE INSURED PERSON’S CAR !!!
AUTO INSURANCE
 Collision Insurance Coverage: protects a car owner against
financial loss associated with damage resulting from a
collision with another car or object (very expensive)
 DOES NOT COVER INJURIES / DAMAGE TO THE PROPERTY OF OTHERS
 Collision coverage does not provide for payment of damages
greater than the car’s assessed value (Kelly’s Blue Book
Value)
 Assessed Value Of Car
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New Paint Job
New Engine
Components (Audio)
Antique value
AUTO INSURANCE
 Comprehensive Coverage: protects the insured car against
almost all damage losses except those caused from a collision or
from the car turning over
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Fire
Tornado
Hail
Flood
Windstorm / Tree Damage
Vandalism / Breaking In / Keying
Falling Objects / Asteroid / Plane
 If the insured’s car is totally destroyed or stolen, the amount
paid out by the insurance company is not necessarily equal to
the amount paid for the car, it is equal to the car’s estimated
value at the time of the loss
 DEPRECIATION AMOUNT
BUYING AUTO INSURANCE
 People in the United States spend more than $115 billion a
year insuring over 143 million vehicles
 This expenditure is about 45% of all of the money spent on
property and casualty insurance
 FYI: Always ask for the Good Student Discount!
 3.0 GPA or better
BUYING AUTO INSURANCE
 Insurance companies use several factors to determine the cost
of your automobile insurance, some of those factors include:
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Your age and other characteristics (female / male)
The purpose for which you use your car (pleasure / work)
The number of miles you drive your car each year
The value and type of your car (sedan / sport / sport utility)
The community in which you live (Lincoln / North Platte)
Types of coverage and deductibles
 To determine premium rates, drivers are classified according to:
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Age (25 Years)
Marital Status
Driving Record
Scholastic Achievement (Higher Education)
REDUCE YOUR COST
 Taking an approved driver education course can reduce the
cost of a teenager’s car insurance by as much as 25% of the
premium
 If you insure several vehicles under the same company you
may receive a discount
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Motorcycles
Recreational Vehicles (4 runners)
Jet Skis / Boats
Snowmobiles
BODILY INJURY LIABILITY INSURANCE IS A MUST!!!
VEHICLE INSURANCE LAWS
 Compulsory Insurance Laws: require you to carry certain types
of automobile insurance before your car can be licensed
 Personal Injuries
 Property Damage
 Compulsory Insurance Laws state that you may not register a
car or obtain a license to drive without presenting proof of
having the minimum amounts of insurance coverage required
 Financial Responsibility Laws: if you cause an accident and
cannot pay for the damages either through insurance, your
savings, or the sale of property…
 Your driver’s license will be suspended!
HEALTH INSURANCE
HEALTH INSURANCE
 Hospital Insurance : type of insurance that covers an illness or
injury that requires you to be hospitalized (most popular type of
health insurance)
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Room ($500—Up)
Operating Room ($3000—Up)
Anesthesia ($600—Up)
X-Rays ($160—Up)
Laboratory Tests ($150--Up)
Medicines ($100—Up)
 Surgical Insurance : type of insurance that covers all or part of
the surgeon’s fees for an operation, usually bought in
combination with hospital insurance (very expensive )
 $2,500 C-Section (30 minutes)
 $500 Doctor Assists (30 minutes)
 $50,000 Open Heart Surgery (2-4 hours)
BLUE CROSS/BLUE SHIELD
 Non-profit organizations that cover mainly medical and
surgical treatment rather than hospital care
 These plans list the maximum amounts that will be paid for
dif ferent types of surgery
 Generally, you are not provided coverage for pre-existing
conditions or illnesses or injuries that are covered by other
insurance
HEALTH INSURANCE
 Regular medical insurance : type of insurance that pays part of
or all of the fees for non -surgical care given in the doctor’s
of fice, the patient’s home, or a hospital
 Amount payable for each visit or call
 Maximum number of visits allowed
 Payments for diagnostic and lab expenses
 The protection provided by regular medical, hospital, and
surgical coverage is referred to as Basic Health Coverage
HEALTH INSURANCE
 Major medical insurance: type of insurance that provides
protection against the high costs of serious illnesses or
injuries (compliments the big three)
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Health care prescribed by a doctor
Treatment in and out of the hospital
Special nursing care
X-rays
Psychiatric care
Medicine
 Maximum benefits range up to $250,000 and higher
HEALTH INSURANCE
 Coinsurance Clause: the policyholder will be expected to pay a
certain percentage of the total medical bill (generally 20—
25% of the costs over and above the deductible amount )
 Comprehensive Medical Policy: insurance policy that
combines the features of hospital, surgical, regular, and major
medical insurance
 Features of the individual insurance are the same
 There is only one deductible
 Less expensive (package deal)
HEALTH INSURANCE
 Dental Insurance: type of insurance that helps pay for normal
dental care (annual claims now approaching $10 billion)
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Examinations
X-rays
Cleanings
Fillings
Dental injuries resulting from accidents
Other dental work
 Some dental plans contain deductibles and coinsurance
provisions while others pay for all claims
HEALTH INSURANCE
 Vision Insurance: type of insurance that helps pay for normal
eye care (provided by many employers)
COVERED
-Eye examinations
-Prescription lenses
-Frames
-Contact lenses
NOT COVERED
-Tinted lenses
-Coated / Plastic lenses
-Nonprescription lenses
-Vision training
HEALTH INSURANCE
 Disability Income Insurance : type of health insurance that
provides periodic payments if the policyholder becomes disabled
(the insured receives weekly or monthly payments until the
person is able to return to work)
 Long illness
 Accident
 A waiting period provision is required before the policyholder can collect
on the disability
 Health insurance is available from several sources and in many
different forms
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Individual Policies
Group Policies
Health Maintenance Organizations
Preferred Provider Organizations
State Government Assistance
INSURANCE FRAUD
 Being dishonest when applying for insurance or filing
dishonest claims (fines and or jail time)
 Not disclosing existing medical conditions
 Number of miles a policyholder drives their car per year
 Exaggerated or nonexistent injuries as a result of an accident
GOVERNMENT ASSISTANCE
 Workers’ Compensation: an insurance plan that provides
medical and survivor benefits for people injured, disabled, or
killed on the job
 Workers’ Compensation Laws provide medical benefits to
employees who are injured on the job or become ill as a direct
result of their working conditions ( Employers are required to
provide and pay for this type of insurance)
 Mold
 Asbestos
GOVERNMENT ASSISTANCE
 Medicaid: federal and state government health insurance plan
administered to low income families (meet certain criteria
with income)
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Hospital Care
Doctors’ Services
X-Rays
Lab Tests
Nursing Home Care
Diagnosis and treatment of children’s illnesses
Home Health Care Services
GOVERNMENT ASSISTANCE
 Medicare: an insurance program designed to help people age 65
and older and some disabled people pay the high cost of health
care (partially funded by Social Security)
 Hospital Insurance
 Medical Insurance
 The hospital insurance plan includes coverage for:
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Hospital care
Care in an approved nursing home
Home health care up to a certain number of visits
No premium payments are required for hospital insurance, and almost
everyone 65 years old and older may qualify
 The medical insurance plan includes coverage for:
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Doctors’ services
Medical services and supplies
Home health services
The insured will have to pay a small monthly premium for this type of
coverage
COST OF HEALTH INSURANCE
 The cost of health insurance is usually determined by at least
four factors:
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Extent of the coverage
Number of claims filed by the policyholder
Age of the policyholder
Number of dependents