Insurance n Life Estimate insurance premiums using a

Insurance n Life ¡ Estimate insurance premiums using a rate table. ¡ Apply the extended term non-forfeiture option. n Property ¡ Estimate insurance premiums using a rate table. ¡ Find the refund for a cancelled policy. ¡ Find the compensation for a coinsurance policy. n Motor Vehicle ¡ Find automobile insurance premiums using rate tables. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Insurance: a form of protection against unexpected financial loss. n Comprehensive policy: insurance policy that protects the insured against several risks such as fire, flood and earthquake. n Insured (policyholder): the individual, organization or business that carries the insurance or financial protection against loss. n Insurer (underwriter): the insurance company that assures for a specific loss according to contract provisions. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Policy: the contract between the insurer and the insured. n Premium: the amount paid by the insured for the protection provided by the policy. n Face value: the maximum amount of insurance provided by the policy. n Beneficiary: the individual, organization, or business to whom the proceeds of the policy are payable. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 1. 1 Estimate Life Insurance Premiums Using a Rate Table n Life insurance pays a specified amount to the beneficiary and provides financial assistance to the surviving dependents of the insured person. n A company may offer life insurance as a fringe benefit to its employees. n Several types of policies exist; some even function as savings policies. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Types of life insurance policies n Term insurance: insurance purchased for a certain period of time. At the end of the time period, the policy has no cash value and the insurance ends. n Straight-life (ordinary life) insurance: insured pays premiums for entire life. At the death of the insured, the beneficiary receives the face value of the policy. If the policy is cancelled, the insured is paid the cash value of the policy. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Table 18 -1 Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Estimate an annual life insurance premium using a table 1. Locate the estimated annual rate in Table 181 according to the type of policy, age and sex. 2. Divide the policy face value by $1, 000 and multiply the quotient by the rate from step 1. Estimated annual premium = face value ÷ 1000 x rate Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example n Estimate the annual premium of an insurance policy with a face value of $100, 000 for a 20 year old male for (a) a 10 -year fixed rate policy and (b) a straight life policy. n Estimated annual premium = $100, 000 ÷ $1, 000 x rate n Look at Table 18 -1 for each rate and calculate the estimated annual premium. n (a) = $121 Business Math, Eighth Edition Cleaves/Hobbs (b) $272 © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Making insurance premium payments If premiums are not paid annually, but in smaller increments semi-annually, quarterly or monthly, this table shows premium rates for periods less than one year. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example n Use Tables 18 -1 and 18 -2 to estimate the (a) semiannual, (b) quarterly and (c) monthly premiums for a $250, 000 20 -yr. fixed rate policy on a 30 -year old female. n Annual premium = amount of coverage ÷ $1, 000 x rate n $250 x 1. 85 = $462. 50 n The annual premium for this policy would be $462. 50. (Go to next slide) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Premium payments n Semiannual premium = $462. 50 x 0. 51 = $235. 88 n Quarterly premium = $462. 50 x 0. 26 = $120. 25 n Monthly premium = $462. 50 x 0. 0875 = $ 40. 47 n In the semiannual payment structure, the insured would pay $471. 76 during a year. n In the quarterly payment structure, the insured would pay $481 during a year. n In the monthly payment structure, the insured would pay $485. 64 during a year. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Fixed payment insurance policy: gives a specific face value for the insured’s entire life, but payments are made only for a fixed period of time; at the end of the fixed time, the insured has paid-up insurance. n Fixed time endowment insurance policy: a combination of insurance and savings plan. n Universal life insurance policy: has flexible premium rates and death benefits depending on interest rates, mortality rates and insured’s age. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 1. 2 Apply the Extended Term Non-Forfeiture Option n Most life insurance policies, except term life insurance, build up cash value. If a policy holder decides to cancel a policy or allow it to lapse, the insured normally has three choices called nonforfeiture options: ¡ Cash value or surrender option ¡ Paid-up insurance ¡ Extended term insurance Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

How to apply the extended term non-forfeiture option 1. Identify the cash value of the cancelled policy. 2. Estimate the annual premium for the term policy of the same value. (Use the 10 -year fixed rates on Table 18 -1) 3. Determine the amount of paid-up insurance = cash value of surrendered policy ÷ annual term of term policy Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example A 50 -year old female started a $100, 000 straight-life policy when she was 30. It has a cash value of $3, 857 and she wants to convert it to an extended term for the same face value. Using the 20 -year fixed rates, estimate how long her extended term insurance will last. (Go to next slide) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

How long will it last? n Estimated annual term premium: $3. 51 per $1, 000 n $100, 000 ÷ $1000 = 100 units n $3. 51 x 100 = $351 (annual term rate) n Cash value ÷ annual premium $3, 857 ÷ $351 = 10. 99 years n Her extended term insurance will last an estimated 10. 99 years. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 2 Property Insurance Businesses and homeowners need property insurance to protect them from financial loss that could come from: ¡ Fire ¡ Storms ¡ Burglary ¡ Vandalism Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Annual Fire Insurance Rates per $100 of Face Value Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 2. 1 Estimate Property Insurance Premiums Using a Rate Table n Insurance rates are expressed as an annual amount per $100 of coverage. n To find the annual premium, divide the amount of coverage by $100 and multiply by the rate in the table. (Do this for both building and contents) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Estimate the annual fire insurance premium using a table 1. Locate the annual rate for building (or contents) being insured according to the building’s area rank and its class. 2. Find the annual premium for both the building and contents. 3. Add the two premiums. Annual premium = face value x rate $100 Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example The building owned and occupied by O’Toole Hardware is insured for $85, 000. The contents are insured for $50, 000. If it is a class B building located in area 2, find the annual premium for the building and contents. n Annual premium (for building) = $85, 000 ÷ $100 x 0. 54 = $459 n Annual premium (for contents) = $50, 000 ÷ $100 x 0. 62 = $310 n The sum of the two premiums is $769 Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 2. 2 Find the Refund For a Cancelled Policy n A business or individual may need insurance for less than one year or they may need to cancel a policy before it has expired. n A short-term policy is an insurance policy for less than one year. n A short-rate premium is the premium for a short-term policy. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Short-rate property insurance schedule Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Find a refund for a cancelled policy 1. Identify the annual premium 2. Identify the time the policy is in force 3. Use Table 18 -4 to find the short rate for the time the policy is in force. 4. Find the short-rate premium = annual premium x short rate 5. Find the refund = annual premium –short rate premium Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example Sheldon Dan paid an annual premium of $5, 285 for the building and contents for his business. He sold his business 7 months after the policy was in force and cancelled the policy. What was his refund? n Annual premium = $5, 285 n Time policy is in force = 7 months n Short-rate percent = 75% ( go to next slide) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Sheldon’s refund n Annual premium x short-rate percent = $5, 285 x 0. 75 = $3, 963. 75 n Refund is = annual premium – short-rate premium n Refund : $5, 285 - $3, 963. 75 = $1, 321. 25 n Sheldon’s refund is $1, 321. 25 Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 2. 3 Find the Compensation With a Coinsurance Clause n A coinsurance clause states that property must be insured for at least 50% of the replacement cost for full compensation for a loss. n Businesses take out this kind of policy to save money on premiums since a fire, for example, rarely destroys a whole building or all of its contents. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Find the compensation with a coinsurance clause 1. Find the face value required by the 80% coinsurance clause for full compensation: multiply 0. 8 by the replacement value of the property. 2. Find the compensation for the loss if the insurance is less than 80% of the replacement value. (go to next slide) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Compensation formula Compensation (up to amount of loss) = amount of loss (up to face value) x face value of the policy 80% of replacement value Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example Budget Construction owns a building with a replacement value of $200, 000. It has a fire insurance policy with an 80% coinsurance clause, and a face value of $130, 000. There is a fire and the building damage is figured to be $50, 000. What will the insurance company pay as a compensation? n Compensation = loss x face value of the policy 80% of replacement value Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Budget’s compensation n Compensation = $50, 000 x $130, 000 $160, 000 = $40, 625 n Budget receives $40, 625 compensation for its loss of $50, 000. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

18. 3. 1 Motor Vehicle Insurance n Major expense item for individuals and businesses because of high risk of personal injury or death, and damage to property. n Insurance can cover risks such as liability for personal injury and property damage, damage to or loss of the insured vehicle; damage or loss to an insured vehicle due to collisions, theft, fire, floods, or storms. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Liability insurance: protection for the owner of a vehicle if an accident causes personal injury or property damage and is the fault of the driver of the insured vehicle. n Comprehensive insurance: protection for the owner of the vehicle for damage caused by a non-accident incident, such as fire, water, theft or vandalism. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Collision insurance: protection for the owner of a vehicle for damages to the insured’s vehicle for an accident that is the insured driver’s fault. n No-fault insurance: protection for the owner of a vehicle for damage to the insured vehicle when the amount of damage falls within the no-fault limits imposed by state law. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Uninsured-motorist coverage: protection for the owner of a vehicle when damages are incurred in an accident that is not the owner’s fault, but the other driver has no insurance. This coverage only applies to the owner’s vehicle. n Territory: the primary location where the vehicle is driven. n Driver class: the class for the primary driver based on factors such as age, sex, marital status and driving history. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Bodily injury: personal injury sustained in an accident. n Property damage: damage to the property of others in an accident. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Factors affecting the cost of automobile insurance n Location of the vehicle (city, town, rural area) n Total distance traveled per year n Distance traveled to work each day n Types of use (personal, commuting, business) n Academic record of the driver (for those still in school) n Driving record and training of the insured drivers n Age, sex and marital status of insured driver n Type and age of the vehicle. n Amount of coverage desired Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Annual Automobile Liability Insurance Premiums Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Annual Automobile Comprehensive and Collision Insurance Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Key Terms n Deductible: the amount an insured pays for damages to the insured vehicle before the insurance company pays for damages in excess of the deductible amount. n The book value: the value of a particular year, make and model of a vehicle is published for car dealers and insurance companies. If the damages resulting from an accident exceed the book value, the insurance company will only pay the book value and the automobile is said to be totaled. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Find an annual automobile insurance premium using table values 1. Locate the bodily injury premium according to territory, driver class, and person/per accident bodily injury coverage. 2. Locate the property damage premium according to territory, driver class, and property damage coverage. 3. Locate the comprehensive premium according to model class, vehicle age, territory and deductible. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Insurance premium calculation (continued) 4. Locate the collision premium according to model class, vehicle age, territory and deductible. 5. Add the premiums from steps 1 -4. Total annual premium = bodily injury premium + property damage premium +comprehensive premium + collision premium. Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

Look at this example n Use Tables 18 -5 and 18 -6 to find the annual premium for an automobile liability insurance policy in which the insured lives in territory 1, is class A, and wishes to have 50/10 coverage. n The automobile is a three-year old, model class 2 vehicle and both comprehensive and collision are carried with a $250 deductible. (continue on following slide) Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved

The annual premium n Bodily injury premium: $230 n Property damage premium: $105 n Comprehensive premium: $112 n Collision premium: $168 Total: n $615 The total annual premium is $615 Business Math, Eighth Edition Cleaves/Hobbs © 2009 Pearson Education, Inc. Upper Saddle River, NJ 07458 All Rights Reserved