FIN 200: Personal Finance

1. FIN 200: Personal Finance Topic 12-Auto and Homeowner’s Insurance Lawrence Schrenk, Instructor

2. Learning Objectives • Discuss the general types of insurance. ▪ • Explain the general features of auto insurance. • Explain the general features of home owners insurance. • Calculate annuities with non-annual payments.▪

3. Insurance in General

4. Selected Types of Insurance Don’t Forget: Expatriate Insurance, Pet Insurance, Kidnap and Ransom Insurance, Terrorist Insurance, etc...

5. Terminology • Risk Management • Insurance–Financial Contract... • That redistributes costs of financial losses, or • in which one party compensates another party for losses • Insurer versus Insured • Premium

6. The Insurer • Profit • Revenue • Earned Premium • Investment Income • Costs • Incurred Loss • Underwriting Expenses • Diversification of Risk • Captive versus Independent Agents

7. Insurer Issues • Moral Hazard–Possibility that someone insured will act differently, i.e., to the detriment of the insurer, than when uninsured. • If your apartment is insured against theft then there is less incentive to be security conscious. • Insurance changes our behavior. • Insurance Fraud

8. The Insured • The Psychological Bases of Finance • Greed • Risk Aversion • Income Smoothing • Can’t insure against everything.

9. The Effect of Insurance

10. Auto Insurance

11. Policy • Who’s Covered • People • Vehicle • Coverage • Dollar limits • Dates • Policy/Binder Number

12. Coverage: Liability • Bodily Injury • Caused by Insured Parties • Medical and Lost Wages • Limits • Individual (recommended minimum $100,000) • Total (recommended minimum $400,000) • You are liable above limits • Property Damage • Recommended minimum $50,000 • State Requirements • DC 25/50/10

13. Coverage: Medical Payments • Bodily Injury • To Those in Insured Vehicle • Recommended minimum $10,000 • Distinguish from Regular Health Insurance

14. Coverage: Un-/Underinsured • Uninsured Driver • No Insurance • Bankrupt Insurance Company • Underinsured Driver • Insufficient Insurance • Applies if You are Not at Fault • Recommended minimum $300,000

15. Coverage: Collision and Comprehensive • Collision • Damage to your car when you are at fault • Comprehensive • Various damages to you car • Flood, fire, theft • Optional • May be required by lender • Kelley Blue Book Value Normally Maximum • Deductable

16. Homeowner’s Insurance

17. Coverage Types • Coverage A–Residence • Coverage B–Detached Structures • Coverage C–Personal Property • Coverage D–Added Living Costs • Coverage E–Personal Liability • Coverage F–Medical Payments

18. Coverage A–Residence • Repair/Replacement of Home • Possible Causes or Loss • Fire, Tornado, etc. • Land not included • Two Suggestions • Insure for 100% of full replacement cost • Don’t be underinsured.

19. Coverage B–Detached Structures • Generally 10% of coverage A • Possible Applications • Garage • Barn • In-Ground • Excludes structures used for business.

20. Coverage C–Personal Property • Payout Values • ‘Cash Value Policy’–After Depreciation • ‘Replacement Cost Policy’–Actual Cost to Replace (in theory) • Coverage is normally 50-75% of coverage A. • Do you need additional coverage?

21. Coverage D–Added Living Costs • Home Unlivable due to Covered Loss • Additional Living Expenses • New Costs • Motels • Take-Out Meals • Less Old Costs not Incurred • Utilities • Possible Time Limits • 12 Month • Unlimited

22. Coverage E–Personal Liability • Personal Liability for injuries and property damage you cause. • Two Important Points • This is general liability insurance • Not restricted to your property • Does not cover vehicular incidents • Covers Lawsuits and your Defense • Usually $100,000 included. • Do you need more?

23. Coverage F–Medical Payments • Covers a guest hurt on your property. • Can duplicate guests own health insurance.

24. Typical ‘Causes-of-Loss’ • Included • Fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicle damage, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action • Excluded • Earthquake, Flood, Faulty maintenance, Damage from insects or vermin, Wear and tear, gradual damage or deterioration

25. Other Issues • Deductible • Estimating Coverage • Documentation • Photos • House-Interior and Exterior, Special Features • Personal Property

26. Project Notes I

27. Project Notes II

28. Project Notes III

29. Annuities: Non Annual Payments

30. Non-Annual Payments • We need to incorporate the possibility of non-annual payments into our financial calculations. • Fortunately this is simple... • You need to change the payments per year (P/Y) to 12 for monthly payments. • NOTE: HP users, your calculator is set to 12 by default. • Then do the problem just as you would for annual payments.

31. Changing P/Y (TI) • [2nd ] [I/Y] • 12 (monthly or 4 quarterly, or 52 weekly) • [Enter] • [2nd ] [CPT]

32. Future Value with a Calculator • How much do we have after 3 years if we save $200 per month beginning next month and the interest rate is 12%? • Input 36, Press N (3 x 12 = 36) • Input 12, Press I/Y • Input 200, press +/-, press PMT(you get -200) • Press CPT, FV to get $8,615.38 NOTE: N is the number of periods, so if you save weekly for 2 years, N = 2 x 52 = 104.

33. Non-Annual Practice Problems • How much will you have if you save $100.00 per month for 25 years at 8%? • $95,102.64 • How much can you borrow if you pay $50.00 per week for 5 years at 7%? • $10,962.57 • How much do you need to save per month to have $10,000 in 5 years at 10%? ▪ • $129.14 ▪

34. Ethical Dilemma You teach personal finance at a local community college. The state in which you teach requires proof of liability insurance in order to renew your license plates. During the discussion of this topic in class, several students admit that they obtain a liability policy just prior to the renewal of their license plates and then cancel it immediately thereafter. They do this because they know that the state has no system for is a following up on the cancellation of the liability policies once the license plates are issued. These students, who are out of work as a result of a local plant shutdown, indicate that they cannot afford to maintain the insurance, but they must have access to cars for transportation. a. Discuss whether you consider the conduct of the students to be unethical. b. How does the conduct of these students potentially impact other members of the class who maintain liability insurance on their vehicles?