chapter 9 - insurance
DESCRIPTION
Business MathematicsTRANSCRIPT
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CHAPTER 9:
INSURANCE
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Key Terms• Policy: the contract between the insurer and the
insured.• Premium: the amount paid by the insured for the
protection provided by the policy.• Face value: the maximum amount of insurance
provided by the policy.• Beneficiary: the individual, organization, or
business to whom the proceeds of the policy are payable.
• Indemnity Principle: Person cannot collect more money from the damage/disaster
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Fire Insurance
1. Protects the owner building against damage from a fire.
2. Include coverage for damage from smoke and the water needed to put out the fire.
3. Premiums based on amount of the coverage, location property, the contents of the building & location of fire hydrants.
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Fire Insurance
Insurance rates are based on an annual amount per $100 in coverage. The amount due is called a premium. The annual premium is found by using this formula:
Annual Premium = Insured Value x Rate
100
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Fire Insurance : Example
A homeowner insured his house for $80,000. If the rate is $0.74 per $100, find his annual premium.
Annual Premium = Insured Value x Rate
100
= $80,000 x $0.74
100
= $592
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Fire Insurance : Coinsurance Clause
1. A coinsurance clause states that property must be insured for at least 50% clause of the replacement cost for full compensation for a loss.
2. Most companies use the 80% clause.
3. Businesses take out this kind of policy to save money on premiums since a fire, as in many cases of fire, the damage is only to part of the structure. It will usually not a total loss.
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Coinsurance Clause Formula
Compensation (up to amount of loss)
= amount of loss (up to face value) x face value of the policy
80% of replacement value
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Try ThisBudget 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?
SOLUTION :
Loss = $50,000
Face Value of the policy = $130,000
80% of replacement value = $200,000 x 0.8 (80%)
= $160,000
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Try This
Compensation = amount of loss x face value of policy
80% of replacement value
= $50,000 x $130,000
$160,000
= $40,625
The owner received $40,625 compensation for its loss of $50,000
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Try This
1. Find the annual premium on a $40,000 building if the rate is $0.87 per $100.
2. The owner of the building has $75,000 in insurance on a building worth $150,000. How much he can collect on a loss of $25,000 using the 80% coinsurance principle.
3. A person owns a building worth $200,000. He insures it for $150,000. It has fire insurance with 80% coinsurance clause policy. If the loss from a fire is $20,000, how much money he would receive?
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Fire Insurance
1. There are maybe some cases where the owner would receive 100% compensation for all damages up to 80% of the property value. If the loss was greater than 80%,the owner would never get anything above 80%.
2. Another situation can occur is when a policy is cancelled before its expiration date. In this case, the insured person is due to a refund.
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Fire Insurance : Refund
The amount of refund can be compute by this formula :
Amount of refund = Number of days left x Premium
365
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Fire Insurance : Refund
A fire insurance policy on a building was purchased on March 6. The premium was $800. If the building was sold on November 10, find the amount of the refund.
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Automobile Insurance
There are several factors that need to be considered when purchasing automobile insurance.
1.Liability
2.Bodily Injured
3.Collision Insurance
4.Comprehensive Insurance
Most insurance have deductible clause.
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Automobile Insurance• Liability: The drive is liable for the safety of
passengers and safety of other drivers and other vehicles as well.
• Bodily injured: personal injury sustained in an accident.
• 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.
• Comprehensive Insurance: protection for the owner of the vehicle for damage caused by a non-accident incident, such as fire, water, theft or vandalism.
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Automobile Insurance
Automobile insurance are written in terms the amount of the company is willing to pay per accident. It usually stated as 25/50/10/. Means that:
•In event of accident, insurance will pay up to $25,000 for an injury to one person.•Insurance will pay up to $50,000 for injuries to all the people involved in one accident.•Insurance will pay up to $10,000 for any property damage. The owner is liable for any other damage.
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Automobile Insurance
Automobile insurance are written in terms the amount of the company is willing to pay per accident. It usually stated as 25/50/10/. Means that:
•In event of accident, insurance will pay up to $25,000 for an injury to one person.•Insurance will pay up to $50,000 for injuries to all the people involved in one accident.•Insurance will pay up to $10,000 for any property damage. The owner is liable for any other damage.
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Automobile Insurance : Example
Catherine Reno was involved in an automobile accident in a $32,000 injury. The insurance policy contained 25/50/10 clause. How much did the insurance company have to pay.
Insurance will pay up to $25,000 for injury to one person
So, $32,000-$25,000= $7000
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Automobile Insurance
Ping Kim and his wife were involved in an automobile accident. If Ping was awarded $28,000 in damages & injury and his wife awarded $12,000, how much money did the insurance company have to pay and how much money did the insured pay if his policy contained a 25/50/10.
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Example
Sam Johnston is at fault in an automobile accident. He carries 50/100/10. The driver of the car he hit was awarded $52,000. Two passengers in the vehicles were awarded $8,000 and $7,000 respectively. Damage to Sam’s automobile was $5,000 and to the car he hit, $8,000. How much did his insurance company pay and how much was Sam’s liability?
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Life Insurance
A person can insure his or her life by purchasing life insurance. There are certain types of insurance:
Straight life insurance – Requires insurers to pay premium for his/her entire life. Collect dividend and face value at the time of his/her death
Term life insurance – Requires the insured to pay premiums for a specific number of years such as 1 year, 5 years, 10 years or 20 years
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Life Insurance
Limited payment – Policy requires payments be made for a specific number of years and beneficiary receives the value of the policy upon the death of the insured
Endowment Policy – Policy is paid is paid off in a specific number of years. If the insured lives past the maturity date, he receives the face value of the policy.
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Life Insurance : Example
If healthy 45- year old female purchased $100,000,10 year old term policy and the premium was $61.80 per month, find the yearly premium and the total amount she would pay for 10 years.
1 year - $61.80 x 12 = $741.60
10 year - $741.60 x 10 = $7416.00
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Life Insurance : Example
Sometimes rates are given per $1000. To find the annual premium use the following formula:
Annual Premium = Face Value x Rate
$1,000
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Life Insurance : Annual Premium
Byron Simmons purchased a $50,000 straight life insurance policy. If the premium is $23.40 per $1,000 for a 35 years old male, what was his annual premium?
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THE END