CHAPTER 9:

INSURANCE

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

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.

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

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

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.

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

Try This
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?
SOLUTION :
Loss = $50,000
Face Value of the policy = $130,000
80% of replacement value = $200,000 x 0.8 (80%)
= $160,000

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

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?

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.

Fire Insurance : Refund

The amount of refund can be compute by this formula :
Amount of refund = Number of days left x Premium
365

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.

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.

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 insureds vehicle for an
accident that is the insured drivers fault.
Comprehensive Insurance: protection for the
owner of the vehicle for damage caused by a nonaccident incident, such as fire, water, theft or
vandalism.

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.

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.

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

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.

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
Sams automobile was $5,000 and to the car he hit,
$8,000. How much did his insurance company pay and
how much was Sams liability?

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

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.

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

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

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?

THE END