INS22 Revision Guide

INS 22 – Reference Guide By Santosh and Abhishek

Chapter 1 -Overview of Personal Insurance

Personal Insurance covers losses to individuals and families due to death, illness, injury, disability and unemployment.

Loss exposure presents the possibility of financial loss, whether or not loss occurs.

1.1 Property Loss Exposures

Property loss can occur because of it being destroyed, damaged, stolen, lost or reduced in value by a cause of loss (peril).

1.1.1. Elements of Property loss exposures

Property exposed to losso Real property – land, building and other structures embedded in it or

attached to it. E.g.: Underground pipes, foundations, storage shed, and detached garage.

o Personal Property – tangible / intangible property that is not real property. E.g. Patent, Copyright, Coins

Possible causes of loss – means by which property is damaged/destroyed (perils) Financial consequences of loss

o Reduction in value of property: preloss value – postloss valueo Increased expenses – in addition to normal living expenseso Lost income

1.1.2 Classification of personal property

Dwelling contents: o Broadest category of personal propertyo Common to the use of dwelling as a homeo Items generally insured as a group

High-value personal property:o Silverware, jewellery, furs and firearmso Can be partially covered under dwelling contents, however might require

separate category because of limitations on coverage amount.o To keep premium reasonable for the average customer, might have to pay

additional premium to insure such property Property with unusual or intrinsic value:

o Value comes from its unique characteristicso Antiques, work of art, coin or stamp collectionso Value is established by appraisal at the time of purchase of insurance

Business personal propertyo Office furniture, computer equipment for business purpose.o Additional coverage might be necessary for this exposure

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Motor vehicles, trailers, watercraft and aircrafto Present unique loss exposures – should be separately insured.

1.2 Liability Loss Exposures

1.2.1. Elements of Liability loss exposures

Liability loss is a claim for money damages because of injury to another party or its property.

Possibility of a claim for money damages: Claims are governed by civil law – the legal foundation of insurance.

Financial consequences that might occuro Cost of investigation and defenseo Money damages awarded if defense is unsuccessful

Civil law deals with rights and duties of citizens regarding one another.

1.2.2. Types of claims

Tort Liability: Tort – a wrongful act other than a crime or breach of contract.o Negligence – failure to act in a reasonably prudent manner

A duty to act Breach of duty Injury or damage Breach of duty – the direct cause of injury/damage

o Intentional torts – regardless of whether harm is intended – deliberate act Libel – written or printed untrue statement Slander – oral untrue statement Assault – intentional and unlawful threat of bodily harm Battery – unlawful physical contact Trespass – unauthorized possession or use of land. Nuisance – violation of a person’s right to enjoy use of property

without disruption from outside sourceso Absolute liability- dangerous activities/defective products, regardless of

degree of care, it does not require proof of negligence. Contractual Liability

o Liability assumed under any contracto Breach of warranty

Statutory Liabilityo No- fault auto lawso Workers compensation laws

1.3 Liability Loss Exposures

Carrying out decisions that will decrease the adverse effects of potential losses is risk management.

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1.3.1 Basics of Personal Risk Management (risk management applied to loss exposures of individuals and families)

It involves the following steps: Identifying loss exposures Analyzing loss exposures Examining various techniques Choosing the appropriate technique Implementing the chosen technique Monitoring and revising the plan.

Errors and omissions: Negligent act (error) or failure to act (omission) while conducting insurance business. – Can lead to legal liability of damages

1.3.2 Techniques to treat loss exposures

Loss Control Loss prevention: control frequency of loss Loss reduction: controls severity of loss

Avoidance: by choosing not to own a particular property or engage in particular activity

Noninsurance Transfer: transfers loss from one party to another party that is not an insurer.

Retention: no transfer of loss exposures to insurance company or anyone else. Intentional Unintentional

1.3.3 Types of Personal Insurance PoliciesPackage policy includes two or more lines of insurance: E.g.: Homeowners and Personal Auto Policy

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Chapter 2 – Automobile Insurance and Society

2.1 Problems associated with automobile insuranceFollowing are the problems in obtaining automobile insurance -

2.1.1 High Frequency Of Auto Accidents

The accident frequency has increased due to - Drunk Driving Tailgating Falling asleep at wheel, using cell phones Driver aggression

2.1.2 High Costs Of Automobile Accidents

Costs over $50bn in a year. Losses include property loss, medial expenses, legal expenses, lost income &

emergency services Medical & legal costs are steadily rising.

2.1.3 Underwriting Losses

Insurers have experienced underwriting losses in many states when premiums are less than the costs of losses and expenses in meeting losses.

Insurers increase premiums and tighten eligibility requirements so many motorists are not able to obtain insurance in the standard market.

2.1.4 Irresponsible DriversThere are 3 categories of drivers ho fall into this group -

Drivers with no automobile insuranceo Cannot pay for the damages caused and are bad drivers

Drivers under influence of alcohol & drugso States have tightened laws for drunk driving and drug abuse.

Other high-risk driverso Habitually violate traffic lawso Involved in a large number of accidentso Driving with a suspended licenseo Individuals have high probability of a high-risk accident.

2.1.5 Availability & Affordability Of Automobile Insurance Coverage is available to certain drivers at higher premiums than to others at

standard premiums. Drivers with bad traffic records are not able to obtain insurance.

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2.2 Compensation Of Auto Accident VictimsPeople injured or incurring losses from auto accidents due to negligence of owners or auto operation. The insurers and state governments have designed following approaches for compensating auto accident victims -

2.2.1 The Tort Liability System This method is based on Fault. Most common form of tort liability is ‘negligence’. Auto operators and owners are generally at fault should exercise ‘reasonable care’

to prevent others from coming to harm. The injured party must prove that the loss was incurred from the negligence of the

another party. Contributory Negligence Law – If the injured party is also responsible in some

way for injury, then he loses the right to collect damages. Applicable in some states.

Comparative Negligence Law – If the injured party is less responsible in some way for injury, then he has the right to collect proportionate damages.

Tort Reforms – Proposed legislation to reduce legal costs arising out of negligence lawsuits.

2.2.2 Financial Responsibility LawsRequire motorists to provide proof of financial responsibility (like liability insurance) in following conditions (failure means suspension of license and vehicle registration) –

After occurrence of an auto accident involving bodily injury or property damage exceeding a dollar amount.

After conviction of a serious offence such as rash driving, reckless driving or losing a driver’s license due to repeated violations

Upon failure to pay a judgment that results from an auto accident.Following are the defects in the laws –

Becomes effective after an accident or judgment but do not guarantee that a negligent driver will pay for the loss.

Financial responsibility laws do not guarantee payment to all accident claims. Delay in legal system causes considerable delay in compensating accident

victims. Inured persons might not be fully indemnified for their injuries.

2.2.3 Compulsory Insurance Laws Require auto liability insurance for all motorists that drive the state. Minimum limit should be carried before vehicle is registered. The following are the defects in compulsory insurance laws -

o Compulsory insurance laws do not guarantee compensation to all accident victims.

o Compulsory insurance laws provide incomplete protection

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o There can be considerable delay in the legal system until the victims are compensated.

o Compulsory insurance laws might not reduce the number of uninsured motorists.

o Insurers argue that compulsory laws restrict their freedom to select profitable insureds.

o Consumer advocates argue that if insurers are allowed to increase rates they may become high for good drivers.

o Compulsory insurance laws do nothing to prevent or reduce the number of automobile accidents.

2.2.4 Unsatisfied Judgment FundsUnsatisfied judgment funds are established by states to compensate victims who have obtained court judgment but the negligent party cannot pay.

Maximum amount paid is limited to state’s minimum compulsory amount. Negligent driver must repay the fund or driver’s license is revoked until he

reimburses the fund. States obtain funds by assessing insurers, by charging motorists a fee, by

assessing uninsured driver & surcharging motorists for moving violations.Those opposed to these point out the following flaws –

Financing is inequitable because insured motorists within a state are charged a fee.

Administration of funds is cumbersome and slow Uninsured motorists are not able to pay full amounts Financial problems due to inadequate funding.

2.2.5 Uninsured Motorists Coverage Financial protection against an uninsured driver. Drawbacks are –

o Person might not be fully compensated.o Legal responsibility of the uninsured motorists must be established.o Property Damage is excluded in most states.o The victim is paying for insurance of some other negligent person.

2.2.6 Underinsured Motorists Coverage Financial protection when the negligent driver who cannot pay for all damages.. Applies only when a liability is not met fully. Uninsured coverage does not apply

along with this. Can be underwritten if the following conditions are met –

o It must be included in the policy.o Limit of this coverage is more than state’s minimum financial liability

limit.o Limit for underinsured and uninsured coverages must be the same.

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o Policy must apply to all automobiles.

2.2.7 Low Cost Auto Insurance Decreasing the number of uninsured drivers by providing minimum liability

coverage at available at reduced cost. Not a success so far.

2.3 No Fault Automobile Insurance Insureds can collect damages from insurers regardless who was at fault. Monetary Threshold – Claim has to be below a monetary threshold to avail this

coverage. If higher, damages to be sought from the negligent party. Verbal Threshold – mentioned specifically the injuries that are covered under

this insurance and what are to be paid by the negligent driver. Damages have to be collected from the insurer if specified.

2.3.1 Characteristics of No-Fault Laws Remove the need to prove negligence.

o Quick payments of benefits.o Define the additional benefits that need to be taken from the party at fault.

Typical No Fault Benefits PIP (Personal Injury Protection) benefit is added to the policy by insurers for

providing no fault benefits. Benefits given by endorsement are limited to economic loss of the insured –

medical expenses, loss of wage, other expenses, etc. Non-economic losses (pain, suffering, anguish, etc.) to be recovered from the

negligent party. Typical No-Fault Benefits are –

o Medical Expenses – paid upto some maximum limito Rehabilitation Expenses - paid in addition to medical expenseso Loss of earningso Expenses for essential serviceso Funeral Expenseso Survivor’s loss benefits

Right to seek compensation from party at fault Depends on the state no-fault laws. Usually insured has the option to receive no fault benefits, instead of seeking

compensation. No-fault insurer can collect benefits from the negligent party.

Exclusion of Property Damage No-fault laws generally apply to injuries and not to property damage.

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Property damage compensation is sought from the party at fault. Reasons - o Property damage is small and applies to vehicles.o Amount of damage to property is easier to determine.o Auto insurers can generally settle for damage from insured’s property

quickly.

2.3.2 Types of No Fault Laws

Pure No-Fault System Would have abolished tort liability insurance systems for collecting damages from

the negligent party. Generally a modified system is used in states.

Add-On Plans Injured person retains the right to seek compensation and damages from the

negligent party. Under this law, policyholder has the right to decline to purchase no-fault

insurance whereas the insurer has to offer it.

Modified No-Fault Plans The right to seek compensation and damages from the negligent party is limited

but the injured person can still seek them. The claim has to be above modified threshold or verbal threshold to seek these

damages.

Choice No-Fault Plans Insured has the choice whether to be covered by no-fault plan or not. Insured pays a higher premium if the no-fault plan is selected. Lower premium is for limitations on tort recovery.

2.3.3 Evaluation Of No-Fault Laws

Arguments in Favor of No-Fault Laws Eliminate the need to determine fault - difficult task in accidents Eliminate in-equities in claim payments – small claims overpaid & serious claims

underpaid. Correcting the limited scope of the present system. Beneficiaries collect less

under the system. Decreasing the proportion of premium dollar used for claim investigation and

legal costs. Avoiding delay in payments.

Arguments Against No-Fault Laws Defects of present tort liability system are exaggerated – most claims settled out

of court. No fault might penalize safe drivers.

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Claims of premium savings and greater efficiency are overstated and unreliable. No-fault benefits do not include payment for pain and suffering. The present tort system needs to be reformed and not replaced.

2.4 Automobile Insurance for High Risk Drivers Obtain insurance from the residual market.

2.4.1 Automobile Insurance Plans Eliminate the need to determine fault - difficult task in accidents Each insurer writes a proportionate amount of high-risk drivers insurance

commensurate with the percentage of the total number of drivers it underwrites insurance for.

Certain persons may be ineligible for coverage due to their past felony records. Premiums are generally higher than the premiums in the standard market.

2.4.2 Joint Underwriting Associations JUA sets rates and approves policy forms for high-risk drivers. A limited number of insurance companies act as servicing insurers. Servicing insurers runs all the underwriting and claims operations. All companies pay the proportionate share of joint underwriting losses according

to the insurance underwritten in the state.

2.4.3 Reinsurance Facilities Insurers accept all auto applications and classify certain drivers as high-risk

drivers & assign their risk for reinsurance. All insurers doing business in the state share underwriting losses in proportion of

the business they do in the state. State-wide reinsurance pool is created by the insurers in which, premiums and losses for high-risk drivers are assigned.

2.4.4 Specialty Insurers Specialize in insuring drivers with poor-driving records. Following are the characteristics –

o Premiums are substantially higher than premiums in standard market.o The amount of insurance is at least equal to state’s financial responsibility

or compulsory insurance.o Medical payments coverage may be limited.o Medical coverage is limited.o Collision coverage comes with a high deductible.

2.5 Regulation & Rating of Personal Auto Insurance Auto insurance is required for -

o States require insurance for vehicles to legally operate in the state.o Protect the insured from financial liability or hardship.

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2.5.1 Restrictions on Cancellation or Renewal Protect policyholders from the following unfair actions of the insurer –

o An insurer’s decision to stop coverage in a geographic area.o An insurer’s decision to stop coverage for a particular group as young

drivers.o An insurer’s decision to eliminate authority of a particular agent to stop

selling insurance policies.o Cancellation of a policy of the insurer after a single loss.

Restrictions on Cancellation

Coverage is terminated before the policy expiry date. Do not apply to policies that are not in force for less than a certain period (60

days). A certain number of days notice is required. Also required to indicate that

insurance is available under residual plan. Following reasons are allowed for cancellations –

o Non payment of premiumo Suspension or revocation of driver’s licenseo Submission of false or fraudulent claimo Material Misrepresentation of underwriting informationo Violation of policy terms or conditions.

Restrictions on Renewal

Usually insurers can non-renew the policy subject to following - o Written notice that policy will not be renewed.o A certain number of days advance notice.o Many states require to give reason for non-renewal.

2.5.2 Rate Regulation State ensure that rating laws should not be unfairly discriminatory Rating should be adequate and discriminatory

Primary Rating Factors The following are the major factors for determining insurance premium –

Age Gender Marital Status – younger married males have lower rates of insurance. Territory – Location of insured’s residence. Use of an auto – Rates are lowest for farm and highest for business use. Good Student Discount - Driver Education Credit – 10% discount on completing course.

Other Rating Factors The following are the secondary factors for determining insurance premium –

Driving Record – most important factor

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Type Of Vehicle - performance, age, brand Number of Vehicles – More vehicles imply discount Deductibles – higher deductibles – significant credit Liability Limits – Rates are based on minimum insurance rates in the state.

Other Discounts & CreditsSome insurers give credit for the following -

Anti-theft devices Passive restraints Defensive driving courses Senior citizens Farmers Nonsmokers Number of years of continuous coverage with an insurer (anniversary discount). Multi-Policy Discount Reduced vehicle use by students.

Matching Price to ExposureInsureds are classified into –

Preferred Standard Nonstandard

Prices are charged commensurate with their classification. Different rates for different levels of loss exposures are provided to the applicants.

Competition Among Insurers When losses are low and profits favorable, price war among insurers. In reverse case, the rates are increased and applicants are screened with more

selectivity Must always meet state’s requirements for rates.

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Chapter 3 – Personal Auto Policy (PAP) Part - I

3.1 Overview of PAP Designed for private passenger autos. Can also be used to cover mobile homes, golf carts, snowmobiles, motor

cycles ,etc.

3.1.1 Summary Of Coverages

Part A–Liability Coverage – Protects the insured from a suit or claim for bodily injury or property damage arising out of operation of an auto.

Part B– Medical Payments Coverage – For reasonable & necessary medical payments arising out of bodily injury to the insured in an auto accident.

Part C– Uninsured Motorists Coverage – Provides protection if the insured has suffered losses from an uninsured motorist, a hit-and-run driver or insolvent insurer motorist.

Part D– Coverage for damage to your auto – Protection for damage to auto & certain non-owned auto. (Physical Damage Coverage)

Part E– Duties After an accident or Loss – Duties of an insured after an accident or loss.

Part F– General Provisions – information about cancellation or termination of policy, terms & conditions, etc. are included.

3.1.2 DeclarationsIt contains parties, vehicles involved and coverages provided by the insurer. Following information is given –

Insurance Company – Name Named Insured – can be an individual, married couple or other parties. Policy Period – Date & time of start and end of coverage. Description Of Insured Auto Insured – vehicles & trailers Schedule of Coverages – Coverages, limits and deductibles to all listed vehicles. Applicable Endorsements – Contains all endorsements like snowmobiles. Lienholder – Name of financing bank or owner or institution if the vehicle is

leased or owned & financed by a bank. Garaged Location – Place where the vehicle is primarily garaged. Rating Information – Rating class of vehicle and any discounts if applicable. Signature of signing parties in the agreement.

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3.1.3 Agreement & DefinitionsAgreement

A brief general agreement serves as an introduction to policy outlining o Insured’s premium paymentso Insurer’s obligation

Definitions You & Your – refer to named insureds (applies to spouse living in same house).

o If couple divorces, then you does not apply to both. o If the one spouse moves out but still remains married coverage applies to

both for 90 days. We, Us & Our - Refers to the insurance company. Owned includes Leased - A vehicle leased for more than 6 months is considered

owned under PAP. Bodily Injury – Bodily harm includes sickness, death & disease Business – Trade, profession, Occupation Family Member – Related to insured by blood, marriage or adoption and resides

in his household. Occupying – In, Upon, Getting In, Getting Out, On, Out, or Off. (B & C

coverage) Property Damage – physical injury or destruction to tangible property. Trailer – Vehicle pulled by an private passenger auto or van or pick-up. Your Covered Auto – includes 4 types of vehicles -

o Any vehicle listed in declarationso A trailer owned by insuredo A temporary substitute auto – Used in short term substitute for an out-of-

service covered auto.o New Acquired Auto

Newly Acquired Auto – Any auto of which the insured becomes the owner during the policy period. It can be an additional auto or a substitute auto.

o An additional auto is covered for 14 days.o Replacement auto for remainder of policy.o Does not apply to physical damage coverage – must be redone.

$500 deductible is charged on a physical damage coverage for 4 days if insured does not carry collision coverage.

If there is collision coverage then it is provided for 14 days.

3.2 Part A – Liability CoverageCovers insured’s legal liability from ownership or operation of an auto -

3.2.1 Insuring Agreement Pays damages for bodily injury

o Compensatory damages General Damages Special Damages

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o Punitive Damageso Damages paid upto 2 kinds of limits – (both per accident)

Split Limits – Different limits for bodily injury & property damage Single Limit – For the entire damages per accident

o Include Pre-judgment interest.o Damages are paid in lump or structured settlement (paid periodically for

large bodily injuries). Legal defense costs paid in addition – can exceed beyond policy limit.

3.2.2 Insured Persons4 categories of people are covered under PAP -

Named insured and any family member Any person using a covered auto – has reasonable that he has permission to use

the auto. Any person or organization legally responsible for acts of a covered person while

using a covered auto is covered. Any person or organization legally responsible for the named insured’s or family

member’s use of any auto or trailer (other than a covered or owned or hired auto).

3.2.3 Supplementary Payments Must be paid in addition to liability limits and legal defense costs. Includes -

o Cost of bail bonds upto $250 (only on bodily injury).o Premiums on appeal bonds and bonds to release attachments.

Insured will pay for original judgment Insured will pay any judgment releasing the lien on property

o Interest accruing after judgment (post-judgment interest)o Loss of earnings because of attendance at trials. (Upto $200 per day).o Other reasonable expenses at insurer’s request are also paid. Like travel &

transportation costs or lodging costs at trial.

3.2.4 Liability Coverage Exclusions Broad coverage is narrowed down by exclusions. Major exclusions are -

o Intentional Injuryo Property Owned and Transported – Homeowners policy covers ito Property rented to, used by or in care of insured - Does not apply to a

residence or a private garage.o Bodily injury to employee of the insured. (worker’s compensation policy).o Public or Livery Conveyance -

Excludes car pools or if groups go for vacation. Excludes ordinary business use like pizza delivery or sales use. Includes using vehicle to transport public for a fee.

o Garage Business – (covered by commercial policy)

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Includes selling, repairing, storing or parking vehicles meant for highways in garage.

Does not apply to road testing & delivery of vehicles.o Other Business Use

Includes all uses besides farming & ranching. If insured drives a bus, then PAP does not apply.

o Using vehicle without reasonable belief of being entitled to do soo Nuclear Energy liability losses.o Vehicles with < 4 wheels & designed for off-road use.o Other vehicles owned by the named insured or available for the named

insured’s regular use.o Vehicles owned by the named insured or available for regular use by

family members.o Racing

3.2.5 Limit Of Liability Coverages are provided on split limit basis The limits are -

o Bodily injury to a persono Bodily injury to all persons in the accidento All property damage in each accident.

3.2.6 Out-Of-The-State Coverage Applies when accident occurs in another state in which the auto is principally

garaged. In case of financial responsibility laws, the PAP provides minimum coverage. PAP provides minimum amounts and types of coverage in case of compulsory

insurance law.

3.2.7 Compliance with Financial Responsibility Laws PAP automatically complies with new laws to reflect the changes in financial

responsibility laws. Can be used as a proof of financial responsibility by the insured.

3.2.8 Other Insurance Situation in which one claim is covered by more than one policy. Insurer pays its only pro-rata share of the loss in proportion to limit of liability on

all applicable limits. If other insurance is available on a non-owned vehicle, then PAP insurance pays

the excess over a collectible amount.

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3.3 Part B – Medical Payments Coverage Insurer pays medical expenses of some people upto a certain limit within 3 years

of the accident. Limit is between $1000 to $10000 per person.

3.3.1 Insuring Agreement Insurer provides reasonable & necessary medical & funeral expenses arising out

of bodily injury in an accident.o Pays for services rendered between 3 years of the accident.

Medical benefits are paid for both insured and other occupants of the auto.

3.3.2 Insured Persons 2 groups of people are insured -

o Named insured & family memberso Any other person while occupying the covered auto – includes other

passengers & pedestrians. Does not apply if the insured is struck by a tractor – not for use on public roads. Passengers in non-owned vehicles would seek protection under their own policies

or under the medical payments coverage that applies to that vehicle.

3.3.3 Medical Payments Exclusion Motorized Vehicles with fewer than 4 wheels. Public or Livery Conveyance. Vehicle used as a resident or premises (does not apply for mobile homes). Injury during course of employment. Other vehicles owned by named insured or available for the named insured’s

regular use. Vehicles owned by or Available for Regular Use of Any Family Member. Occupying the vehicle without reasonable belief of being entitled to do so. Vehicles used in business of the insured. Bodily injury from nuclear weapons or war. Racing.

3.3.4 Limit Of Liability Ranges from $1000 to $10000 per injured person in a single accident. No duplicate payments from same elements of loss. (E.g. Coverage B & Coverage

C cannot apply together).

3.3.5 Other Insurance Pro-rata share if one liability

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3.4 Part C - Uninsured Motorists Coverage

3.4.1 Insuring Agreement Insurer pays compensatory damages arising out of bodily injury in an accident

with an uninsured motorist.o Coverage applies if motorist is found responsible for an accident.o Punitive damages not paid.

Subject to a deductible of $200 or $300 in some states.

3.4.2 Insured Persons 2 groups of people are insured -

o Named insured & family memberso Any other person while occupying the covered auto – includes otherso Any person legally entitled to recover damages because of bodily injury to

a person in 1 or 2.

3.4.3 Uninsured Motor Vehicles – Coverage Eligibility No bodily injury liability insurance or bond applies to vehicle at the time of

accident. Limit of insurance < min. amount of financial responsibility in the state. The vehicle is a hit-and-run vehicle whose driver or owner cannot be identified. Bond or liability insurance exists but insurance company denies coverage or is

insolvent.Does not include ->

Vehicle owned or furnished or available for regular use of named insured or family members.

Vehicle owned / operated by a self-insurer. Vehicle owned by a government unit or agency. Operated on rail or crawler threads. Located for use as a residence.

3.4.4 Exclusions No uninsured motorists coverage on vehicle. Primary coverage in another policy Claims settled w/o insurer’s consent Vehicle being used as public conveyance No workers compensation Only compensatory damages are being paid.

3.4.5 Limit of liability Minimum liability = financial responsibility / compulsory law Higher can be purchased. Prevents stacking No duplicate payments (if C is paid, A is not paid)

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3.4.6 Other Insurance Total paid <= highest limit of policy For a non-owned vehicle, coverage provided on an excess basis over any

collectible insurance on primary basis. Multiple policies – Reach policy in ratio of UM coverage limit [on primary basis] If on excess basis then, in ratio of excess limits.

3.4.7 Arbitration Process for settling disputes, if coverage applies Arbitrators decides –

o Whether coverage exists & whether to pay damageso How much damages to pay

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Chapter 4 – Personal Auto Policy (PAP) Part- II

4.1 Part D – Physical Damage Coverage

4.1.1 Insuring Agreement Insurer pays for direct loss to any covered or non-owned auto less deductible 3 coverages are available -

o No physical damage coverage. [Collision]o Other-than-collision coverageo Both collision & other-than-collision coverage.

Motorists purchase non-collision insurance as collision insurance comes with a higher deductible.

Collision Loss Auto collides with another vehicle. Auto collides with telephone pole. Overturning of auto. Stationary Collision –

o Hit by a car parked next to you.o Hit by a car in parking.

Paid regardless of fault If there are more than one autos insured and the owner has gets collision damages,

then the higher damage and higher deductible applies.

Other-than-collision loss (comprehensive coverage) Physical damage not caused by collision & are not specifically excluded in this

policy. Included cause of losses are –

o Missile or falling objects.o Fireo Theft or larcenyo Explosion or earthquakeo Hail, Water & floodo Malicious mischief & vandalismo Breakage of glasso Contact with bird or animal

Physical damage coverage for non-owned autos Non-owned auto – Substitute used as covered auto or trailer is out of normal use

due to repair, breakdown, servicing, loss or destruction. Covers a borrowed or a rented auto.

o Does not apply if borrowed vehicle is being used regularly. Non-owned auto should not be made available for regular use.

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Always the broadest coverage is applied if the insured has 2 auto policies for covered autos and is driving a non-owned auto.

Deductible Of $100, 250, 500 or more apply to each collision loss. Separate for other-than collision loss. (less than collision loss) Used to

o Reduce small claimso Encourage prudenceo Hold down premiums

4.1.2 Transportation Expenses Reimburse expenses upto $20 per day (max. $600) for temporary travel expenses

for each covered and physical damage loss. For non-owned auto the owner is paid $20 per day(including if the car was rental)

Theft Coverage starts 48 hours after the theft has been reported and continues till the

auto is repaired and fit for use or has been replaced. Reimbursement provided = (time till car was found + time till car was repaired –

2)*20 [or (time till car was replaced –2 ) * 20] Max limit is $600.

Other Than Theft 24 hours after auto was withdrawn from use. Car has to be taken away for a covered loss.

4.1.3 Exclusions Public or livery conveyance (does not include carpool system). Wear and tear, freezing, breakdown, repairs, etc. Radioactive contamination or War Electronic equipment designed for reproduction of sound unless permanently

installed to the car (limit $1000). Equipment designed for visual and data signals transmission and reception. Media and Accessories Camper body or trailer not shown in declarations Another person under coverage takes away the auto W/O reasonable belief of

entitlement Radar / Laser equipment Racing Customizing equipment

o Carpeting / Insulationo Furniture o Height extending roofso Custom murals, paintings etc.

Non owned auto used in business

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Rental vehicle – if collision damage is waivered.

4.1.4 Limit Of Liability2 methods of replacement

ACV = Cost – (Depreciation and obsolescence) Repair / Replacement cost to reasonably similar condition prior to loss.

o ACV less Deductible is generally paid Non owned trailers – limit = $500 Betterment -

o Insurer does not pay for the betterment of the auto post-loss Diminution Value –

o Damaged vehicle though repaired has a low market value than undamaged vehicle.

o Insurer pays for this difference called diminution value Payment of Loss

o Loss may be paid in money, repair or replacemento Money is paid in arranged appraisal valueo Pay for loss => applicable sales tax when the vehicle is replaced or

repaired. No benefit to Bailees

o Policy does not benefit the bailees.o If custodian damages the car, the owner receives the coverage money.

Other Sources Of Recoveryo If the damage is covered by more than one policy, then the insurer will

pay his share. E.g.

PAP = 3000HO = 1000Value of Car = 3000Fire Destroys carPAP insurer pays = 3000/4000*3000 = 2250HO insurer pays = 1000/4000*2000 = 750

o For non-owned auto - owner first, user’s excess. E.g.

Damage = 1000Owner’s ded. = 200User’s ded. = 100Owner’s PAP pays = 800User’s PAP pays = 100.The rest 100 is collectible from the user.

Appraisal Each party appoints 1 appraiser. The 2 appraisers select an umpire whose decision

is binding. Each party pays its appraiser and both parties pay their umpire.

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4.2 Duties After Accident or LossInsured must comply with all duties so that the insurer can provide coverage.

4.2.1 General Duties Prompt notice of loss – 5 W and 1 H and also information on witnesses. Cooperation with insurer on settlement, investigation and defense Submission of legal papers Physical exam at insurer’s expense. Examination under oath Authorization of medical records Proof Of Loss

4.2.2 Additional Duties for uninsured motorists coverage Inform the police (to prevent fraudulent claims) Submit legal papers

4.2.3 Additional Duties for Physical Damage Coverage To prevent further loss – ensure safekeeping of the vehicle Notify the police Permit inspection & appraisal

4.3 Part – F General Provisions

4.3.1 Bankruptcy of the insured Insurer is not relieved of his obligations if the insured is bankrupt or insolvent.

4.3.2 Changes in Policy Terms of the policy cannot be changed except by an endorsement from the

insurer. Changes in premium have to be in accordance with the rules of insurer. Change in premium comes from changes in the following –

o Number, type and use of insured vehicleso Operators of the insured vehicleso Place of principal garaging of insured vehicleso The coverages, deductibles and limits of liability.

Liberalization clause is used whenever insurer modifies the policy.o Does not apply when the new editions of policy come out.

4.3.3 Fraud No coverage for fraudulent conduct or false statements

4.3.4 Legal Action against Insurer No legal action against insurer until insured has complied with all policy terms

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Insurer and insured have to agree that the insurer has the right to pay damages in case of coverage A.

Insurer is not to be called on to determine the liability of the insured.

4.3.5 Insurer’s right to recover payment Subrogation

o Insured must help insurer to exercise subrogation rights.o Does not apply if the person is using the auto with reasonable belief of

entitlement If the insured recovers payment from insurer and another party, he should

reimburse the insurer.

4.3.6 Policy Period & Territory Covers accidents occurring in accident territory within the policy period Policy period is usually six months to 12 months PAP does not provide coverage in Mexico

4.3.7 Termination

Cancellation Named insured can cancel a policy a by giving notice to the insurer to make

cancellation effective. Insurer has limited cancellation rights -

o If policy has been issued less than 60 days ago, then the insurer can cancel the policy if it does not meet the standards.

o Policy can be canceled for non-payment of premium – given 10 days notice.

o For other grounds of cancellation, insurer has to give a 20 days notice. The reasons allowed for cancellation are –

o Non-payment of premiumo Driver’s License suspended or revokedo Material misrepresentation

Non-renewal Insured must be given 30 days notice for non-renewal. Time period of policy is used to determine the non-renewal time -

o If policy period is < 6 months, insurer can non-renew every 6 months o If policy period < 6 months and greater than 1 year, then insurer has the

right to non-renew at the end of policy period.o If policy period > 1 year, then insurer can non-renew at the anniversary of

policy effective date.

Automatic termination Insurer offers to renew, named insured does not accept, policy automatically

terminates. If insured obtains other insurance, PAP terminates this policy.

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Other termination provisions Insurer delivers cancellation notice through mail or in person.

o Proof of mail sent is necessary. In the event of policy cancellation insured is assigned a premium refund. The effective date of cancellation is the end of policy period.

4.3.8 Transfer of Insured’s interest in the policy Limits assignment of policy by the insured. Cannot be assigned by insured’s written consent. If the named insured dies, then legal representatives / spouse has the coverage

4.3.9 Two or More Auto policies Maximum limit of liability = highest applicable limit of the policy. Intent is to avoid stacking.

4.4 Endorsements of PAP Endorsements are used to add coverage and modifications.

4.4.1 Endorsement covering motorcycles, recreational vehicles & customizing equipment

Following coverages are used -

Miscellaneous Type vehicle endorsement Motor home, golf carts, motorcycles, dune buggies and snowmobiles are covered. Passenger hazards are excluded and are an optional coverage - Amount paid for physical damage is minimum of -

o Stated amount in policyo ACV of vehicleo Replacement cost or repair cost.

Trailer / Body Coverage Endorsement Insurer pays for the direct and accidental damage to trailer or camper body. Related facilities like kitchen appliances, plumbing are also covered. Exclusions for electronic equipment, media equipment still apply.

Customizing equipment Coverage Endorsement Deletes the exclusion for customizing equipment Includes

o Carpeto Furnishingso Height extending roofso Custom murals, paintings, etc.

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Snowmobile Endorsement Vehicle should be used off-public road in snow or ice. Propelled by wheels, crawler threads, belts of similar mechanical devices. Has all the available coverages. Other persons covered only while using insured’s snowmobile. Exclusions are –

o Does not apply if snowmobile is used in businesso Excludes any person or org. other than named insured while renting or

leasing snowmobile.o Exclusion if a person is being towed by snowmobile.o Racing and Speeding contests.

4.4.2 Other Endorsements affecting Multiple CoveragesNamed non-owner coverage endorsement

Excludes physical damage coverage Spouse and other family members are not automatically covered This coverage is excess over any other liability coverage If non-owner buys a car, then he has insurance coverages A, B & C for 14 days.

Extended Non-owned coverage for Named and Individual Endorsement Applies only to individuals named in the endorsement. Allows vehicle to be covered while being used for business use. Liability coverage is excess over any other coverage. Exclusions provided are –

o Non-owned vehicle made available for regular useo Vehicle used in businesso Vehicle used as public or livery conveyanceo Protection against fellow employee suit arising out of a work related

accident.

Limited Mexico Coverage Endorsement Coverage in Mexico -> within 25 miles of US border Trip < 10 days Effective if primary insurance is purchased from a Mexican insurer. Its excess

over Mexican policy.

4.4.3 Underinsured Motorists Coverage Endorsement Added to PAP to supplement UM Coverage Distinguished from UM Coverage Vary by state -> limits, coverages, etc.

4.4.4 Endorsements Affecting Physical Damage Coverage Widely added endorsements are -

o Towing & labor costs Upto some stated amount are paid.

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Non-owned auto->broadest possible coverage applies. Requires other physical damage to be effective.

o Coverage for excess sound producing equipment, audio and visual data electronic equipment.

Excess sound producing equipment upto $1000. Equipment should be permanently installed. Powered by auto’s electrical system. Tape records and discs – max. 200

o Coverage for damage to your auto. [stated amount] Determine maximum limit of liability Insurer’s maximum limit of liability is determined by min. of -

ACV Stated amount Repair cost Replacement Cost.

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Chapter 5 - Homeowners Insurance: Section I

5.1 Homeowners 3 Special Form: HO3 (HO2000) Policy

The homeowners policy includes coverages for a house, its contents and the occupant’s liability. It’s a self-contained policy – single document that forms a complete contract.

Insurers use forms developed by ISO, AAIS or be themselves.

Most widely used homeowners policy: ISO’s Homeowners 3 Special Form (HO 00 03) commonly known as HO-3.

Designed for owner-occupants of a 1-4 family dwelling used as the residence of the named insured.

Dwelling under construction also insured Purchased under a long-term installment contract, without legal title to the

property. Occupants with a life estate arrangement – allows them to stay for the rest of their

lives – are eligible. Can be issued in the name of a trust.

5.2 Structure of the HO-3 Policy

Section I: Property Coverage – specifies property covered, the perils for which it is covered, and the conditions and exclusions that affect property coverages and losses.

Section II: Liability Coverages – provides information regarding liability coverages, exclusions and conditions.

5.2.1 Declarations Page

Policyholder Policyholder’s residence Coverage limits Premium Section I deductible Effective date of the policy Forms and endorsements that apply Mortgage holder

5.2.2 AgreementEstablishes the basis for the contract and what the insurer and the policyholder will do for each other.Insurer agrees to provide coverage in lieu f premium and compliance with conditions.

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5.2.3 DefinitionAny ambiguity is interpreted in favor of the insured.

5.2.3.1 ‘Named Insureds’ and other ‘Insureds’The name ‘you’ and ‘your’ refers to the named insured shown in policy declaration and his/her resident spouse, even if the spouse is not named.

The definition of named insured includes: Relatives who are residents of the household. Other persons under 21 under the care of named insured or relative Full time student who stays away but resided in the household prior to leaving

for school – age under 24 if under the care of named insured/ under 21 if living under the care of resident relative.

When policy refers to insured, it means ‘one or more insureds’.

5.2.3.2 ‘Residence Premises’ and ‘Insured Location’Means 1 to-4 family dwelling where the named insured resides in at least one of the

units. That part of any other building where the named insured resides. Other structures and grounds at that location.

Insured location includes ‘residence premises’ and also includes

An unlisted residence acquired by the named insured during the policy period. A nonowned premises where any insured is temporarily residing (hotel) Vacant land (other than farm land) owned by or rented to an insured. An insured’s land where 1 to 4 dwelling is being constructed Individual or family cemetery plots Any part of a premise occasionally rented to an insured for nonbusiness use

(such as hall rented for a wedding reception).

5.2.3.3 DeductibleStandard deductible is $250.

5.2.4 Section I: Property Coverages

Consists of the following coverages:Coverage A: DwellingCoverage B: Other StructuresCoverage C: Personal PropertyCoverage D: Loss of useAdditional coverages

5.2.4.1 Coverage A: DwellingApplies to the dwelling on the ‘residence premises’

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Chapter 6 – Homeowners Insurance: Section II and Section I and II Conditions

6.1 Section II – ConditionsEstablishes the duties and responsibilities of the insurer and the policyholder.

Limit of Liability: The limit of Coverage E – Personal Liability appearing on the declarations page is the total limit of coverage for any one occurrence. Defense costs will be paid in excess of the Coverage E liability limit.

The total liability under Coverage F – Medical Payments to others for al medical expenses for bodily injury to one person as the result of an accident will not be more than the Coverage F limit shown on the declarations page.

Severability of Insurance: Policy condition that applies insurance separately to each insured; does not increase the insurer’s limit of liability for any one occurrence.

Duties After Loss:

Give written notice: time, place, circumstances, name and addresses of the claimants and witnesses, identify policy and the named insured.

Cooperate with the insurer: investigation, settlement and defense activities.

Forward Legal documents Provide claims assistance Submit evidence of damage of property of others: within 60 days a sworn

statement of loss and show damaged property to insurer. Not make voluntary payments: cannot make commitments on the behalf

of the insurer.

Duties of an Injured person – Coverage F Injured person must give the insurer written proof of the claim as soon as

possible; the proof must be given under oath if required. Authorize the insurer to obtain copies of medical reports and records. Must submit to a physical exam by a doctor chosen by the insurer as often

as the insurer requires such examinations.

Payment of Claim – Coverage FNot an admission of liability by the insured or the insurer.

Suit against Insurer: No legal action can be brought against the insurer unless the insured has

met all its obligations under Section II No one has the right to join the insurer as a party to any action against an

insured.

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No action with respect to Coverage E can be brought against the insurer until the obligation of the insured has been determined by a final judgment or agreement signed by the insurer.

Bankruptcy of an Insured: The insurer still obligated to handle the loss as it normally would.

Other Insurance – Coverage E: Coverage E limits are paid as excess over any other collectible insurance unless the other insurance is written specifically to provide excess coverage.

Policy Period: BI and PD to occur only during the policy period. The claim can be filed at any time even after the policy has expired.

Concealment or Fraud: Innocent insureds are not precluded from liability coverage.

6.2 Section I and II – Conditions

Liberalization Clause:If the insurer, during the policy period or 60 days before the policy period adopts a revision that broadens the coverage without an additional premium charge, the increased coverage will automatically apply to all existing policies on the date it is implemented in the state. It does not apply to general homeowners program revision that both broadens and restricts coverage.

Waiver or change of policy provisions:Valid only if insurer makes it in writing. Agents with binding authority can make policy changes through an oral binder that is effective until a written policy change endorsement is produced.

Cancellation:Insured can cancel by returning the policy or contacting the insurer in writing and advising the date the cancellation is to take effect.

Additional interests- residence premises endorsement (HO 04 10) is used if other persons or organizations with an interest in the property are to be notified if the insurer renews or cancels the policy.

Insurer can cancel with written notice to policyholder at his mailing address for1. nonpayment of premium if policyholder is given at least 10 days notice

before effective date of cancellation.2. new policy in effect < 60 days if policyholder is given at least 10 days

notice before effective date of cancellation.3. new/renewal policy in effect > 60 days if policyholder is given at least 30

days notice before effective date of cancellation if there has been material

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misrepresentation of facts, or the risk has changed substantially since the policy was issued.

State laws take precedence over policy language wrt cancellation/renewal. When policy is cancelled pro rata refund is established. In some cases short-rate penalty is used.

Nonrenewal:Accomplished by mailing a notice to the policyholder at least 30 days before policy expiration date.

AssignmentCannot be assigned (transferred to another party) without insurer’s written consent.

SubrogationRight to recover its claim payment to an insured from the party responsible for the loss.

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Chapter 8 – Other Residential Insurance

8.1 Dwelling PoliciesSome residences are not eligible for eligible for HO coverage, so insurers decline it –

Residence is not owner occupied. Value of dwelling is less than minimum limit for HO policy. More separate living units than allowed in an HO policy. E.g. a large home with 5

apartments in it. Does not match some of the underwriting guidelines. E.g. 50 years old house.

Insured may also choose not to obtain coverage due to following reasons – Insured might not need full range of HO coverage. Policy is more expensive than insured is willing to pay.

Dwelling policy is an alternative policy to HO policies.

8.1.1 Structures eligible for Dwelling Policy Principally designed for 1-4 dwellings. It can also be used for –

o Mobile homes at permanent locations.o Houseboats in some states.o Certain incidental occupancies – operated by owner or a tenant at the

insured location.

8.1.2 Dwelling Policy Programs Developed by ISO & AAIS ISO does not provide coverage for theft & liability coverages but other insurers

who do not follow ISO forms provide them. Some states require insurers to modify policies to include special state

endorsements.

8.1.3 ISO Dwelling Policies It has 3 forms -

o Dwelling Property – 1 – Basic Form (DP – 1)o Dwelling Property – 2 – Broad Form (DP – 2)o Dwelling Property – 3 – Special Form (DP – 3)\

Coverages offered are similar to HO.

Insuring Agreement & Definitions (Comparison with HO) Agreements are identical Definitions section is not same as most definitions become irrelevant.

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8.1.4 Coverages All coverages are not included automatically. DP-1 includes fair rental value but not additional expense coverages. DP-2 & DP-

3 have both coverages.

Coverage A – Dwelling Dwelling – Is used primarily for dwelling purposes. Building equipment & outdoor equipment is also included in coverage A if

coverage C is not bought. Coverage B – Other Structures

Coverage provided for detached structures like garage & storage sheds.

Coverage C – Personal Property This coverage is optional for the insured. Property is in the desired location and is being used by insured or his family

members. No special limits to personal property unlike HO. No theft coverage is provided. Money & securities are excluded. Sub limit on watercrafts including their equipment & furnishings but not on boats

excluding rowboats and canoes.

Coverage D – Fair Rental Value & Coverage E – Additional Living Expense Coverage D is provided in all. Corresponds to Loss Of Use in HO. Coverage E- included in DP-2 and DP-3. Coverage for additional living expense.

Other Coverages Loss assessment coverage added to dwelling policy for additional premium. Additional coverages for landlord’s credit cards, furnishings, etc. not included. Comparison of other coverages with HO –

Coverage Home Owners Dwelling PolicyOther Structures Same applies to HO-1, 2 & 3. 10% of Coverage A. DP-2 & DP-3 have it as

additional insurance, DP-1 – coverage A limit is reduced by 10%

Debris Removal Additional 5% of coverage limit Included in damaged property limit.Improvements, Additions

10% of coverage C in HO 4 10% Coverage C to covers renter improvements

Worldwide Coverage

No limitation. 10% limit on property on secondary residence.

10% of coverage C except rowboats and canoes as an additional insurance

Rental Value & Additional Living Expense.

HO-2 & HO-3 have coverage upto 30% of coverage A limit.

DP-2 & Dp-3 provide upto 10% of Coverage A as additional. DP-1 – 10% of A as included on rental value.

Reasonable Repairs

Covers cost of repairs done to prevent further loss.

Property Limit is same as limit for property being removed. Covered property is protected

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Removed if it is removed under an insured peril.Trees & Plants Same 5% of coverage A limit. 500 for one plant.

DP-1 – requires endorsement.Fire Department Service Charge

$500 service charge. Additional insurance with no deductible.

$500 charge. provided if property is not in city limits or close to fire station.

Collapse HO-2 & HO – 3 Available in DP-2 & DP-3 Not in DP – 1. Glass or Safety Glazing Material

Included in HO policy where glass is a part of building.

Provided in DP-2 & DP-3 for damage to covered property (also in HO)

Ordinance or Law

10% of Coverage A or 10% of Coverage B in DP-2 & Dp-3. If tenant is the insured, then 10% of improvements, alterations & additions limit.

8.1.5 Perils Insured AgainstCoverage A – Dwelling & Coverage B – Other Structures

DP-3 -> similar to HO-3 – covers risk of direct loss to property. Coverage is determined by causes of losses that are excluded. DP-2 & HO-2 are same. Exclusions in DP-3 – same as HO-3

Coverage C – personal property Similar to perils covered in HO-3. Theft not covered but damage by theft, burglary, larceny, etc. is covered. Windstorm or Hail coverage not available for damage to canoes or rowboats.

Available in HO-3 is equipment is inside an enclosed building.

General Exclusions Similar to HO-3, include loss caused directly or indirectly by any of the following

o Ordinance Law (except if it is included in coverages)o Earthquakeo Water Damageo Power Failureo Neglecto Nuclear Hazardo Intentional Losso Weather conditions leading to losso Acts or decisions by groups of persons, government or organizations.

Dwelling Policy Conditions Single set of conditions for DP-3 applying to policy coverage.

8.1.6 Coverage for Liability & Theft Losses Personal Liability Supplement

o Written as addendum / separate policy Coverage L for personal liability Coverage M for medical payment

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o Loss assessment coverage not provided. Residential Theft Coverage

o Broad Theft Coverage Owner Occupied Theft, larceny, burglary, malicious intent is covered. Off-premises coverage is available if on-premises coverage is

bought.o Limited Theft Coverage

Available if dwelling is non-owner occupied. Eliminates money and jewelry from coverage.

8.2 Mobile Home CoverageMH are less expensive homes that are built but not affixed on permanent foundations.

8.2.1 Exposures Damage or destruction of the MH Damage or destruction of the other structures in residential premises. Damage or destruction of personal property in MH. Loss of the use of MH. Liability Loss

The Mobile Home (MH) Not permanently affixed to where it is located. Exposure to extra perils because

o Not fixed to a foundationo Transportation exposure

Susceptible to windstorm. tornadoes and earthquake Needs to be tied down to be covered for wind exposures. Other Property and Liability Exposures

o Content / Fixtures / Personal Property subject to same exposures as HO.o Similar liability exposures as HO.

8.2.2 Mobile Home Coverages Prefabricated, manufactured & modular mobile homes can also be insured. Come

under HO policies if the same is permanently affixed to a foundation.

ISO MH Endorsement MH is designated for coverage if it is portable and fit for round the year living. At least 10 feet wide and minimum 400sq. ft in area. Endorsements in HO-2 & HO-3 policy. Tenants -> HO-4 policy.

MH Endorsement MH is designated for coverage if it is portable and fit for round the year living. Policy is created by adding a MH endorsement form to a HO policy. Major differences between MH and HO policy are –

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o Definitions – “residence premises” changes to mean MH & other structures including the location of the land.

o Coverage A – Dwelling MH used as private residence. Structures and utility tanks are included. Applies to equipments & fixtures like floor covering etc.

o Coverage B – Other Structures 10% of coverage A limit to a max. of $2000.

o Additional Coverages $500 for property removed (no deductible) Ordinance or law coverage.

o Section 1 Conditions Carpeting and appliances, not included in property to be valued on

ACV basis will be valued on replacement cost basis.

Other MH Endorsement ACV – Changes loss settlement terms on MH from replacement cost basis to

ACV basis. Transportation / Permission to move – coverage for perils of transportation for 30

days from the effective date. MH lien holder’s single interest –

o Provides coverage only to lien holder for transportation perils.o Coverage for loss due to conversion, embezzlement or secretion of MH.

Property removed increased limit – o Increases the basic limit of removal expenses from $500 for an

endangered MH against an insured peril. Ordinance or Law

o Add coverage for an amount equal to a % of coverage A.

8.2.3 AAIS MH Owners Program Covered property includes MH, Other Structures & personal property. Coverage for medical payments, personal liability and additional living expense. Separate Renters Form Insurance against other perils included. Covers by ACV basis.

8.3 Personal Insurance for Farms and Ranches Loss exposures need a combination of commercial and personal insurance. Personal exposures are similar to HO. Private insurers generally provide insurance for farmowners. Insurers also provide HO policies have endorsements for livestock, animal

collision and other farm exposures. Liability insurance can be provided by either personal liability or farm operations

liability policies or commercial liability policies.

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8.3.1 AAIS Farmowners Program Diversified to meet personal, commercial & special exposures. AgOP – to insure property of “agribusiness” operations. Medical benefits are paid for both insured and other occupants of the auto. Dwelling coverage a major component of FO coverage but minor component of

agribusiness operations.

8.3.2 Policy Overview (AAIS Program) Can be used issue both property & liability or property only policy. Farms with MH as primary dwelling are also eligible. Farm liability form for coverage of liability exposures. Personal liability exposures covered by farm commercial liability coverage.

8.3.3 Property Coverages 3 forms are similar to HO / Dwelling Forms

o Dwelling Coverage – Basic Form FO - 1o Dwelling Coverage – Broad Form FO - 2o Dwelling Coverage – Special Form FO - 3

Primary Coverage includes – o Farm Dwellingo Related Private Structureso Household personal propertyo Additional Living expense and loss of rent

Dwelling Coverage Special Buildings and Contents Formo FO0005 – broadest level of dwelling coverageo Coverages A, B, and C on special form – replacement cost basiso Has higher coverage limits.

Dwelling Coverage – Renters form (FO-4)o Used to cover household personal property & additional living expense of

renter.o Offers loss of income coverage for farming operations and farm rentals

FO-6 covers farm buildings, scheduled farm personal property and unscheduled farm personal property.

Optional Coverageso Ordinances and Law coverageo Replacement cost & special form coverage for farm structureso Special coverages for certain animalso Additional perils for livestocko Animal boarding.

8.3.4 Farm Personal Liability Coverage Personal liability coverage form GL-2 offers the same coverage as HO.

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Coverage for most business activities other than farming is excluded. Liability coverage for customer farming is provided if when the income does not

exceed $5000 annually Following liability exposures are covered –

o Personal Injuryo Expand Custom Farmingo Additional Business activitieso Farm Chemicals limited liabilityo Fruit and Vegetable picking by the public.

8.3.5 ISO HO Endorsements for FARMS Requires that farming should not be the primary occupation of the insured. Incidental Farming Personal Liability

o Section II of HO policy is extended to include incidental farming operations at the dwelling location or separate location [must be mentioned].

o Permissible farming activities include boarding and grazing of animals and use of land as garden space.

Farmers Personal Liabilityo Covers liability exposure arising out of commercial operations of the farmo Coverage E – personal liabilityo Coverage F – medical paymentso Each farm premises must be listed and each location mentioned.o All business conducted are mentioned in policy.

8.3.6 Livestock Collision Coverage Coverage for specified amount for death of animals if death is caused by –

o Collision of animals with a vehicle on public roado Collision or overturning of a vehicle transporting a livestock.

8.4 Flood Insurance Catastrophic loss potential of floods, the cost to insure against flooding is high. HO & Dwelling policies exclude loss by flooding. NFIP program provides subsidized flood insurance to HO & FO.

8.4.1 Community Eligibility Can only be written in communities designated by FEMA as participating

communities. Community must establish & enforce flood control & land use restrictions. When a community first joins, property owners can purchase insurance under

emergency program at subsidized rates. Community is divided into zones and marked out with probability of flooding.

Flood control & land use restrictions are established, regular program coverage. Higher amount of insurance purchased by property owners.

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8.4.2 Amount of Insurance Emergency program -

o $35000 on 1-4 dwelling and $10000 on contents.o For other residential structures, its $100,000.

Regular Programo $250000 on 1-4 dwelling and $100,000 on contents.

8.4.3 Waiting Period Coverage is not effective 30 days after application – Done to avoid adverse

selection. Exception if the property has been purchased recently or making or increasing

mortgage on a property. Policy is effective at time of transfer or mortgage effective date.

8.4.4 Write-Your-Own Program Allows private insurers to sell flood insurance. Insurers receive an expense allowance for policies written and federal government

retains losses. [90% flood insurance written through WYO companies] Insurance is sold through a WYO company or NFP.

8.5 Insurance for Hard-To-Insure Residences Insurers are reluctant to insure some homes due to greater exposures

8.5.1 FAIR Plans Coverage in areas where insurance is difficult to obtain in standard market. Property owners apply through a licensed agent or broker. Insured must have property inspected to be eligible for FAIR plan coverage. Following exposures are considered uninsurable under FAIR

o Vacant propertyo Property Poorly Maintained o Unacceptable hazards like storage of inflammable materials.o Property in violation of law or public policy – “condemned building”.o Property not in accordance with building and safety codes.

Provide small number of coverages limited to HO. Higher coverages can be sought from a specialty insurer using DIC (Difference in

condition) policy for coverages excluding fire.

8.5.2 Beachfront and Windstorm plans Exposed to heavy windstorm losses during hurricanes and other storms. Vulnerable to high tides and coastal erosion. A part of “assigned risk” program like FAIR. Losses from tidal water covered by flood insurance. Plan offers coverage only in designated areas. Do not offer coverage to uninsurable property listed above.

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Coverage to hailstorm also offered.

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Chapter 9

9.1 Inland Marine Floaters Insurance provided to moving goods, goods in cargo, property in transmission and

communication. Personal umbrella provides liability protection above policy limits of HO, PA &

WC. Floaters – Policy that provides coverages for policies that move or “floats” like

jewelry, fur, cameras, etc. Generally special form coverages is used.

9.1.1 Characteristics of Inland Marine Floaters Covered is tailored to type of property being moved Insured can select policy limit unlike HO. Extensive coverage with respect to perils provided anywhere in world. Usually written without a deductible.

9.1.2 Inland Marine Floater Policy Provisions Insuring Agreement –

o Insure covered property worldwide on a special form basis subject to exclusions.

Perils Excluded – o Wear & tearo Insects and vermino Mechanical or electrical breakdowno Waro Nuclear hazardo Fine Arts Floater (excludes breakages to fragile items)

Persons Insuredo Named insuredo Members of named insured’s family

General Conditions – The amount paid for recovering damages is the minimum of o ACV of the property at the time of loss or damageo Amount insured in the policyo Replacement costo Repair Cost

9.1.3 Types of Personal IMF Personal Articles floaters -

o Coverage on 9 optional classes of personal property - Jewelry, furs, camera and photographic equipment Musical instruments, silverware, fine arts, coins and stamps, etc.

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o Specific coverage for each class is defined.o Reasons for coverage using floaters –

Retired person in retirement home with no HO policy & jewelry to insure.

Joint owners of valuable photographic equipment not living in same homes.

HO premium separate from jewelry premium as HO premium is part with mortgage.

Personal property floaters - o Coverage on unscheduled personal property

Unscheduled PP is the property that is normally kept at insured’s residence and is used by insured.

o Provides worldwide coverage on personal property when it is away from home.

o 13 class of items in personal propertySilverware Clothing Rugs and

DraperiesMusical instruments and electronic equipment

Painting and other art objects

China and Glassware

Cameras and photographic equipment

Guns and other sports equipment

Major appliances

Bedding and linens

Furniture Professional books and equipment

Building additions and alterations

o A deductible applies to each class with coverage specific to each class.o Sum of all coverages is the maximum policy limit.

Personal effects floaters –o Provides special form coverage on the property used by tourists or

travelers.o Coverage is available only when property is away from residence

premises.o Sold to people who are not eligible for HO and want broadest protection.

9.2 Personal Watercraft Insurance Coverage for loss exposures and hazards of operating a personal watercraft.

9.2.1 Property Loss Exposures Damage to a boat’s hull as a result of collision with another boat. Theft of boat’s motor, equipment or boat itself. Damage to propeller by an underwater object. Lightning damage to electrical or navigational equipment. Fire damage to boat trailer.

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9.2.2 Liability, Medical Payments and Uninsured Boaters Exposures Bodily injury liability loss – passengers get injure din boat Property Damage liability loss – boat damages property e.g. Dock Medical Payments loss – guest gets injured on the boat. Uninsured boater loss – Uninsured boater runs into the boat.

9.2.3 Limited Watercraft Coverage Under HO and PA policies. HO Section I – Property Coverages

o Max limit of $1500 applies to Watercrafto Coverage for a limited number of perils.o Coverage for windstorm and hail if boat is inside enclosed shed ($1500)o Theft coverage if the boat is stolen from the premises.

HO Section II – Liability Coverages - Liability from following is excluded - o Ownership, maintenance, loading / unloading of any excluded watercraft.o The entrustment by the insured of an excluded watercraft to any persono Negligent supervision or failure to supervise the person to operate

watercraft.o An insured’s vicarious liability of a child or minor using an excluded

watercraft. Coverage Under Personal Auto Policy

o Physical damage to a boat or trailer is covered if given on the declarations page.

o Boat trailer is covered if it can be towed by a pick-up or van.

9.2.4 Personal Watercraft Policies Small boats policies

o Boats must be 26 feet in length.o Covered property –

Boat, trailer, equipment, motor $100 deductible and ACV basis used.

o Covered perils – Special form coverage includes liability insurance, medical

payments, etc.o Exclusions –

General risk of direct loss – wear ,tear, vermin, breakdown, etc. Repair or Service Business Pursuits

Boat Owners and Yacht policieso Covers larger boats and yachts.o Warranties

Pleasure Use Seaworthiness

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Lay-up Period Navigational Limits

o Persons Insured Named insured, family members, relatives in same household Other people with insured’s permission

Physical Damage Coverageo Hull insuranceo Exclusions are –

Wear and Tear Mechanical Breakdown Freezing and thawing of ice Racing and Speeding Intentional Loss War and nuclear hazard.

Liability Coverage (protection and Indemnity Insurance) – The exclusions are - o Intentional Injuryo Business Pursuito Liability from dangerous sports – water skiing, parasailingo Racingo Losses covered by workers compensationo Bodily injury or property damage arising out of transportation of boat on

lando Liability assumed under contracto Injury to an employee if employee’s work involves maintenance of

watercrafto War and nuclear hazard.

Medical Payments coverageso Covers insured family members under HO.

Uninsured Boaters Coverage – similar to UM coverage Other Coverage

o Liability of injury to maritime workerso Legal obligation of insured to remove a wrecked or sunken vessel.o Cost of commercial towing and assistanceo Damage or loss to insured’s personal effectso Bodily injury from transportation of boat.

9.3 Personal Umbrella Liability Insurance Liability limit exhausted => insured has to pay from personal assets. Personal umbrella provides liability protection above policy limits of HO, PA &

WC. Provide broader coverage than most policies. Umbrella is excess over some primary policy.

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9.3.1 Nature of Personal Umbrella Coverages Designed to provide bodily injury, personal injury and property damage liability

coverage in case of a catastrophic lawsuit or judgment. Amount of insurance purchased ranges from $1 million to $10 million. Covers named insured, resident relatives and family members worldwide. Also

covers other people using insured’s vehicles or homes with permission.

Provides Excess Liability Coverage Provides additional liability limits over underlying insurance like HO. Insured must maintain certain underlying policies with specified limits to avail

umbrella insurance. Underlying requirements are –

Personal auto policyBodily Injury liability $250000 per person

$500000 per occurrenceProperty Damage liability $50000 per occurrenceBI & PD $300000 or $500,000 per

occurrence (single limit)Homeowners Section II $100000 (or $300000) Watercraft Liability Insured owns a boat $500,000

If insured fails to maintain underlying limits, then the umbrella insurance will only pay the excess.

Provides Broad Coverage Provides drop down coverage - if underlying coverage not available and loss not

excluded by umbrella, the umbrella coverage covers entire loss less some deductible (Self-Insured Retention –SIR). [minimum $250].

Applies when underlying policy does not cover loss.

9.3.2 Personal Umbrella CoveragePersonal Injury Liability

Covers insured’s liability for personal injury Includes false arrest, wrongful imprisonment, wrongful entry or eviction,

malicious prosecution or humiliation, libel, slander, defamation or character besides bodily injury.

Property Damage Liability Covers insured’s liability for property damage

Defense Costs Include payment of attorney fees, premiums on appeal bonds, release of

attachment bonds, court costs and loss of earnings to attend court proceedings. Defense costs are paid in addition to policy limit.

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Uninsured and Underinsured Motorists Coverage Insurer offers the extend umbrella over UM coverage and underinsured motorists

coverage. Insured must reject the coverage in writing if he does not want it.

ExclusionsExclusions to personal umbrella coverage are –

Workers compensation Damage to insured’s property – damage to non-owned watercraft or aircraft. Nuclear Energy Intentional Injury Aircraft Watercraft – excludes for large watercraft with 50HP engine Business property and pursuits Professional liability Directors and Officers Transmission of any communicable diseases Advertising and broadcasting Recreational Vehicles

Conditions The insured must maintain underlying coverages and limits shown in declarations. The insured must give a notice of loss as soon as practicable The umbrella policy is excess over insurance whether collectible or not.

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Chapter 10 – Personal Loss Exposure & Financial Planning

10.1 Personal Loss Exposures Premature Death

o Loss of future earnings Poor Health & Disability

o High medical billso Low income from labor work.o Sick person should have group or personal insurance to avoid financial

problems. Unemployment –

o Unemployment compensation - All states run unemployment compensation programs that pay weekly cash benefits to workers who are unemployed. Following is the eligibility criterion

Become involuntarily unemployed Earn Qualifying wages during a specified base period Actively seek work Be free from disqualifying acts such as refusing work Meet a specified waiting period

The benefits are paid upto a period of 26 weeks in all states. Weekly benefits are based on covered earnings.

o Extended Benefits - A federal state program of 13 weeks of additional benefits to people in states with high unemployment rates. Federal & state governments share the cost of extended benefits.

Retiremento Workers have insufficient income after retirement and the problem gets

aggravated in illness.

10.2 Planning For Future Develop a financial and investment plan

10.2.1 Developing a Financial PlanDeveloping a financial plan is a 5-step process -

Gather financial Informationo Current Incomeo Assets – financial assets, retirement plans, value of life insurance policies,

real estate.o Outstanding liabilities and Debtso Current Spendingo Number and ages of dependents

Analyze the financial conditiono Find out the net worth.o Net worth = Assets - Liabilities

Determine Specific financial goals and objectives

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Design a financial plan to attain these goals Periodically review and revise the plan\

Advantages of financial planning are – increase in personal wealth, better quality of life and proper attainment of goals. Protection against liability and other exposures.

Obstacles are high use of credit cards, low savings and less knowledge of financial planning and delay saving for specific goals like children education.

10.2.2 Common Financial Goals Increase in personal wealth Higher Standards of living Protection of family and property Saving for retirement Purchase of a home College education for children Emergency fund Getting out of debt Minimizing taxes Investment goals

10.3 Investing to Attain financial goals

10.3.1 Investment Objectives Capital Appreciation Preservation of Capital Current Income – steady stream of income from investments Growth and Income – Growth in investments and steady income – stocks. Liquidity Minimizing Taxes

10.3.2 Investment Risks Investment risk is the variability of investment outcomes. Different types of investment risks are –

o Inflation Risk – risk of an overall increase in price level in the economy.o Market Risk – risk of price fluctuations of stocks or bonds.o Interest Rate risk – risk of changes in interest rateso Financial Risk – the risk associated with ownership of securities in a large

debt company and company might go bankrupt.o Business risk – the risk associated with the fluctuation of a company’s

earnings and its ability to pay dividends or interest.o Liquidity Risk – The risk of being unable to liquidate the investment at a

reasonable price. “Risk tolerance” determines the types of investments the investor makes.

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10.3.3 Types of Investments Savings Accounts and Savings Instruments –

o Savings accounts are free of market risk, interest rate risk and financial risk when insured by the federal government (FDIC).

o Suffers from inflation risko Used for short term planning and emergencieso Important types of accounts and instruments are –

Regular Saving accounts – insured upto 100,000 by FDIC. Certificates of Deposits – work like FDs. Insured by FDIC. Money market mutual funds – short-term high quality securities of

US treasury, major corporations, large banks and government agencies.

Money market deposit accounts – offered by commercial banks and financial institutions insured by FDIC.

Stocks -o Common stocks / Preferred stockso Riskiest part of investmentso Preferred stocks have features of stocks and bonds

Bonds –o Debt obligations issued by corporate or government entities.o Less risky than stocks.

Mutual Funds – o Offers a lot of advantages –

Diversification Professional Management Record Keeping Marketability Liquidity

Real Estate – o Homes have a good performance in terms of investments.o Also include commercial offices, shopping malls, apartment complexes,

etc.o Investors receive rental income and get capital appreciation if the value of

property declines. Miscellaneous Investments –

o Gold, Silver, precious metalso Artwork and collectibleso Risky and should be pursued as hobbies

10.4 Retirement Planning Medical expenses not covered by Medicare program Income declines from earnings.

10.4.1 Importance Of Retirement Planning Difficult to attain comfortable retirement due to following reasons -

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Increased proportion of retirees – income from SS program will be inadequate. Longer Period of retirement – Workers are spending a relatively longer periods

not working due to higher life expectancy and people retire at 65 or before. Insufficient Money Income – for retirees facing high expenses. Insufficient financial assets – for people nearing retirement are also very small. Poor health – current Medicare program does not support long term nursing

facility needed by many old people. Minimum Floor Income from Social Security – insufficient to cover expenses.

10.4.2 Investing for retirementRetirement planning should be higher priority investment goal -

Begin Investing early – for compounding the gains over a longer period. Make maximum contributions to tax-deferred retirement plans

o Receive favorable income tax treatment – 401(k) plans Change of allocation of assets over the life cycle –

o Longer the period of investing, greater the risk to assumeo Reduce risk with increase in age

Consider dollar averaging – o Fixed amount is invested at regular intervals regardless of market price.o Most tax deferred plans use it.

Do not ignore the effect of inflation on retirement.

10.5 Tax Deferred Retirement Plans Individual or employer sponsored plans provide income post-retirement in

addition to social security benefits. Employers’ contributions are income tax deductible. Not taxed as current income

to participating employees. At retirement taxable income is lower, so is tax liability.

10.5.1 Private Pension Plans Eligibility Requirements –

o Minimum 21age and 1 year service completed. 2 Basic types of pension plans -

o Defined Contribution Plan – Contribution rate is defined and retirement benefit is variable. Benefits depend on earnings, investment performance and age of retirement.

In a defined contribution plan, retirement benefit depends on the amount in employee’s account.

Cannot be withdrawn before the age of 59.5 yearso Defined Benefit Plan – Retirement benefit is specified but the employer’s

contributions vary depending on the amount needed to fund the benefit Benefit depends on worker’s earnings, years of services, etc. Benefits are reduced for earlier retirement as funds have not earned

enough interest.

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Retirement Age – o 65 is the normal retirement age for receiving full unreduced benefits.

Vesting – o Employee’s ownership of pensions contributions made by the employer.o Used reward long term employees, reduce turnover and to avoid forfeiture

for employees who changed jobs. Annual Limits on Contributions and benefits Early and late distributions –

o No penalty if the employee dies or is permanently disabled. Substantially equal payments are made over life expectancy.

o Retirement distributions start mandatory at the age of 71.5 If participant still working, he can delay distributions.

10.5.2 Traditional Individual Retirement Account (IRA) Allows workers with taxable compensation below threshold to make limited

annual contributions and receive favorable tax treatment. Worker must have taxable compensation during the year and must be less than

71.5 in age Income includes salary, tips, commissions, fees, bonuses, self-employment

income, taxable alimony and separate maintenance investments.o Investment income, rental income and pension does not qualify.

Tax Deductible Contributions Worker should not be a participant of employer-sponsored-retirement plan If worker is a member, then his gross taxable income after certain deductions

should be less than $34000 (54000 for married couples). If the worker is not a member, then it the limit is $44000 for individual and

$64000 for a jointly filing married couple.o Max limit is 3000. (If spouse not working, its 6000).o 7000 if both spouses are 50 or older.

Homemaker spouses with no employer IRA can contribute $3000.

Withdrawing IRA Funds 10% penalty on w/d of funds before age of 59.5 No penalty on w/d to pay medical payments deductible above 7.5% of gross

income. Individuals with 12 consecutive week unemployment payments, can withdraw

without penalty to pay health insurance premiums. W/d for higher education expenses and first-time home purchase (upto $10000)

are excluded. Must withdraw after they reach 71.5 or a tax penalty applies.

Roth IRA Same limits for annual contribution as traditional IRA. Annual contributions not income tax deductible. Investment earnings accumulate free of federal income taxes.

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Tax-free w/d after age of 59.5 or later. Does not make it mandatory to w/d after age of 71.5 Maximum individual contribution gross income is $95000 (150000 for married

couples).o With adjusted gross limits phased out – between 95000 & 110000o For married couples – between 150000 and 160000.

A traditional IRA can be converted to a Roth IRA for workers with inc < 100000.

Other tax-Deferred Retirement Plans Section 401(k) plan - contribute before tax plans in dollars and receive funds in

cash. Max limit 11000. Favorable income tax treatment. Profit-Sharing Plan – Defined contribution plan that pays part of the firm’s profits

to participating employees.15% of covered compensation is max. limit. Thrift Plan (or Savings plan) - Defined contribution plan – employees contribute

upto a portion of their salary. Employer contributes some % of employee’s contribution.

Keogh Plan (HR-10 plan) – A qualified plan that allows self-employed individuals to make tax-deductible contributions to a defined contribution plan or defined benefit plan.

Simplified Employee pension – Employer contributes to IRA of each employee. SIMPLE plan – for employers with < 100 eligible employees and not having any

other retirement plan. Section 403(b) – Tax deferred employment plans for tax-exempt employers and

public schools. Employee contributes a % of her salary upto an annual limit.

10.6 Individual Annuities Fundamental purpose of annuities is to provide periodic payments for a fixed

periods or over lives. Life insurers sell following annuities -

o An immediate annuity – purchased for lump sum – monthly payments received.

o A deferred annuity – money paid annually -> payment later in lump sum.o Flexible-premium annuity – pay variable premium till retirement ->

receive payment accordinglyo Fixed annuity – fixed payment and fixed receipt at retirement.o Variable annuity – depend upon variable return from investments of the

fund. Protects against inflation.

10.7 Social Security Most people above 62 use this plan and most important plan in US Survivor, Disability income and Medicare benefits to beneficiaries.

10.7.1 Basic Characteristics of OASDI Compulsory Program

o Most employers and employees must contribute to this program.

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o Provides base financial security to the population.o Adverse selection is controlled as all are covered.

Minimum Floor Of Incomeo Provides a minimum floor of income with respect to covered losses.

Emphasis on Social Adequacyo Provide a standard of living to all beneficiaries.o Formula weighted towards lower income groups, aged people an large

families. Benefits Loosely related to earnings

o Higher the covered earnings, greater the cash benefit. Benefits prescribed by law

o OASDI benefits are based on federal law and is not a contract. Financially Self-Supporting

o Funds derived from payroll tax contributions of employees, employers and the self-employed.

Full Funding unnecessaryo Full funding means that if program should terminate assets discharge all

liabilities. Its unnecessary because Program is indefinite Since it is compulsory, new entrants to workforce will support it. Federal government will back it in case of financial problems.

No means testo Does not require a means test to get benefits

10.7.2 Covered Occupations Most occupations in private sector are compulsory covered. Self employed workers with earnings of $400 or more. Workers of NGOs, religious organizations, etc. Federal civilian employees hired after 1983.

10.7.3 Insured Status 1 credit for each $870 covered earnings. Max 4 credits in 1 year allowed. 3 kinds of insured status

o Fully Insured – full time workers for 10 yearso Currently Insured – earned 6 credits in the last 13 calendar quarters in

which the disability, death or retirement benefit occurs.o Disability Insured - must be disability insured with credits depend on age.

31 years + must be fully insured and have min. 20 credits for last 40 quarters.

Special rules for younger workers and blind persons.

10.7.4 Types Of BenefitsThe program has 4 major benefits -

Retirement benefits – o Require fully insured status

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o Benefits payable at full retirement age of 65.o Monthly benefits based on primary insurance amount (PIA).o Cost-Of-Living Adjustment

Monthly benefits are adjusted automatically for cost of living through the WPI or CPI.

o Early retirement Age – For early retirement at 62, a person receives 80% of full benefits.

o Delayed retirement Credit For each year above 65, PIA is increased by 5%.

o Monthly Retirement Benefits – Paid to following persons - Retired workers upto age of 62 or older A retired worker’s spouse at least aged 62. An unmarried divorced

spouse , 2+ years divorce, 10+ years marriage, age 62+. A retired worker’s unmarried children aged under 18. A retired worker’s unmarried disabled children under age 18 or

older if they were severely disabled before 22 and continue disabled.

A retired worker’s spouse of any age caring for under 16 disabled children.

Survivor Benefitso Can be paid to dependents of a deceased worker –

Unmarried children below 18 Unmarried disabled children as defined above Surviving spouse caring for unmarried children under 16 or

unmarried disabled children Surviving spouse > 60, if deceased was fully insured. Disabled widow or widower between 50 and 59, if deceased was

fully insured. Dependent parent aged 62 ,if deceased was fully insured.

Disability Income Benefitso Disabled workers and eligible dependents

Medicare benefitso Medicare program covers most people above 65o Covers people with disabilities.

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Chapter 11 - Life Insurance

11.1 Premature Death- Early death of a working person with outstanding or financial obligations.

Costs associated with premature death- Income earned by the diseased terminates- Additional costs for funeral expenses, uninsured medical bills, probate and

estate settlement costs, child-care expenses and federal and state taxes for large estates.

- A reduction in the standard of living- Emotional and noneconomic costs

11.2 Need for Life InsuranceFinancial impact on a family depends upon family structure:

11.2.1 SinglesModest amount of life insurance for funeral expenses and uninsured medical bills. Insurance needs could change in the future.

11.2.2 Single-Parent familiesGreat financial insecurity for the surviving dependent children despite the possibility of receiving Social Security benefits. Generally they have low incomes and possibility of purchasing life insurance is limited.

11.2.3 Two-Income FamiliesWith children: financial insecurity to maintain customary standard of living. Without children: reduced need. However, other concerns such as indebtedness and current or future financial support of parents or other relatives might increase the need.

11.2.4 Traditional families- only one parent is in the labor force. There’s significant need for insurance.

Need for life insurance on the spouse can result in significant expenses, such as those fro child-care and housekeeping.

11.2.5 Blended Families- one in which a divorced person with children marries someone who also has

children. Need for life insurance is great.

11.2.6 Sandwiched Families- one in which a son or daughter with children provides financial support or other types of assistance, such as physical care, to one or both parents. The son or daughter is ‘sandwiched’ between the older and younger generation

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11.3 Determining the Amounts of Life Insurance to Own

11.3.1 Needs ApproachThis is based on survivors’ financial needs and the amount of existing life insurance, financial assets, and expected Social Security benefits. The most important family needs include the following:

- An estate clearance fund: funeral expenses, uninsured medical bills, car loans and installment debts, and estate administration expenses.

- Income during the readjustment period- Income during dependency period- Income to surviving spouse during the blackout period: Social Security

benefits can be paid to a surviving spouse with eligible children under the age of sixteen. The benefits do not resume until the spouse reaches 60. Children’s benefits continue till the child reaches 18.

- Retirement income- Special needs, such as paying off a mortgage, an emergency fund, or a college

fund for children.

11.4 Types of Life Insurance

11.4.1 Term InsuranceIf the insured dies within the term or policy period, the face amount of the policy is paid; if the insured survives beyond that period, nothing is paid.

- Temporary insurance: no of years or till a certain age- No cash value/savings element- Usually renewable and convertible: Generally do not renew after a

certain age.- Are based on mortality rates: increases with age as mortality rates

increase.

Cash Value: funds that accumulate in a whole life insurance policy – can be accessed by borrowing, paid-up life insurance and surrendering the policy in exchange for the cash value.

Renewable: characteristics of term life insurance that allows renew ability for additional periods without evidence of insurability

Convertible: Can be exchanged for some type of permanent life insurance policy with no evidence of insurability

Mortality rates: probabilities of death at specific ages.

11.4.1.1.Types of Term Insurance

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- Yearly renewable term: policyowner has the right to renew for successive one-year periods.

- Specified period term: Premium increases on renewal at end of the term; doesn’t change within the term.

- Decreasing term: Used frequently to pay off a mortgage at the death of a homeowner.

- Reentry Term: the premium is increased substantially if the insured cannot provide satisfactory evidence of insurability.

11.4.1.2 Uses of Term Insurance

- When income is limited and substantial amounts of life insurance are needed. Premium has decreased over time because of intense price competition and increases in life expectancy.

- To meet a temporary need, such as the need fro income during the readjustment, dependency and the blackout period.

- To guarantee the future insurability of the insured: might convert it later into a permanent policy without evidence of insurability.

Evidence of Insurability:A requirement that insured demonstrate that he or she still meets the insurer’s underwriting standards - submit a medical questionnaire or have a physical examination.

Disadvantages: not suitable for lifetime protection since premium increase with age prohibitively. They do not develop cash values.

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INS22 Revision Guide

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