Risk Management and Insurance

What is risk?

The chance of loss from some type of disaster

Risk as a teenager

Getting hurt in a car accident or while riding their bike

Having their bike, phone, backpack, etc. stole

Getting jumped by a gang

Risk as an adult

Getting a deadly disease Getting laid off from a job Having a fire or flood ruin their home Having a spouse die or get very ill.

How do you manage the risk?

Avoid the risk. – For example, don’t ride in a car if the driver has been drinking

Reduce the risk. – Since many risks cannot be avoided altogether, the more practical choice is

trying to reduce the risk. Risk-reducing behaviors could include always wearing your seatbelt, locking up your bike, or avoiding walking around dangerous parts of the neighborhood after midnight.

Accept the risk. – This is good if the likelihood of danger or loss is very small or the loss itself will

not have major consequences in your life. For example, it might be very inconvenient to go without a backpack, so you use one even though there is some chance of it being stolen.

Share the risk. – This is what insurance and investments do, especially insurance. You pay the

insurance companies a sum of money a little, and if disaster occurs, they help you handle the loss.

Risk management – how you deal with the potential of personal or financial loss.

HOW DO WE HANDLE RISK?

Insurance

What is insurance?

Insurance is protection against large-scale financial loss

– For a relatively small payment called a premium, you’re protected against the chance of a large loss or financial setback

What is Insurance?

INSURANCE 101

Types of Insurance

Auto Insurance Homeowners/Condominium Insurance Renters Insurance Life Insurance Insurance Health Insurance Supplemental Insurance – “Umbrella Policy” Other Insurances:

– Disability Insurance– Long term care Insurance– Others

Homeowners and Condominium Insurance

Protects a dwelling, personal possessions and personal liability.

Typically protects against fire, theft, collapse, explosion, falling objects, and other perils. Coverage for additional perils, such as earthquakes, can be added, if needed.

Condominium unit owners insurance is similar, but specifically designed for a unit in a building that is owned and insured by a Condominium Association or similar organization.

Renter’s Insurance

For people who do not own a home but instead rent a house or an apartment.

Protects personal property against fire, theft, vandalism, and other perils similar to homeowner’s coverage.

Like the Homeowners policy, it also protects the renter if they are held legally liable for bodily injury or damage to the property of another person.

Life Insurance

Protect families when a spouse or parent dies.

Term life insurance provides death protection for a stated time period (term), generally from 5 to 30 years.

Whole life insurance provides permanent coverage for as long as the insured lives and continues to make timely premium payments.

Health Insurance

Covers a variety of medical expenses for individuals and family members.

Employers often offer health insurance as a benefit, paying the entire cost or asking the employee to pay part of the monthly fee.

Health coverage can include doctor visits, tests and hospital stays. Coverage varies. Dental and eye care insurance may also be offered.

Supplemental

For “special” or expensive items – jewelry, collections, musical instruments, etc.

Umbrella Policy – a policy that is in addition to all of your other policies. Covers you for liability – damage you cause to others

Auto Insurance

Liability coverage – for damage you cause or are liable for

Collision coverage – for damage to your vehicle in an accident

Comprehensive coverage – for damage to your vehicle not occurring in an accident

PIP – Personal Injury Protection for injuries in an auto accident

Other coverages – Rental and towing

Supplemental Insurance

Policies that provide additional coverage not included in standard policies.

Examples: – Personal Articles, for protection of valuables not fully covered

under a standard home or renters policy. collections

– Personal Liability Umbrella, to provide additional liability protection over and above homeowner, automobile, boat, and other standard policies (for example, if someone is injured in your home or in an auto accident).

– Flood, for flood damage.

ACTIVITY

6 Corner Game

What type of insurance is needed in each scenario?

Insurance Terms

The Insured: An individual covered by an insurance policy

The Insurer: The company that provides insurance coverage

Policyholder: The owner of an insurance policy

Insurance Terms

Policy: A contract of insurance, describing the term, coverage, premiums and deductibles

Premium: The payment you make to an insurance company in exchange for its promise of protection and help– Can be paid monthly, quarterly, semi annually or

annually

How does insurance work, exactly?

• You recognize your risk

• You choose type of insurance for your risk

• Choose an insurance company

• Choose best type of policy

• Pay premium to purchase your insurance

NO LOSS

LOSS

Continue paying your premium

Report a claim

Insurer determines if there is coverage

Pay your deductible and/or copay

Receive a payment for your loss

Deductibles and Copays

Deductible – The amount the insured pays on a claim before the insurer pays

Copay – The percentage of your loss that you pay. (The insurer pays the other percentage)

How much is your loss?

Replacement Cost – the cost to replace the itemYou can pay a higher premium to be paid the replacement cost . Choose a policy with guaranteed replacement cost

Depreciation - decrease in value due to use, wear and tear, decay, etc.

Actual Cash Value – the Replacement Cost of the object, less Depreciation

Actual Cash Value vs. Replacement Cost

The Math: Deductibles

Amount of your loss:(After depreciation, Actual Cash value)

$3,000

Less your deductible: (What the insured pays “out of pocket”)

- $500

Payment from the insurer: 2,500

Sometimes there is a “limit” or a maximum that your insurer will pay

The Math: Co-InsuranceHealth insurance may have co-insurance

Amount of your loss:(After depreciation, Actual Cash value)

$3,000

Less your deductible: (What the insured pays “out of pocket”)

- $500

Subtotal: 2,500

Sometimes there is a “limit” or a maximum that your insurer will pay

80/20 Co-Insurance: (80% is paid by the insurer, 20% is paid by the insured)

Payment from the insured (20%) 500

Payment from the insurer (80%) 2,000

PRACTICE

Complete the worksheet to calculate how much the insured will receive in various scenarios.