Financial Planning Exercises
1. Co-insurance clauses. Assume that Tina Walsh had a homeowner’s insurance policy with
$100,000 of coverage on the dwelling. Would a 90 percent co-insurance clause be better
than an 80 percent clause in such a policy? Give reasons to support your answer.
Co-insurance, a provision commonly found in property insurance contracts, requires
policyholders to buy insurance in an amount equal to a specified percentage of the replacement
value of their property, or else the policyholder is required to pay for a proportional share of the
For Tina, an 80% co-insurance will be better. The higher the co-insurance requirement, the more
insurance she must maintain in order to have full coverage up to the policy limit. That also
2. Evaluating homeowner’s policy coverage. Last year, Brett and Amber Walsh bought a
home with a dwelling replacement value of $250,000 and insured it (via an HO-5 policy) for
$210,000. The policy reimburses for actual cash value and has a $500 deductible, standard
limits for coverage C items, and no scheduled property. Recently, burglars broke into the
house and stole a two-year-old television set with a current replacement value of $600 and
an estimated useful life of eight years. They also took jewelry valued at $1,850 and silver
flatware valued at $3,000.
a. If the Walsh’s policy has an 80 percent co-insurance clause, do they have enough
insurance?
For property with a replacement value of $250,000, an 80% co-insurance requirement means that
b. Assuming a 50 percent coverage C limit, calculate how much the Walshs would receive if
they filed a claim for the stolen items.
An HO-5 provides comprehensive coverage on the real and personal property. Coverage C
refers to personal property and the policy states that the coverage is actual cash value with a
$500 deductible. Standard limits provide for 50% of total coverage limit for personal property,
The items lost and their value are:
Two year old television $800 replacement value less 2/8 or $200
yields actual cash value of $600
c. What advice would you give the Walsh family about their homeowner’s coverage?
Probability of a second robbery is very low. With the current insurance, the have a total loss of
$5,650 in replacement cost. Their insurance recovery is $3,600 or about 64% of loss. To
overcome this deficiency, you can either add the personal property floater (PPF) as an
3. Cash-Value benefits. Eva Stone’s luxurious home in Georgetown, a neighborhood in
Washington, DC, was recently gutted in a fire. Her living and dining rooms were destroyed
completely, and the damaged personal property had a replacement price of $27,000. The
average age of the damaged personal property was 5 years, and its useful life was estimated
to be 15 years. What is the maximum amount the insurance company would pay Eva,
assuming that it reimburses losses on an actual cash-value basis?
Actual cast value is the replacement cost less pro-rata depreciation. The replacement cost is
4. Need for renter’s insurance. Tyler and Sherry Hughes, both graduate students, moved
into an apartment near the university. Sherry wants to buy renter’s insurance, but Fred
thinks that they don’t need it because their furniture isn’t worth much. Sherry a points out
that, among other things, they have some expensive computer and stereo equipment. To
help the Sherry resolve their dilemma, suggest a plan for deciding how much insurance to
buy and give them some ideas for finding a policy.
Without insurance, a major casualty such as a fire, would be costly to the Hughes. They have no
insurance and their expensive computers and stereo would be costly to replace. Another asset is
Most insurance companies offer renter’s policies, so finding quotes should be a matter of phone
calls. Agencies in college towns write a lot of renter’s policies and are ready to give quotes. If
5. Personal automobile policy coverage. Marc Rose has a PAP with coverage of
$25,000/$50,000 for bodily injury liability, $25,000 for property damage liability, $5,000 for
medical payments, and a $500 deductible for collision insurance. How much will his
insurance cover in each of the following situations? Will he have any out-of-pocket costs?
a. Marc loses control and skids on ice, running into a parked car and causing $3,785
damage to the unoccupied vehicle and $2,350 damage to his own car.
His collision insurance will cover over a $500 deductible the damage to his car. The property
b. Marc runs a stop sign and causes a serious auto accident, badly injuring two people. The
injured parties win lawsuits against him for $30,000 each.
The policy covers bodily injury liability of $25,000 per person with a limit of $50,000 per
c. Marc’s 18-year old son borrows his car. He backs into a telephone pole and causes $450
damage to the car.
The damage to the car is covered since Marc authorized his son use of the car. However, the
LG4 6. Evaluating personal automobile policy features. Jose Ruiz is a single 40-year-old
loan officer at large regional bank; he has a 16-year-old son. He has decided to use his
annual bonus as a down payment on a new car. One Saturday afternoon in late September,
he visits Unique Motors and buys a new car for $32,000. To obtain insurance on the car,
Jose calls his agent, Carrie Perkins, who represents Brown’s Insurance Agency, and
explains his auto insurance needs. Carrie says that she’ll investigate the various options for
him. Three days later, Jose and Carrie get together to review his coverage options. Carrie
offers several proposals, including various combinations of the following coverages: (i)
basic automobile liability insurance, (ii) uninsured motorist’s coverage, (iii) automobile
medical payments insurance, (iv) automobile collision insurance, and (v) comprehensive
automobile insurance.
a. Describe the key features of these insurance coverages.
i. Basic automobile liability insurance — As part of the liability provisions of a PAP, the
insurer agrees to:
ii. Uninsured motorist’s coverage — Uninsured motorists coverage is available to meet the
iii. Automobile medical payments insurance –Medical payments coverage insures a covered
iv. Automobile collision insurance — Collision insurance is automobile insurance that pays
v. Comprehensive automobile insurance — Comprehensive automobile insurance protects
b. Are there any limitations on these coverages? Explain.
Yes. The policy will have an overall limit and there will typically be limits on a per person and
c. Indicate the persons who would be protected under each type of coverage.
Essentially, an insured person includes you (the named insured) and any family member, any
person using a covered auto, and any person or organization that may be held responsible for
your actions. The named insured is the person named in the declarations page of the policy. The
Critical Thinking Cases
10.1 The Perkins’ Homeowners’ Insurance Decision
Calvin and Danielle Perkins, ages 30 and 28, were recently married in Kansas City. Calvin
is an electrical engineer with Analytical Solutions, a computer component design firm.
Danielle has a master’s degree in education and teaches at a local middle school. After
living in an apartment for six months, the Perkins have negotiated the purchase of a new
home in a rapidly growing Kansas City suburb. Kansas City Savings and Loan Association
has approved their loan request for $270,000, which represents 90 percent of the $300,000
purchase price. Before closing the loan, the Perkins must obtain homeowner’s insurance
for the home. The Perkins currently have an HO-4 renter’s insurance policy, which they
purchased from Calvin’s bridge partner, Gene Patterson, who is an agent with the Roberts
Insurance Company. To learn about the types of available homeowner’s insurance, Calvin
has discussed their situation with Tim, who has offered them several homeowner’s policies
for their consideration. He has recommended that the Perkins purchase an HO-5 policy
because it would provide them with comprehensive overage.
Critical Thinking Questions
1. What forms of homeowner’s insurance are available? Which forms should the Perkins
consider?
2. What are the perils against which the home and its contents should be insured?
Exhibit 10.2 A Guide to Homeowner’s Policies
The amount of insurance coverage you receive depends on the type of homeowner’s (HO) policy
you buy. You can also obtain coverage if you’re a renter or a condominium
Form Coverages Covered Perils
Basic Form
(HO-1)
A—$15,000 minimum;
B—10% of A; C—50% of A;
Fire, smoke, lightning, windstorm, hail, volcanic
eruption, explosion, glass breakage, aircraft,
Broad Form
Minimum varies; other
Covers all basic-form risks plus weight of ice,
Special Form
(HO-3)
Minimum varies; other
coverages
Dwelling and other structures covered against
risks of direct physical loss to property except
C—Minimum varies by
company
D—20% of C
Comprehensive
Form (HO-5)
Coverages A and B—Not
applicable
Covers same perils as HO-4, but covered perils
are dwelling, other structures, and personal
Condominium
Form (HO-6)
Coverage A—Minimum
$1,000
B—Not applicable
C—Minimum varies by
company
D—40% of C
E—$100,000
F—$1,000 per person
Covers same perils covered by HO-2 for personal
property
Modi3ed
Coverage
Same as HO-1, except losses
are
Same perils as HO-1, except theft coverage
applies only to losses on the residence premises
* Coverages:
C. Personal property
D. Loss of use
3. Discuss the types of loss protection provided by the homeowner’s policies under
consideration.
HO-5 Comprehensive coverage provides Coverage A, the dwelling; C, the personal property
with limits typically 50% of coverage on dwelling; D. loss of use of dwelling limited to 40% of
4. What advice would you give the Perkins regarding Gene’s suggestion? What coverage
should they buy?
HO-5 Comprehensive coverage is the normal homeowner’s policy and that is what I would
suggest. The value of their home is $300,000. Typical co-insurance is 80%, thus, they should
purchase at least $240,000 of coverage. They should at least get two quotes from independent
10.2 Auto Insurance for Dwight Fox
Dwight Fox is a divorced 40-year-old loan officer at a large regional bank; he has a 16-year–
old son. He has decided to use his annual bonus as a down payment on a new car. One
Saturday afternoon Dwight visits Unique Motors and buys a new car for $32,000. To obtain
insurance on the car, Dwight calls his agent, Carrie Dawson,, who represents Brown’s
Insurance Company, and explains his auto insurance needs. Carrie says that she’ll
investigate the various options for him. Three days later, Dwight and Carrie get together to
review his coverage options. Carrie offers several proposals, including various
combinations of the following coverages: (a) basic automobile liability insurance, (b)
uninsured motorist’s coverage, (c) automobile medical payments insurance, (d) automobile
collision insurance, and (e) comprehensive automobile insurance.
Critical Thinking Questions
1. Describe the key features of these insurance coverages.
a. Basic automobile liability insurance — As part of the liability provisions of a PAP, the
insurer agrees to:
1. Pay damages for bodily injury and/or property damage for which you are legally responsible
b. Uninsured motorist’s coverage — Uninsured motorists coverage is available to meet the
c. automobile medical payments insurance –Medical payments coverage insures a covered
d. automobile collision insurance — Collision insurance is automobile insurance that pays
e. comprehensive automobile insurance — Comprehensive automobile insurance protects
2. Are there any limitations on these coverages? Explain.
Yes, each will have a limit stated in terms of a limiting amount per person and per accident.
3. Indicate the persons who would be protected under each type of coverage.
Essentially, an insured person includes you (the named insured) and any family member, any
person using a covered auto, and any person or organization that may be held responsible for
your actions. The named insured is the person named in the declarations page of the policy. The
4. What kind of insurance coverages would you recommend that Dwight purchase? Explain
your recommendation.
I suggest a basic policy with limits high enough to cover the property (I suggest $25,000 at
least), liability (I suggest $500,000) and medical (I suggest $10,000). These amounts are on the
Terms Found in the Chapter
actual cash value A value assigned to an insured property that is determined by
subtracting the amount of physical depreciation from its replacement
cost.
bodily injury
liability losses
A PAP provision that protects the insured against claims made for
bodily injury.
captive agent An insurance agent who represents only one insurance company and
who is, in effect, an employee of that company
claims adjustor An insurance specialist who works for the insurance company, as an
independent adjustor or for
an adjustment bureau, to investigate claims.
collision insurance Automobile insurance that pays for collision damage to an insured
automobile regardless of who is at fault.
comprehensive
automobile
insurance
Coverage that protects against loss to an insured automobile caused by
any peril (with a few exceptions) other than collision.
comprehensive
policy
Property and liability insurance policy covering all perils unless they
are specifically excluded.
co-insurance In property insurance, a provision requiring a policyholder to buy
insurance in an amount equal to a specified percentage of the
replacement value of their property.
financial
responsibility laws
Laws requiring motorists to buy a specified minimum amount of
automobile liability insurance or to provide other proof of comparable
financial responsibility.
independent agent An insurance agent who may place coverage with any company with
which he or she has an agency relationship, as long as the insured
meets that company’s underwriting standards.
liability insurance Insurance that protects against the financial consequences that may
arise from the insured’s responsibility for property loss or injuries to
others
named peril policy Property and liability insurance policy that individually names the
perils covered.
negligence Failing to act in a reasonable manner or to take necessary steps to
protect others from harm.
no-fault automobile
insurance
Automobile insurance that reimburses the parties involved in an
accident without regard to negligence.
peril A cause of loss.
personal
automobile
policy (PAP)
A comprehensive automobile insurance policy designed to be easily
understood by the “typical” insurance purchaser.
personal liability
umbrella policy
An insurance policy providing excess liability coverage for
homeowner’s and automobile insurance as well as additional coverage
not provided by either policy.
personal property
floater (PPF)
An insurance endorsement or policy providing either blanket or
scheduled coverage of expensive personal property not adequately
covered in a standard homeowner’s policy.
principle of
indemnity
An insurance principle stating that an insured may not be compensated
by the insurance company in an amount exceeding the insured’s
economic loss.
property damage
liability losses
A PAP provision that protects the insured against claims made for
damage to property.
property insurance Insurance coverage that protects real and personal property from
catastrophic losses caused by a variety of perils, such as fire, theft,
vandalism, and windstorms
replacement cost The amount necessary to repair, rebuild, or replace an asset at today’s
prices.
right of
subrogation
The right of an insurer, who has paid an insured’s claim, to request
reimbursement from either the person who caused the loss or that
person’s insurer.
underinsured
motorists coverage
.
Optional automobile insurance coverage, available in some states, that
protects the insured against damages caused by being in an accident
with an underinsured motorist who is found liable.
uninsured
motorists
coverage
Automobile insurance designed to meet the needs of “innocent”
victims of accidents who are negligently injured by uninsured,
underinsured, or hit-and-run motorists.
Protecting Your Property
Chapter Outline
Learning Goals
I. Basic Principles of Property Insurance
A. Types of Exposure
1. Exposure to Property Loss
a. Property Inventory
b. Identifying Perils
2. Liability Exposures
B. Principle of Indemnity
1. Actual Cash Value versus Replacement Cost
2. Subrogation
3. Other Insurance
C. Co-insurance
*Test Yourself*
II. Homeowner’s Insurance
A. Perils Covered
1. Section I Perils
2. Section II Perils
B. Factors Affecting Home Insurance Costs
C. Property Covered
D. Personal Property Floater (PPF)
E. Renter’s Insurance: Don’t Move In Without It
F. Coverage: What Type, Who, and Where?
1. Types of Losses Covered
a. Section I Coverage
b. Section II Coverage
2. Persons Covered
3. Locations Covered
G. Limitations on Payment
1. Replacement Cost
2. Policy Limits
3. Deductibles
H. Homeowner’s Insurance Premiums
*Test Yourself*
III. Automobile Insurance
A. Types of Auto Insurance Coverage
1. Part A: Liability Coverage
a. Policy Limits
b. Persons Insured
2. Part B: Medical Payments Coverage
a. Policy Limits
b. Persons Insured
3. Part C: Uninsured Motorists Coverage
a. Policy Limits
b. Persons Insured
c. Underinsured Motorists Coverage
4. Part D: Coverage for Physical Damage to a Vehicle
a. Collision Insurance
b. Comprehensive Automobile Insurance
B. No-Fault Automobile Insurance
C. Automobile Insurance Premiums
1. Factors Affecting Premiums
2. Driving Down the Cost of Car Insurance
D. Financial Responsibility Laws
*Concept Check*
IV. Other Property and Liability Insurance
A. Supplemental Property Insurance Coverage
B. Personal Liability Umbrella Policy
*Concept Check*
V. Buying Insurance and Settling Claims
A. Property and Liability Insurance Agents
B. Property and Liability Insurance Companies
C. Settling Property and Liability Claims
1. First Steps Following an Accident
2. Steps in Claims Settlement
3. Claims Adjustment
*Concept Check*
Summary
Financial Planning Exercises
Applying Personal Finance
Insure Your Property!
Critical Thinking Cases
10.1 The Perkins’ Homeowner’s Insurance Decision
10.2 Auto Insurance for Dwight Fox
Money Online!