648 chapter 19 • inSurance
REvIEw ExERcIsEs
Calculate the annual, semiannual, quarterly, and monthly premiums for the following life
insurance policies.
Face Value
of Policy
Sex and Age
of Insured Type of Policy
Annual
Premium
Semiannual
Premium
Quarterly
Premium
Monthly
Premium
1.
$ 5,000
Male—24 Whole Life
$79.50
$41.34
$20.67
$7.16
2. 10,000 Female—35 10-Year Term
$53.50
$27.82
$13.91
$4.82
Calculate the value of the nonforfeiture options for the following life insurance policies.
Face Value
of Policy
Years in
Force Type of Policy
Cash
Value
Reduced Paid-Up
Insurance
Extended Term
Years Days
9.
$ 50,000
10 Whole Life
$4,900
$9,300
17
54
10. 250,000 7 20-Year Endowment
$46,500
$95,250
26
310
$5,495
$10,990
21
218
$2,900
$9,000
217
$2,275
$5,825
19
204
$7,575
$27,525
23
152
15. Leroy Kirk is 35 years old and is interested in purchasing a 20-year endowment insurance policy
with a face value of $120,000.
a. Calculate the annual premium for this policy.
b. Calculate the semiannual premium.
step 3.
tryitexerciSe 3
Norm Jaffe is evaluating his life insurance needs. His family’s total living expenses are $54,000
per year. Kate, his wife, earns $38,000 per year in salary and receives another $5,000 per year from
an endowment fund. If the prevailing interest rate is currently 5%, how much life insurance should
Norm purchase to cover his dependents’ income shortfall?
CHECK YOUR ANSWER WITH THE SOLUTION ON PAGE 667.
19
Section i
Complete worked-out solutions
for Exercises 1 and 9 appear in
AppendixB.
85461_ch19_hr_640-671_1.indd 648 9/23/15 5:09 PM
$842.00
$75.78
$1,632.60
$11,510.00
$5,985.20
$2,992.60
$1,035.90
Section i • Life inSurance 649
busInEss DEcIsIon: thE consultatIon
20. Tina Parker, a single mother, is 20 years old. She has called on you for an insurance consultation.
Her objective is to purchase life insurance protection for the next 10 years while her children are
growing up. Tina tells you that she can afford about $250 per year for insurance premiums. You
have suggested either a 10-year term policy or a whole life policy.
a. Rounded to the nearest thousand, how much insurance coverage can Tina purchase under each
policy? Hint: Divide her annual premium allowance by the rate per $1,000 for each policy.
16. Rene Boyer, age 27, wants to purchase a 5-year term insurance policy with a face value of
$25,000. As her insurance agent, answer the following questions:
a. What is the annual premium for this policy?
b. What is the monthly premium?
c. How much more will Rene pay per year if she chooses monthly payments?
17. Carmen Gutierrez purchased a $75,000, 20-payment life insurance policy when she was 20 years
old. She is now 30 years old and wants to investigate her nonforfeiture options. As her insurance
agent, calculate the value of Carmen’s three options.
18. Alex Baron is evaluating his life insurance needs. His family’s total living expenses are
$39,800per year. Carol, his wife, earns $23,000 per year in salary and receives an additional
$4,000 per year in municipal bond interest. If the prevailing interest rate is currently 2.5%, how
much life insurance should Alex purchase to cover his dependents’ income shortfall?
19. Richard Ryan is evaluating his life insurance needs. His family’s total living expenses are
$37,500 per year. Olga, his wife, earns $14,900 per year in salary and receives another $3,500
annually in disability benefits from an insurance settlement for an accident. If the prevailing
interest rate is 7
1
2
%, how much life insurance should Richard purchase to cover his dependents’
income shortfall? Round to the nearest $1,000.
85461_ch19_hr_640-671_1.indd 649 9/23/15 5:09 PM
650 Chapter 19 • InsuranCe
b. If she should die in the next 10 years, how much more will her children receive under the
term insurance?
c. If she should live beyond the 10th year, what are her nonforfeiture options with the whole
life policy?
ProPerty Insurance
understandIng ProPerty Insurance
and calculatIng tyPIcal FIre Insurance PremIums
Businesses and homeowners alike need insurance protection for the financial losses that
may occur to their property from such perils as fire, lightning, wind, water, negligence, bur-
glary, and vandalism. Although the probability that a particular peril will occur is small, no
homeowner or business can afford the risk of not having property insurance. Most mortgage
lenders, in fact, require that sufficient property insurance be purchased by the borrower as a
condition for obtaining a mortgage.
19-4
property insuranceInsurance
protection for the financial losses that
may occur to business’ and homeowner’s
property from such perils as fire, lightning,
wind, water, negligence, burglary, and
vandalism.
19
Section ii
Most expensive
states
Rank
Louisiana
Homeowners average
premium Rank Least expensive
states
Homeowners average
premium
Texas 1,625
1,722
Florida $1,191
1
2
3
1
2
3
Idaho
Oregon
Utah
$534
576
580
Exhibit 19-2 The Top Ten Most Expensive and Least Expensive States for Homeowners Insurance
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656 Chapter 19 • InsuranCe
REviEw ExERcisEs
Calculate the building, contents, and total property insurance premiums for the following
policies.
Area
Rating
Structural
Class
Building
Value
Building
Premium
Contents
Value
Contents
Premium
Total
Premium
1. 5 D $425,000
$5,907.50
$70,000
$1,001.00
$6,908.50
ExamplE8
CalCulatIng multI-
CarrIer payouts
dynaco development Corp. had multiple carrier fire insurance coverage in the amount of
$400,000 as follows.
Travelers: $80,000
policy
SolutionStrategy
step 1. Carrier’s percent of total coverage =
Amount of carrier’s policy
Total amount of insurance
Travelers =80,000
400,000 =20%
step 2.
Carrier’s share of loss =Amount of loss ×Carrier’s percent of total coverage
tryitexerciSe 8
Savoy International had multiple carrier fire insurance coverage in the amount of $125,000 as
follows.
Aetna: $20,000
policy
Classroom aCtIvIty
• Ask students to think of insurance
risk situations that may require
• Have students research Lloyd’s
of London, Goodfellow Rebecca
Ingrams Pearson (GRIP), or other
insurance companies that have
written insurance on “unusual”
risks such as movie stars’ body
parts (dancers’ legs, singers’
19
Section ii
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seCtIon II • property InsuranCe 657
Calculate the short-term premium and refund for each of the following policies.
Annual
Premium
Canceled
After
Canceled
By
Short-Term
Premium Refund
7. $750 2 months insured
$225.00
$525.00
8. $390 5 months insurance company
$162.50
$227.50
Calculate the amount to be paid by the insurance company for each of the following claims.
Replacement
Value of
Building
Face Value
of Policy
Coinsurance
Clause (%)
Amount
of Loss
Amount of Loss
Insurance Company
Will Pay
14. $430,000 $225,000 70 $150,000
$112,126.25
20. You are the insurance agent for Castle Mountain Furniture, Inc. The owner, Craig Ferguson,
would like you to give him a quote on the total annual premium for property insurance on a new
production facility in the amount of $1,640,000 and equipment and contents valued at $955,000.
The building is structural classification B and area rating 4.
21. A property insurance policy has an annual premium of $1,625. What is the short-rate refund if the
policy is canceled by the insured after 10 months?
22. Insignia Enterprises has a property insurance policy with an annual premium of $1,320. In recent
months, Insignia has filed four different claims against the policy: a fire, two burglaries, and a
vandalism incident. The insurance company has elected to cancel the policy, which has been in
effect for 310 days. What is the regular refund due to Insignia?
23. Hi-Volt Electronics had multiple carrier fire insurance coverage in the amount of $500,000,
asfollows:
Assuming that all coinsurance clause stipulations have been met, how much would each carrier
be responsible for in the event of a $95,000 fire?
658 Chapter 19 • InsuranCe
Motor Vehicle insurance
understanding Motor Vehicle insurance
and calculating typical preMiuMs
With the steadily increasing costs of automobile and truck repairs and replacement, as well
as all forms of medical services, motor vehicle insurance today is an absolute necessity! In
fact, most states require a minimum amount of insurance before a vehicle may be registered.
Motor vehicle insurance rates, regulations, and requirements vary widely from state to
state, but the basic structure is the same. Vehicle insurance is divided into three main catego-
ries: liability, collision, and comprehensive.
Liability. This category includes (1) payment for bodily injury to other persons resulting
from the insured’s negligence and (2) damages to the property of others resulting from the
insured’s negligence. This property may be other vehicles damaged in the accident or other
objects such as fences, landscaping, or buildings.
Collision. This category covers damage sustained by the insured’s vehicle in an accident.
As a premium reduction measure, collision coverage is often sold with a deductible amount,
for example, $250 deductible. This means that the insured pays the first $250 in damages for
each occurrence and the insurance company pays the amount over $250. As the deductible
amount increases, the premium for the insurance decreases.
19-8
motor vehicle insuranceInsurance
protection for the financial losses that
may be incurred due to a motor vehicle
accident or damage caused by fire,
vandalism, or otherperils.
liabilityA portion of motor vehicle
insurance that includes payment for bodily
injury to other persons and damages to
the property of others resulting from the
insured’s negligence.
collisionA portion of motor vehicle
insurance that covers damage sustained
by the insured’s vehicle in an accident.
comprehensiveInsurance coverage
that protects the insured’s vehicle for
damage caused by fire, wind, water, theft,
vandalism, andother perils not caused by
accident.
Business Decision: Business interruption insurance
24. As the owner of a successful business, you have just purchased an additional type of property
insurance coverage known as business interruption insurance. This insurance protects the profits
that a company would have earned had there been no problem. Business interruption insurance
covers damages caused by all types of perils, such as fires, tornadoes, hurricanes, lightning, or
any other disaster except floods and earthquakes.
This insurance pays for “economic” losses incurred when business operations suddenly
cease. These include loss of income due to the interruption and additional expenses (e.g., leases;
relocation to temporary facilities; overtime to keep up with production demands; recompiling of
business, financial, and legal records; and even the salaries of key employees).
Your coverage provides insurance reimbursement for 80% of any losses. Your company
pays the other 20%. The annual premium is 2% of the income and extra expenses that you
insure.
a. If you have purchased coverage amounting to $20,000 per month, what is the amount of your
annual premium?
b. If a tornado put your company out of business for
51
2
months, what would be the amount of
the insurance reimbursement for your economic loss?
Home-Based Business For those running a business from home, a typical homeowner’s policy
is not enough because it provides only $2,500 in coverage for business equipment. The insurance
industry has recently created “in-home business” insurance policies. For about $200 a year, you can
insure your business property for$10,000. General liability coverage is included in the policy.
For an additional premium, a business owner can purchase $300,000 to $1 million in liability
coverage. The policy also covers lost income and expenses such as payroll for up to one year if
damageoccurs to the house and the business is shut down.
© Monkey Business Images/Shutterstock.com
Section iii
19
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662 Chapter 19 • InsuranCe
review exercises
tryitexerciSe 10
Jody Burnett has automobile liability insurance in the amount of 25/50/10 and carries $250 deduct-
ible collision and full-coverage comprehensive. Recently, Jody was at fault in an accident in which
her Nissan went out of control on a rainy day and hit two cars, a fence, and the side of a house. The
first car, a Lexus, had $8,240 in damages. The second car, a Ford Taurus, sustained damages of
$2,540. The repairs to Jody’s car amounted to $3,542. In addition, the fence repairs came to $880
19
Section iii
As an insurance agent, calculate the annual premium for the following clients.
Name Territory
Driver
Class
Bodily
Injury
Property
Damage
Model
Class
Vehicle
Age
Comprehensive
Deductible
Collision
Deductible
Rating
Factor
Annual
Premium
1. Schwartz 2 4 50/100 25 J 3 $100 $250 None
$343.00
2. Mager 1 2 10/20 10 R 1 Full Coverage $500 1.5
$456.00
$625.60
$706.20
9. Rick Clinton wants to purchase an automobile insurance policy with bodily injury and property
damage coverage in the amounts of 50/100/50. In addition, he wants collision coverage with
$250 deductible and comprehensive with no deductible. Rick is in driver classification 4 and
lives in territory 3. His vehicle, a Buick Regal, is in model class B and is 1 year old. Rick has had
two accidents and one ticket in the past 12 months and is therefore considered to be a high risk.
Consequently, the insurance company has assigned a rating factor of 4.0 to his policy. As Rick’s
automobile insurance agent, calculate the total annual premium for his policy.
10. Howard Marshall’s Corvette was hit by a palm tree during a hurricane. The damage was
estimated at $1,544. If Howard carried $250 deductible collision and $100 deductible
comprehensive, how much of the damages does the insurance company have to pay?
seCtIon III • Motor VehICle InsuranCe 663
11. Ben Hoffman has motor vehicle liability insurance in the amount of
50/100/50and carries $250 deductible collision coverage and full-coverage
comprehensive. Recently, he was at fault in an accident in which his camper
hit a bus. Five individuals were injured on the bus and were awarded the
following settlements by the courts: Hart, $13,500; Black, $11,700; Garner,
$4,140; Williams, $57,800; and Morgan, $3,590. The damage to the bus was
$12,230, and Ben’s camper sustained $3,780 in damages.
a. How much will the insurance company have to pay and to whom?
b. What part of the settlement will be Ben’s responsibility?
Liability 50/100/50
Maximum of $50,000 per person
Maximum of $100,000 per accident
Maximum of $50,000 property
Bodily injury (liability)
Hart’s injuries $13,500 Insurance pays all
Black’s injuries 11,700 Insurance pays all
Collision
Business Decision: insuring the Fleet
12. The Flamingo Cab Company of Cougar Creek is interested in purchasing $250 deductible
collision insurance and full-coverage comprehensive insurance to cover its fleet of 10 taxicabs.
As a requirement for the job, all drivers already carry their own liability coverage in the amount
of 100/300/100. Cougar Creek is rated as territory 2. Five of the cabs are 4-year-old Checker
Towncars, model class Y. Three of them are 2-year-old Chrysler station wagons, model classR.
The remaining two are new Buick sedans, model class C. Because the vehicles are on the
roadalmost 24 hours a day, they are considered to be very high risk and carry a rating factor
of5.2. They are, however, subject to an 18% multi-vehicle fleet discount.
a. As the insurance agent for Flamingo Cabs, calculate the total annual premium for the fleet.
b. When the owner saw your rate quote, he exclaimed, “Too expensive! How can I save some
money on this insurance?” At that point, you suggested changing the coverage to $500
deductible collision and $100 deductible comprehensive. How much can you save Flamingo
by using the new coverage?
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