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Archives for 2010

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Introduction to Auto Insurance

In terms of property-liability insurance, auto insurance is the most familiar to the general population.  With the number of accidents that occur each year, it is easy to understand why.
A particular event that could potentially decrease wealth is characterized as a risk exposure. For our more cynical readers I must specify that “marriage” and “kids” are not typically classified as risk exposures, nor is a prenuptial agreement traditionally considered a form of insurance.  In terms of auto insurance, three main risk exposures exist:

  • Property damage/loss
  • Bodily injury to you/your family
  • Legal liability for harm to others due to your negligence.

Most personal auto policies included some level of protection for each category of risk exposures.Keep in mind that although most auto policies have much in common and are written in reasonably understandable language, significant differences, clauses, and exclusions can exist. It is important that you thoroughly review your policy, your state’s requirements, understand your needs and seek clarification on anything that is unclear. A “small” misunderstanding in terms can cost you “big” money.

Under most personal auto policies coverage applies to any individual that has qualified permission (typically from the insured or spouse) to operate the vehicle.

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Can We Put a Value on Human Life?

This concept primarily related to the topic of life insurance.  We’ve mentioned that we cannot place a value on human life.  It is important to understand that though we cannot readily assess the value of a human life, we do put a price on it in different ways, some more direct than others. We will not begin to take a position in this debate, but we will illustrate a few examples for perspective. [Read more…] about Can We Put a Value on Human Life?

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Participating vs. Non-Participating Insurance Policies

This concept primarily related to the topic of life insurance.  Both types of insurance policies, term and cash value, can act as either participating or non-participating (par or non-par, respectively).  Most policies are par policies.

Par Policies

Insurance companies will charge higher than necessary premiums with the intent of returning the excess.  Excess premiums are charged because the insurance company will operate based on more conservative estimates.  For example, they will base premiums on higher operating costs and lower rates of return than are actually expected.  This allows the insurance company to better protect against non-diversifiable (highly correlated) risk. [Read more…] about Participating vs. Non-Participating Insurance Policies

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Indemnity vs. Non-Indemnity, What’s the Difference?

Insurance can be broken down into two groups, indemnity and non-indemnity.  For example, property insurance is indemnity insurance while life insurance is non-indemnity insurance.

Indemnity means that the insured is entitled to a specific amount of compensation for a loss that is tied to a replacement, reimbursement, or fair-market value. The primary difference is that with indemnity insurance, there is no “profit” so to speak.

Non-indemnity insurance tends to cover things with no real replacement value. The amount of compensation received cannot be directly correlated with the loss.  For example, life insurance is non-indemnity insurance because you cannot place a value or a cost of replacement on a person’s life.

Posted By Mays Financial

Introduction to Liability Insurance

Additional liability protection may be added to supplement homeowners and auto insurance policies. These supplemental personal liability policies are commonly referred to as “umbrella” policies because they fit over the top of existing policies as an extra layer of protection. These policies are relatively low-cost and are recommended to wealthier individuals who bear higher liability risks.  Typical coverage ranges are $1 million to $5 million dollars and cover a variety of risks.

If damages exceeded the liability limit of your auto or homeowners policy an umbrella policy would cover the excess.  It is important to ensure that “gaps” are covered.  Liability policies have deductibles like homeowners and auto policies.  The coverage of your auto and homeowners policies should be equal to the deductible of your umbrella policy.  If not, your auto or homeowners policy may offer coverage up to $100,000 while your umbrella policy has a $200,000 deductible. This would leave you responsible for the $100,000 gap. In this situation you’d want to use some combination of raising your coverage or lowering your deductible to eliminate the $100,000 gap. Working through the same insurance company for these needs is an easy way of alleviating problems like these. Additionally, assuming reasonable rates, using the same insurer for multiple insurance needs often qualifies for a discount for consolidated underwriting costs.