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Chapter 8.docx

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Tony Belsito

Basic Purposes of InsuranceProtect you and your family from catastrophic losses caused by theLoss or damage of important assets such as your car or your home home and auto insuranceLoss of your ability to earn income short and longterm disabilityUnexpected expenses critical illness insurance Insurance Planning NeedsMost individuals and families must consider obtaining a widerange of insurance products to manage household riskAutoHomeowners InsuranceReimburses for damage or destruction to existing assetsLife InsuranceReplaces income lost due to premature deathDisability InsuranceReplaces income lost due to disabilityHospitalizationHealth InsuranceCovers medical costs from illness or accidentConcept of RiskRisk is defined as uncertainty with respect to economic lossInsurance planning is used to reduce the risk that losses will cause financial devastationRisk can be dealt with in the following waysRisk AvoidanceNot participating in activities that have the risk of lossExamplenot driving to avoid the risk of an auto accidentRisk avoidance is not always practical or possibleLoss Prevention and ControlPrevention reduces the chance that a loss will occurExample Driving within the speed limit reduces the likelihood of an accidentControl reduces the severity of a loss once it occursExample Wearing a seat belt can minimize the effects of an accidentRisk AssumptionIs a strategy where you bear the risk of loss yourselfExample When your calculator gets stolen you bear the cost out of pocketTransferring RiskPay someone else to bear your risk of lossExample You transfer the risk to the insurance company when you buy an insurance policyTransferring and Sharing RiskTransferring RiskPay someone else to bear your risk of lossExample You transfer the risk to the insurance company when you buy an insurance policy InsuranceA contract between you the insured and an insurance company the insurerThe insurer agrees to reimburse you for any losses you might suffer according to the contractInsurers combine the loss experience of large numbers of people and using the law of large numbers are able to actuarially estimate the loss experience for the group and charge appropriate premiums to each member of the group so that the overall losses are covered together with a profit margin for the insurerInsurance premiums are a function of the size of the estimated losses together with an estimation of the frequency of the claimsThe more probable the lossthe higher the premiumThe greater the average claimthe higher the premium UnderwritingProcess in which the insurance company decides whom to insure and the rate to be chargedCompany must guard against adverse selection a disproportionate number of bad risksCombine the loss experiences of large numbers of peopleCalculate probability of frequency of occurrence and amount of loss using past experienceCharge rates in proportion to level of riskEconomics of Insurance Why Buy Life Insurance Benefits of Life InsuranceProvide financial security for those who depend on your incomePrevent a decline in their standard of living stay in the home afford universityProtection from creditorsBefore death cash value in life insurance policies usually protected against legal judgments and bankruptcy proceedingsAfter death possible to keep benefits out of estate and away from creditorsTax benefitsSavings portion grows tax free unless withdrawnFor taxpayers in higher income brackets these relatively low returns become more attractive as income taxes take a greater bite from current income and shortterm capital gainsProceeds not income taxable to beneficiariesPossible to avoid estate taxation on proceedsVehicle for savingProvides a means of forced savings for those who would not do so otherwiseProvides preservation of capital for those who desire a relatively safe conservative investment Do You Need Life InsuranceConsider life insuranceIf you have dependents who count on your financial supportIf you have debts you would like to clear like a home mortgageYou may not need life insuranceIf no one depends on your support
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