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Chapter 11.docx

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FIN 502
Joan Lobo

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Chapter 11: Property, Home and Automobile Insurance Property Insurance Pure risk – involves possibility of loss only Property insurance- insures your physical properties (home, clothing, furniture, jewellery) against damages/destruction One buys insurance to insure for large and catastrophic exp but not small ones  one transfers risk to insurance comp in return for paying a premium  premium depends on stat prob of loss/exp and expected amt of loss (not same as insured FV) Home Insurance Home insurance - protects family against risk of loss, damage, destruction of home, its related outbuildings (garage), and its contents (clothing, furniture, appliances) - Covers liability to 3 parties for injuries suffered on property Question ask b4 buying a home insurance policy 1. What risks are covered? 2. How much home insurance do I need? More risks covered by policy = higher premium How much insurance do you need? - Contents of the home o Clothes, furniture, appliances o Estim val of contents 1. % (usually 20%) of val of structure (=home excluding land) (20%)(100,000) = $20,000 insurance coverage 2. list and val each item - How do you value the home contents? o Depreciated val – val of replacement/ repair for item to the condition it was in (at the same quality it was in) when lost/ damaged  Dep = (price – allowance for dep)/ # yrs used o Replacement val – cost of buying new item of same quality  Req higher premium o Dep val < replacement val o Replacement cost policy – lost/destroyed item replaced w/ new ones of compatible quality  Insured d/ not to replace/repair  claim settled at dep val  otherwise replace/repair to prev condition Replacement val of a home - Fair mkt val not used  inclu val of land and foundation  not typically destroyed - Want to insure replacement val of home structure - Home structure – everything except land and foundation if home were totally destroyed - Cost approach of valuation – determine replacement cost of home’s structure - Appraisal – give professional estim of dep val and replacement val of home structure - Some insurance comp automatically set amt of home insurance = amt of mortgage  insurance amt of mortgage protects lender’s interest
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