| For example, when an
insurance company is deciding whether or not to offer automobile insurance to a potential policy
owner, it will want to know about the person's previous driving record, whether there have any
recent accidents or tickets, what type of car is to be insured.
All of this information will be
used for two purposes.
- Based upon the responses to
these questions, the insurance company will decide whether the profile of the applicant is
consistent with the type of risks the insurer is trying to attract. Some insurers specialize
in offering insurance to only very safe drivers and therefore will only accept applications
from people who fit the profile of a safe driver.
- Once the insurer has decided
that your risk profile is consistent with the types of risks it accepts, the answers to the
questions will be used to determine which rate to charge you. For example, the insurance
company will decide whether you should be offered insurance at the high risk driver rate or
the low risk driver rate.
Collectively, this entire process
is known as the underwriting process. The primary function of the underwriting department in an
insurance company is to decide whether or not to offer insurance to a person who has completed
an application.
If the answer is yes, then the
underwriting department seeks to determine the "quality" of that risk so that the proper premium
can be charged. That is, high risk people should pay more than low risk people.
What do I give up by not using
an agent to purchase insurance?
The disadvantage of not using an
agent to purchase insurance is that the policyholder does not receive as much, or often any,
personal service. An agent with whom there is direct contact can be vital when purchasing a
product and absolutely necessary when filing a claim.
Auto Insurance Questions
What should I consider when
purchasing automobile insurance?
There are a number of factors you
should consider when purchasing any product or service, and insurance is no different. Here is a
checklist of things you should consider when purchasing automobile insurance.
- Don’t base your decision on
price alone. Base your decision on value – what you get for what you pay. Consider the quality
of the company’s claims service and consumer education.
- Purchase the amount of
liability coverage which makes sense for you.
- You should decide which
optional coverages you want. For example, do you want optional physical damage coverages or is
the market value of your car too low to warrant purchasing them.
- Once you have decided what you
want in your automobile insurance policy, you can now decide who you would like to purchase
the insurance from. For example, you may decide you like the idea of purchasing insurance from
a mutual company rather than a stock company.
What are some practical things
I can do to lower my automobile insurance rates?
There are a number of things you
can do to lower the cost of your automobile insurance. The easiest thing to do is to shop
around.
It is not surprising to find
quotes on automobile insurance that can vary by hundreds of dollars for the same coverage on the
same car. When you shop, be careful to make sure each insurer is offering the same coverage.
Many insurers use the ISO policy forms, but this is not always the case.
Another way to lower the cost of
your automobile insurance is to look for any discounts that you may qualify for. For example,
many insurers will offer you a discount if you insure multiple cars under the same policy, or if
you have had a driver education class in the last five years. Be sure to ask your agent or your
company about their discount plans.
Another easy way to lower the cost
of your automobile insurance is to increase the deductible. Simply raising your deductible from
$250 to $500 can lower your premium sometimes by as much as five or ten percent. However, you
should be careful to make sure that you have the financial resources necessary to handle the
larger deductible.
I have an older car whose
current market value is very low - do I really need to purchase automobile insurance?
Most states have enacted
compulsory insurance laws that require drivers to have at least some automobile liability
insurance. These laws were enacted to ensure that victims of automobile accidents receive
compensation when their losses are caused by the actions of another individual who was
negligent.
Except for the minimum liability
coverages that you may be required to purchase, many people with older cars decide not to
purchase any of the physical damage coverages. It is often the case that the cost of repairing
the damages to an older car is greater than its value. In these cases, your insurer will usually
just "total" the car and give you a check for the car's market value less the deductible.
Suppose I lend my car to a
friend, is he/she covered under my automobile insurance policy?
Whenever you knowingly loan your
car to a friend or an associate, he or she will be covered under your automobile insurance
policy. In fact, even if you do not give explicit permission each time a person borrows your
car, they are still covered under your automobile insurance policy as long they had a reasonable
belief that you would have given them permission to drive the car.
What is the difference between
collision physical damage coverage and comprehensive physical damage coverage?
Collision is defined as losses you
incur when your automobile collides with another car or object. For example, if you hit a car in
a parking lot, the damages to your car will be paid under your collision coverage.
Comprehensive provides coverage
for most other direct physical damage losses you could incur. For example, damage to your car
from a hailstorm will be covered under your comprehensive coverage.
It is important to know the
differences between the collision and comprehensive coverages for a couple of reasons.
- In order to make an informed
purchasing decision about these optional coverages, you need to know the difference between
them.
- The deductibles under the
collision and comprehensive coverages are often different in amount.
What factors can affect the
cost of my automobile insurance?
A number of factors can affect the
cost of your automobile insurance - some of which you can control and some which are beyond your
control.
The type of car you drive, the
purpose the car serves, your driving record, and where you live can all affect how much your
automobile insurance will cost you.
Even your marital status can
affect your cost of insurance. Statistics show that married people tend to have fewer and less
costly accidents than do single people.
Homeowners Insurance Questions
What is homeowners insurance
and who should buy this type of coverage?
Homeowners insurance is one of the
most popular forms of personal lines insurance on the market today. The typical homeowners
policy has two main sections: Section I covers the property of the insured and Section II
provides personal liability coverage to the insured. Almost anyone who owns or leases property
has a need for this type of insurance. And many times, homeowners insurance is required by the
lender as part of the requirements in obtaining a mortgage.
What is the difference between
"actual cash value" and "replacement cost"?
Covered losses under a homeowners
policy can be paid on either an actual cash value basis or on a replacement cost basis. When
"actual cash value" is used, the policy owner is entitled to the depreciated value of the
damaged property. Under the "replacement cost" coverage, the policy owner is reimbursed an
amount necessary to replace the article with one of similar type and quality at current prices.
What factors should I consider
when purchasing homeowners insurance?
There are a number of factors you
should consider when purchasing any product or service, and insurance is no different.
Here is a checklist of things you
should consider when you purchase homeowners insurance.
- First and foremost, purchase
the amount and type of insurance that you need. Remember that if your policy limit is less
than 80% of the replacement cost of your home, any loss payment from your insurance company
will be subject to a coinsurance penalty. Also, determine the amount of personal property
insurance and personal liability coverage that you need.
- Second, determine which, if
any, additional endorsements you want to add to your policy. For example, do you want the
personal property replacement cost endorsement or the earthquake endorsement?
- Finally, once you have decided
on the coverage you want in your homeowners insurance policy, you can now decide which insurer
you would like to purchase the insurance from.
What are some practical things
I can do to lower the cost of my homeowners insurance?
There are a number of things you
can do to lower the cost of your homeowners insurance. The best thing to do is to shop around.
It is not surprising to find
quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the
same home. When you shop, be careful to make sure each insurer is offering the same coverage.
Many insurers use the ISO policy forms, but this is not always the case.
Another way to lower the cost of
your homeowners insurance is to look for any discounts that you may qualify for. For example,
many insurers will offer a discount when you place both your automobile and homeowners insurance
with the them. Other times, insurers offer discounts if there are deadbolt exterior locks on all
your doors, or if your home has a security system. Be sure to ask your agent or company about
discounts any that you may qualify for.
Another easy way to lower the cost
of your homeowners insurance is to raise your deductible. Increasing your deductible from $250
to $500 will lower your premium, sometimes by as much as five or ten percent. However, be
careful to make sure that you have the financial resources necessary to handle the larger
deductible.
What are the policy limits
(i.e., coverage limits) in the standard homeowners policy?
[Note: this answer is based on the
Insurance Services Office's HO-3 policy.]
Coverages A and B provide
protection to the dwelling and other structures on the premises on an "all risks" basis up to
the policy limits. The policy limit for Coverage A is set by the policyowner at the time the
insurance is purchased. The policy limit for Coverage B is usually equal to 10% of the policy
limit on Coverage A. Coverage C covers losses to the insured's personal property on a named
perils basis. The policy limit on Coverage C is equal to 50% of the policy limit on Coverage A.
Coverage D covers the additional expenses that the policyowner may incur when the residence
cannot be used because of an insured loss. The policy limit for Coverage D is equal to 20% of
the policy limit on Coverage A. The coverage limit on Coverage E - Personal Liability - is
determined by the policyowner at the time the policy is issued. The coverage limit on Coverage F
- Medical Payments to Others - is usually set at $1000 per injured person.
Where and when is my personal
property covered?
Coverage C, which provides named
perils coverage, applies to all your personal property (except property that is specifically
excluded) anywhere in the world. For example, suppose that while traveling, you purchased a
dresser and you want to ship it home. Your homeowners policy would provide coverage for the
named perils while the dresser is in transit - even though the dresser has never been in your
home before.
Do I need earthquake coverage?
How can I get it?
Direct damages due to earthquakes
are not covered under the standard homeowners insurance policy. However, unless you live in an
area that is prone to earthquakes, you probably do not need this coverage. If you do live in a
part of the country with high earthquake activity you may want to consider adding an earthquake
endorsement to your homeowners insurance policy. This endorsement will cover damages due to
earthquakes, landslides, volcanic eruptions and other earth movements.
Personal Umbrella Questions
What is a personal umbrella
liability policy?
The personal umbrella liability
policy is an insurance contract designed to accomplish two goals.
- First, it increases the
liability protection beyond what the policy owner already has in his or her homeowners and
automobile insurance policies.
- Second, the personal umbrella
policy is designed to fill in the gaps in a policy owner's liability coverage since several
types of liability exposures exist that are not covered by automobile and homeowners policies.
Together with homeowners and
automobile insurance policies, broad personal liability protection is attained through the
purchase of a personal umbrella policy.
How do I know if I need a
personal umbrella liability policy?
It used to be that the only people
who needed personal umbrella liability policies were wealthy individuals who had sizable amounts
of personal assets that would be at risk in a lawsuit.
However, in our very litigious
society, many people are realizing that they have a need for more liability insurance than what
is provided under their homeowners and automobile insurance policies. The personal umbrella
policy is ideally suited to provide this protection.
Life Insurance Questions
How much life insurance should
an individual own?
Rough "rules of thumb" suggest an
amount of life insurance equal to 6 to 8 times annual earnings. However, many factors should be
taken into account in determining a more precise estimate of the amount of life insurance
needed.
Important factors include:
- Income sources (and amounts)
other than salary/earnings
- Whether or not the individual
is married and, if so, what is the spouse's earning capacity
- The number of individuals who
are financially dependent on the insured
- The amount of death benefits
payable from Social Security and from an employer sponsored life insurance plan
- Whether any special life
insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc.
It is recommended that a person's
insurance adviser be contacted for a precise calculation of how much life insurance is needed.
What about purchasing life
insurance on a spouse and on children?
In certain circumstances, it may
be advisable to purchase life insurance on children; generally, however, such purchases should
not be made in lieu of purchasing appropriate amounts of life insurance on the family
breadwinner(s). It is of utmost importance that the income earning capacity of the primary
breadwinner be fully protected, if possible, through the purchase of the required amount of life
insurance before contemplating the purchase of life insurance on children or on a non-wage
earning spouse. In a dual-earning household, it is important to protect the income earning
capacity of both spouses. Life insurance on a non-wage earning spouse is often recommended for
the purpose of paying for household services lost at this individual's death.
Should term insurance or cash
value life insurance be purchased?
Although a difficult question--one
whose answer will vary depending on circumstances--several principles should be followed in
addressing this issue.
It must first be recognized that
in any life insurance purchasing decision, there are at least two basic questions that must be
answered:
- "How much life insurance should
I buy?" and
- "What type of life insurance
policy should I buy?"
The question contained in (1)
involves an "insurance" decision and the question contained in (2) requires a "financial"
decision.
The "insurance" question should
always be resolved first. For example, the amount of life insurance that you need may be so
large that the only way in which this needed amount of insurance can be afforded is through the
purchase of term insurance with its lower premium.
If your ability (and willingness)
to pay life insurance premiums is such that you can afford the desired amount of life insurance
under either type of policy, it is then appropriate to consider the "financial" decision--which
type of policy to buy. Important factors affecting the "financial" decision include your income
tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or
longer), and the rate of return on alternative investments possessing similar risk.
How does mortgage protection
term insurance differ from other types of term life insurance?
The face amount under mortgage
protection term insurance decreases over time, consistent with the projected annual decreases in
the outstanding balance of a mortgage loan. Mortgage protection policies are generally available
to cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the face
amount decreases over time, the premium is usually level in amount. Further, the premium payment
period often is shorter than the maximum period of insurance coverage--for example, a 20-year
mortgage protection policy might require that level premiums be paid over the first 17 years.
Can an existing life insurance
policy be used to provide for the repayment of an outstanding mortgage loan?
Yes; the purchase of a new
mortgage protection term insurance policy is usually not required by the lender. An existing
policy, either term or cash-value life insurance, can be used for many purposes, including
paying off an outstanding mortgage loan balance in the event of the insured's death.
Credit life insurance is
frequently recommended in conjunction with the taking out of an installment loan when purchasing
expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good
buy?
Credit life insurance is
frequently more expensive than traditional term life insurance. Further, if you already own a
sufficient amount of life insurance to cover your financial needs, including debt repayment, the
purchase of credit life insurance is normally not advisable due to its relatively high cost.
Renters Insurance Questions
Why would I want to buy renters
insurance?
If you live in an apartment or a
rented house, renters insurance provides important coverage for both you and your possessions. A
standard renters policy protects your personal property in many certain cases of theft or damage
and may pay for temporary living expenses if your rental is damaged. (including loss of use). It
can also shield you from personal liability. Anyone who leases a house or apartment needs should
consider this type of coverage.
How does a renters policy
protect my personal property?
A renters policy provides named
perils coverage. This means your property is protected from all the perils that are specifically
listed on your policy. These usually include:
- Fire or lightning
- Windstorm or hail
- Explosions
- Riots
- Aircraft
- Vehicles
- Smoke
- Vandalism or malicious mischief
- Theft
- Falling objects
- Weight of ice, snow, or sleet
- Accidental discharge or
overflow of water or steam
- Sudden and accidental tearing
apart, cracking, burning, or bulging
- Freezing
- Sudden and accidental damage
from artificially generated electrical current
- Volcanic eruptions (but this
doesn't include earthquake or tremors)
Renters coverage applies to your
personal property no matter where you are in the world. This means you're covered when you are
on vacation as well as at home.
Why do some apartment complexes
require tenants to have renters insurance?
The owners of these apartment
complexes require their tenants to have renters insurance to ensure that they have personal
liability coverage. Owners of apartment complexes carry property insurance to protect themselves
in the event that the apartment building is damaged. However, if a negligent tenant causes
damage, the owner's insurer will sue the responsible tenant for the amount of damage they
caused. The owner wants to make sure that the tenant has insurance coverage that will protect
him or her in this event.
What if I share my apartment
with a roommate? Do we both need to have renters insurance?
Standard renters policies cover
only you and relatives that live with you. If your roommate is not a relative, each of you
will need your own renters policy to cover your own property and to provide you liability
coverage for your own actions.
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