Property and life insurance are complex issues with details that are relevant to any policy holder and invaluable for all policy holders to look into. There comes a point in time when it is important for a person to buy life, or property insurance. This is particularly so for a single parent who wants to care for her children in the eventuality of her death or for a business owner who wants to insure his property in the event of accident. The terminology and details of both property and life insurance are, however, complex and mathematically abstruse. The following essay takes up some concerns of both and vivifies, as well as teaches certain aspects of life insurance, via examples. The first section concerns property insurance. The second exercise talks about life insurance.

Property insurance

Example hotel

Co-insurance clause refers to a splitting or spreading of risk among multiple parties in this case likely between insurers and insuring company. (Insurelane)

Let us imagine that a certain hotel is insured for $200,000 under a commercial property insurance policy. The policy contains an 80% coinsurance clause. The hotel sustained a $50,000 loss because of a fire in a storage area. The replacement cost of the hotel at the time of loss is $500,000. What we have here is a case of an underreporting penalty (the hotel is insured for less than its value) and the calculation is worked out in the following way:

The hotel is valued at $500,000. It contains an 80% coinsurance clause, but is insured for only $200,000 Since its insured value is less than 80% of its actual value, when it suffers a loss, the insurance payout will be subject to the underreporting penalty. For example: It suffers a $50,000 loss because of a fire in a storage area.

The calculation is the following:

The insured would recover $200,000 + (.80 x $500,000) x 50,000 = $100,000

The insurer's liability is $100,000.

There is no underreporting penalty since its insurance parallels its value. If the amount of loss is $10,000, the following calculation shows how much the hotel will collect:
The hotel is valued at $500,000. It contains an 80% coinsurance clause, and is insured for the full amount, i.e. $500,000. The hotel suffers a $10,000 loss because of a fire in a storage area; the calculation now would be the following:

. The insured would recover $500,000 + (.80 x $500,000) x 10,000 = $8,000

The hotel will collect $8,000.

Life Insurance

Let us speculative that the hotel's Human Resources manager has asked the Life Insurance agency representative to provide an educational seminar to several new employees from the housekeeping staff. The need approach is widely used for determining the amount of life insurance to purchase and the speaker first discusses this.

The needs approach

The needs approach is a method of calculating how much life insurance is required by an individual/family to cover their needs (i.e. expenses). These include things like funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees, medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care, private schooling and maintenance costs (Investopedia.com Needs approach)

The needs approach is calculated on two variables:

1. How much will be needed at death to meet obligations.

2. How much future income is needed to sustain the household?

The needs approach takes into account three variables: (1) the regular needs for a typical family (2) special needs (3) income needs

The regular needs for a typical family would include things like medical deductibles, emergency funds, mortgage expenses, rent, debt and loans, college, child care,…