Property and Life Insurance Are Complex Issues

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.

Now this same hotel carried $500,000 of property insurance on the hotel at the time of loss. 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, private schooling and maintenance costs aside from regular budget for food, paying bills, vehicle insurance, and extras.

The special needs may include funeral expenses, legal fees, estate and gift taxes, business buyout costs, probate fees.

Income needs are retirement planning

The speaker of the convention may also explain the capital retention approach for determining the amount of life insurance to own.

The capital retention approach is another method under the needs approach. This approach assumes that life insurance principal will support the family indefinitely into the future.

It is calculated by preparing a balance sheet of expected income that will come to family and identifying available income producing assets. The approach then identifies additional assets and combines the two to determine the needed family income after death of one spouse (Reterimentaction.com).

Because the family head will purchase more life insurance under this method, he will be in a better position to use this method if the surviving spouse lives longer than expected.

During the same seminar to the housekeeping staff the agent also describes other important clauses which are included in the life insurance contractual provisions. These are: a. Suicide clause b. Grace period c. Reinstatement clause

a. Suicide clause

The suicide clause states that the insurer will not pay the money if the insured attempts to or does commit suicide during the specified period from the beginning of coverage. If the insured's death is a result of suicide, the insurer will return only previously paid premiums to the family.

b. Grace period

Grace period comes about when financial troubles make it difficult to pay the premiums. This "Grace period" enables insured to make certain monetary arraignments with insuring agency during which time the arrangements continue (i.e. recipeitn still receives insrtuance). If financial difficulties continue after this period with insured unable to pay premiums, the agreement lapses and policy may be cancelled.

If the insured dies during this period, the insurer will pay the insurance money after subtracting the unpaid premium from that money.

c. Reinstatement clause

If as a result of grace period or for other reasons, the policy has lapsed with insured being slow with premiums, the insured can revive his policy by paying all of the outstanding premiums with interest. However, he has to convince insurance company that he is healthy in order to qualify for this provision (Investopedia Life Insurance Clauses Determine Your Coverage)