Understanding property and life insurance through practical examples

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.

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)

Conclusion

Both property and life insurance involves knowledge of one's assets and liabilities and calculations based on these assets and liabilities. Anyone who enters either policy needs to know all the clauses involved. Grace periods are allowed but these are generally followed by repaying premium with interest. There are various methods of calculating life insurance, two of which were provided in this essay.

In terms of recommendations, it is advisable to read the fine print of the company as thoroughly as one can and to ensure that they are licensed and approved by the state. One would also need to do some background research on them to ensure that they fulfill all the requirements. Also important is the fact that in both personal and business affairs it is helpful -- if not necessary -- to have a full and complete picture of one's entire fiscal situation. This includes outgoing needs as well as incoming needs and expected income as well as income producing assets.

Sources

Insurelane

http://www.insurelane.com/insurance-faq/faq24.html

Investopedia Life Insurance Clauses Determine Your Coverage http://www.investopedia.com/articles/pf/06/lifeinsuranceclauses.asp#axzz2NucL9nQm

Investopedia.com Needs approach http://www.investopedia.com/terms/n/needsapproach.asp#ixzz2Nud2Pexf

Reterimentaction.com

http://retirementaction.com/2012/03/02/437