Insurance

“Either what woman having ten pieces of silver, if she lose one
piece, doth not light a candle, and sweep the house, and seek
diligently till she find it?”–Luke 15:8

MAT 107 STUDY GUIDE – Insurance and Risk Management 1

 TABLE OF CONTENTS

COURSE BACKGROUND 3

STUDY GUIDE OUTCOMES 4

GUIDING QUESTIONS 4

KEY CONCEPTS 4

INTRODUCTION 5

INSURING RISKS 6

HOME AND PROPERTY INSURANCE 7

RENTERS INSURANCE 7

AUTOMOBILE INSURANCE 7

HEALTH INSURANCE 10

DISABILITY INSURANCE 12

LIFE INSURANCE 13

LONG-TERM CARE INSURANCE 16

MAT 107 STUDY GUIDE – Insurance and Risk Management 2

COURSE BACKGROUND

Quantitative Analysis and Personal Finance fulfills the Quantitative Literacy General
Education requirement. This course is centered on the use of mathematics, especially in
financial situations, to model and solve real-world problems. Math principles will be taught
in a context of financial management principles that students will encounter over their
lifetime. Topics include probability, statistics, modeling with exponential and linear
functions, geometry, and financial management. Microsoft Excel will be used as a tool
throughout the semester. This course is designed to satisfy the quantitative literacy
course requirements for an Associate of Science degree. This course is intended to help
students demonstrate they are able to integrate mathematical knowledge and skills by
solving real and relevant problems.

MAT 107 STUDY GUIDE – Insurance and Risk Management 3

 IINSURANCE AND RISK MANAGEMENT

STUDY GUIDE OUTCOMES

• Evaluate the methods of risk management.

• Assess risk transfer options.
• Determine the insurance required for your home and automobile.
• Determine your needs

GUIDING QUESTIONS

1. What does self-insure mean? When might you self-insure?

2. What do co-insure, co-pay, and deductible mean? Give some examples.
3. Do insurance companies pay when you are negligent (you run a red light and
crash into someone)?
4. Consider the different elements you need to consider when purchasing
insurance.
5. What is a risk factor? Why is it essential to manage risks?
6. What is disability insurance, and what types of disability insurance are
needed if disabled?
7. Is auto and homeowners’ insurance required? Why?

KEY CONCEPTS
Insurance

Liability

Risk

MAT 107 STUDY GUIDE – Insurance and Risk Management 4

 INSURANCE AND RISK MANAGEMENT

INTRODUCTION

There are few certainties in life. Almost everything is uncertain, which means risk is
involved. The way you manage risks in life can determine your success and feeling of
well-being. The risks in life can be handled in these ways:

Avoid risks You cannot avoid all risks and have a productive life. You could avoid the
risk of being involved in an automobile accident by not driving or avoid the
risk of an on-the-job injury by not working. However, avoiding these risks
reduce your ability to provide a living for your family. The rewards of some
risks are too great to avoid the risks altogether. However, other activities
carry an above-average risk, such as riding a motorcycle or skydiving.
You can certainly decide to avoid these types of risks.

Reduce You can reduce some risks by following established safety procedures
risks such as:
• Wearing a seat belt or other protective equipment
• Installing deadbolt locks
• Installing a security system and smoke detectors in your home
You can also reduce the risk of failing an examination by diligently
studying and the risk of sickness by eating properly and exercising.

Assume or Assuming risks means you take responsibility for the consequences or
transfer losses. When the risk is small, or the cost of insurance is too great, you
risks may decide to assume the risk yourself. For example, you decide not to
insure an older car for other than liability coverage.
A good strategy for assuming the risk is to be self-insured or establish a
savings fund to pay for potential losses. You assume the portion of risk
represented by the deductible amount of any insurance policy.
Significant risks can be transferred by buying insurance coverage. When
you purchase an insurance policy, you normally achieve a combination
of risks. You "assume" the risk for the deductible, and you "transfer" the
risk to the insurance company for everything above the deductible
amount.

MAT 107 STUDY GUIDE – Insurance and Risk Management 5

INSURING RISKS

Insurance is based on the law of large numbers, which says you can determine the
probability of loss and share that risk with a large number of people at a low individual
cost called a premium. Pure risks, or risks in which there is only a possibility of loss, such
as in a fire or injury, are insurable. Speculative risks, or those with potential for a loss or
gain, such as investing or gambling, are not insurable.

The following chart outlines types of insurable risks and an explanation of each:

Types of insurable risks Explanation

Personal Includes the loss of income or life by illness, disability,
retirement, unemployment, or death.
Property Includes the loss of personal or real property by fire, wind,
accidents, theft, and other hazards.
Liability Includes losses resulting from negligence causing bodily
harm or property damage to others caused by your
automobile, by your negligent conduct, or by hazards on
your property.

You can only purchase insurance if you have an insurable interest. This means you must
have the potential for a personal financial loss. You cannot buy insurance on property you
do not own or on the life of someone other than dependents or business partners.

The principle of indemnity applies to insurance. Indemnity means you are insured only for
the loss incurred. This means you cannot realize a gain by insuring far more than the
property's value or by buying duplicate insurance.

While it might be possible to find a lower-cost alternative, it is always advisable to obtain

insurance only from highly rated companies through trained and certified agents or the
internet. Ratings are available in the AM Best reports in the library or through the State
Insurance Department.

All policies contain various riders and coverage. It is particularly important to understand
precisely what is covered, and just as importantly, what is not covered. Make sure that
you are comfortable with the coverage, limits, and service provided for your premium.
You should compare at least a few different insurance companies to make sure you make
the right choice of coverage for your budget and your needs.

MAT 107 STUDY GUIDE – Insurance and Risk Management 6

HOME AND PROPERTY INSURANCE

Insure your home and its contents because they are among your major assets.
Homeowner insurance includes coverage against loss or damage to the structure. It also
covers living expenses to pay the cost of living elsewhere while your home is repaired.

Personal property is covered for loss of belongings, including furnishings, appliances, and
clothing. A personal property floater can cover expensive items such as jewelry for their
specific value. A floater allows you to add a designated asset to your policy with a
specified value, such as a diamond ring. You should also get personal liability coverage
in the event someone is injured on your property.

You can buy actual cash value (ACV) homeowners’ insurance or replacement value (RV)
coverage. ACV coverage will only pay the depreciated value of lost or damaged items.
RV coverage will repair or replace lost or damaged items, but this type of coverage is
expensive, and it could increase if a claim is made. Many factors determine the cost of
your insurance. Some factors are the location of your home relative to the fire department
and water supply, the type of structure, such as brick versus wood, the coverage amount,
and type. Look for discounts for security and smoke detection systems, fire extinguishers,
and deadbolt locks.

RENTERS INSURANCE

If you live in an apartment, you will not have homeowner insurance and do not need to
protect against loss or damage to the home. The landlord will have insurance to cover the
building. However, your personal possessions will not be covered by that policy. It is
relatively inexpensive to purchase a renter's insurance policy to protect against any loss
or damage to your individual property. These policies also may include protection from
liability for any damage you may have caused as a result (i.e., a kitchen fire). Usually,
insurance carriers will offer a discount on your auto policy if you have a renter's policy.
You should consider shopping the different carriers of insurance to see if they offer a
multi-policy discount.

Make sure to ask for any discounts that might be available if your residence has safety
features. These include burglar alarms, fire alarms, fire extinguishers, and/or deadbolts
on exterior doors.

AUTOMOBILE INSURANCE

Liability insurance is a legal requirement to operate an automobile in almost all states.

Following are two categories of insurance coverage:

MAT 107 STUDY GUIDE – Insurance and Risk Management 7

Bodily injury. Covers legal expenses, medical expenses, lost wages, etc., for injuries
caused by an accident you are responsible for. Bodily injury coverage pays the cost of
injury to others. You are not covered. Injuries to you would be covered by PIP (Personal
Injury Protection) and then referred to your medical insurance.

Personal property. Coverage includes property damage liability, collision, and

comprehensive physical damage. Property damage coverage protects against loss when
you damage another vehicle or other property. Collision covers your vehicle no matter
who is at fault, and then your insurance company collects from the other driver's insurance
if it is their fault. Comprehensive physical damage protects your vehicle from fire, theft,
glass breakage, falling objects, vandalism, wind, hail, flood, tornado, lightning,
earthquake, avalanche, or collision with an animal.

The following definitions will help you analyze your needs and what is being offered as
you seek coverage. These terms come from the Rocky Mountain Insurance Information
Association, with additional terms found at the website listed below. [5]

Term Explanation

Automobile Liability Protection in case others hold you legally responsible for
Insurance bodily injury and/or damage to property losses incurred from
a motor vehicle accident. In other words, coverage if you
cause an accident where there is either physical or property
damage to other people. This general term covers bodily
injury (BI) liability and property damage (PD) liability.

Bodily Injury Liability BI pays for injuries to other people in their car and your
passengers when the insured vehicle’s driver is legally at
fault. Bodily injury liability coverage can protect your home
and other assets if a driver or passenger sues you following
an accident.

Collision Coverage Optional coverage for car damage due to impact with
another object (for example, a rollover). It also can come into
play if you hit a pothole that severely damages your car. This
insurance applies only to your car. It does not cover
whatever the car collided with (that is what your property
damage liability is for).

MAT 107 STUDY GUIDE – Insurance and Risk Management 8

 Comprehensive Optional coverage for when your car is stolen or damaged in
Coverage ways that do not involve a collision. Examples include hail
damage, glass breakage, fire, vandalism, damage from an
animal, flood, earthquakes, falling objects, and theft.

No-Fault Insurance In theory, the system is supposed to discourage lawsuits by

allowing policyholders to recover financial losses from their
own insurance company without proving that anyone is at
fault in an accident. Motorists may only sue for injuries and
pain and suffering if their case meets certain minimum
conditions.

PIP (Personal Injury Based on coverage purchased, it covers the basic medical
Protection) needs of the driver when the driver is at fault in an accident.
$3,000 of coverage is required in the state of Utah.

Property Damage This coverage is for when you damage someone else's
Liability property with your vehicle. Usually, it is someone's car, but
it can apply to other properties such as buildings, utility
poles, fences, and garage doors.

Uninsured/Underinsured Insured motorists concerned about being in an accident with

Motorist Coverage an uninsured motorist can purchase this optional coverage
to ensure their losses are covered. There is a high
percentage of drivers who do not have auto insurance. It is
required in the state of Utah to waive this coverage if you
choose not to cover your vehicle against the uninsured.
Your insurance carrier recommends this coverage.

©Rocky Mountain Insurance Information Association. Used with permission for

educational purposes only.

Suppose you have considerable assets to protect from a possible lawsuit. In that case,
you may also want to consider buying an umbrella insurance policy, which can increase
the liability coverage on both your auto and homeowners' insurance policies to $1 million
or more.

Automobile liability coverage is limited based on the amount of protection you choose to
buy, with each state specifying a minimum limit. An example of how coverage is quoted
is as follows:

100 / 300 / 50

MAT 107 STUDY GUIDE – Insurance and Risk Management 9

The first number represents a $100,000 limit for payments to a one-person bodily injury
in an accident. The second number limits the total amount to $300,000 in payments to all
persons for bodily injury in an accident. The third number limits payment to $50,000 for
property damage to others' property. All this coverage is if you are liable for the accident.
These limits only apply to the other person’s personal and property injuries.

To simplify the calculations for this class, we will make the following two assumptions:

1. If you are the driver at fault, none of your medical bills are covered with your
automobile insurance. You will need to use your medical insurance.
2. If you are the driver at fault, your expenses to repair your automobile are always
covered 100%, and it does not cost you anything out of pocket (unless there is a
deductible). The assumption is that you have collision coverage on your vehicle.

Following are key factors that determine the cost of automobile insurance:

Your age, sex, and marital status

• Type of vehicle you drive

• Your driving history (accidents and tickets)
• Coverage you select
• Geographic area in which you live
• Credit history

You can minimize your automobile insurance costs by:

• Shopping around
• Not owning a red sports car
• Being a good driver and a good student
• Being over 25 years old and married
• Living in a less populous area

HEALTH INSURANCE

Since 2019, health insurance is no longer mandatory (unlike auto insurance), but it is still
wise to get coverage. A significant problem in the United States is the number of people
without health insurance. The cost of healthcare and the risk of major medical expenses
are too great to be ignored and can be financially devastating. Financial independence
requires adequate health coverage.

MAT 107 STUDY GUIDE – Insurance and Risk Management 10

This risk can and should be reduced by living a healthy lifestyle. Following is a significant
prescription for healthy living:

1. Eat a healthy, balanced, low-fat diet, and keep your weight under control.
2. Exercise regularly.
3. Live the Word of Wisdom.
4. Get sufficient rest and relaxation.
5. Drive carefully and avoid hazardous activities and circumstances.
6. Pray, attend church, and serve others.

Health insurance plans generally include the following:

Deductible amount The amount you must pay in medical bills before your health
coverage begins. For example, you may have to pay the first
$500 per person before the policy benefits start.

Coinsurance The percentage of medical bills you are required to pay

beyond the deductible. An example is 80 percent coverage,
where you pay the 20 percent not covered.

Co-payment The flat amount you pay each time you receive medical
services. For example, this could be $20 per doctor visit or $15
per prescription.

Stop-loss provision Requires the insurance company to pay 100 percent of all
medical bills once you have paid a specified amount, such as
$5,000 in any one calendar year.

Group health insurance, generally available through your employment or school, is the
least expensive alternative. One of the advantages of working for a large corporation is
the health benefits provided. Their group plan is usually very affordable while providing
excellent benefits. Smaller companies struggle to provide the same types of benefits
because of the cost.

Individual health insurance is a more expensive alternative and usually requires some
type of health review to qualify. These types of individual policies may be unavailable or
available only at a remarkably high premium for those with chronic health problems. There
are also various government programs designed to assist those who cannot get adequate
coverage. Some factors that prevent obtaining coverage are low income, age, and

MAT 107 STUDY GUIDE – Insurance and Risk Management 11

disabilities. Ideally, you would have a health insurance plan that would provide at least
the following:

• Cover at least 80 percent of your hospital and doctor bills.

• Limit your out-of-pocket expenses to no more than $5,000 per year.
• Provide a $1 million lifetime maximum per family member over all reasonable
conditions.

DISABILITY INSURANCE

Other important risks worth considering are accidents or health-related illnesses that
prevent an individual from working and providing income for themselves or their families.
To be financially independent, you need to be insured for loss of income. This can be
accomplished by having short-term and/or long-term disability insurance.

You can buy private disability insurance or participate in a group plan if your employer
offers it. Most disability policies are designed to replace 45-60% of your gross income on
a tax-free basis in the event of your inability to work. This can happen in a short-term
illness or situation (like an injury, surgery, or parental leave) or in a long-term situation
that can keep you from working for years (like cancer, back pain, or mental illness). Short-
term disability insurance is designed to pay you for several weeks or months, and the
payout begins almost immediately. Long-term disability insurance often does not begin
until 3-6 months after the medical situation happens, but it is designed to pay you benefits
for several years.

As an employee, you automatically have some disability coverage from Social Security
and Worker’s Compensation, but you should consider additional coverage. Based on your
salary and the number of years you have worked, you qualify for benefits from Social
Security after being disabled and unable to work for a year. If your illness or injury is work-
related, you may qualify for worker's compensation benefits based on salary and work
history.

While the insurance industry does not agree with the statistics on an average person
sustaining an injury or an illness that will keep them off the job for a lengthy period, most
agree that most adults living in the United States do not have enough coverage. Your
occupation, general health, outside hobbies, and interest will all play a factor in the
probability of you needing this insurance. However, most financial planners will agree that
this insurance should be considered based on your circumstances.

MAT 107 STUDY GUIDE – Insurance and Risk Management 12

LIFE INSURANCE

There are two life or death risks that you face and should manage. First, you might live
too long, or second, you might die too soon. The greater risk of living too long requires
that you plan and provide for your retirement. The risk of dying too soon can be transferred
to an insurance company with the purchase of life insurance.

You purchase life insurance to provide for those who depend on you and who would suffer
a financial loss if you were to die. Another reason for living providently is that it can help
reduce the need for the amount of life insurance required and therefore lower your
insurance costs. For example, those with little or no debt might require less life insurance
than those with significant debt. Your need for life insurance coverage is based on your
responsibilities to a spouse, children, parents, business partners, or others who would be
financially affected by your absence. Such dependents are designated as beneficiaries.
Beneficiaries will receive the proceeds of the insurance in the event of your death.

The following table shows 4 of the most common methods identified as "general
guidelines" for determining your life insurance needs. A more comprehensive approach
to estimating life insurance need is considering funeral costs, existing debt, an emergency
fund, and a college fund.

The amount of life insurance that you need can be determined in several ways, including:

Guideline A general rule suggested by some life insurance companies is

$10,000 of coverage for every $1,000 of annual income.

This means that if you have a $50,000 income, you should

have $500,000 in insurance (50*$1,000).

Easy Method Based on the assumption, your family will need 70 percent of
your salary for seven years to make the financial adjustment
brought on by your death. A simple way to approximate this
number is to multiply your gross income by 5 (70% * 7 years =
4.9, which is rounded to 5)

For example, approx. $250,000 of insurance is required for a

$50,000 wage earner as follows:

($50,000) (5) = ($250,000)

(Gross income) (70% x 7) = (Insurance needed)

MAT 107 STUDY GUIDE – Insurance and Risk Management 13

 The estimates in 1 and 2 above are for a "typical family" of
husband, wife, and two children and should be adjusted based
on your responsibilities.

DINK Method For a dual-income couple with no dependents, insurance needs

can be more easily estimated. Calculate the % of each spouses'
(Dual Income No income of the total household income. Multiply this % times the
Kids) total debt of the couple and then add the funeral expenses. This
provides the insurance needed for each spouse. This illustration
assumes that one spouse earns 60% of the total income and is
illustrated as follows:

Category Spouse #1 (60%) Spouse #2 (40%)

Funeral $10,000 $10,000

Expenses

Mortgage of $90,000 $60,000

$150,000

Other debt of $12,000 $8,000

$20,000

Total Insurance $112,000 $78,000

needed

Non-working This method estimates that $10,000 per year would be

Spouse Method required to provide homemaker services while children are
young. An estimate of the life insurance needs of a stay-at-
home mother or father can be determined by multiplying
$10,000 by the number of years until the youngest child
reaches age 18.

For example, you would need $100,000 of coverage if your

youngest child was eight years old, calculated as follows:

10 years (18 – 8) x $10,000 = $100,000

Total living expenses are estimated and adjusted for social security benefits and the
anticipated income of the surviving spouse. The amount of coverage required is then
determined based on the investment income generated by insurance proceeds, plus the
available investment assets. Every insurance agent will be able to help you with these

MAT 107 STUDY GUIDE – Insurance and Risk Management 14

calculations. In addition, the internet has numerous "Insurance Needs Calculators" that
you can use to determine your insurance needs based on your circumstances.

There are many alternative forms of life insurance from which to choose. The following
are just a few examples of the different types of insurance available.

Type of Life Explanation

Insurance

Term life insurance This is temporary or rented insurance, which provides coverage
only for the term of the policy. The risk of dying is covered by
term life insurance, but it is less expensive than whole life. A
good financial management strategy is to buy term insurance
and invest the difference at a higher rate than would be paid by
the whole-life policy. This requires personal discipline.

Whole life Whole life insurance is permanent or owned insurance. The

insurance essential difference is cash value which is included in whole-
life (but not in term) and provides an increasing "equity" that
can be included in a policyholder's net worth.
When the cash value equals the death benefit, you can stop
paying the premium, or the death benefit will increase. Whole
life insurance addresses both the risk of dying too soon or living
too long. The cash value of a whole life policy can be borrowed
to cover expenses. However, when you die, the death benefit
is reduced by the outstanding loans, plus interest.

Variable Universal This is a relatively recent type of whole-life insurance. It

life insurance provides for term insurance with a separate investment fund.
The separate investment fund can be invested in a variety of
mutual funds and other investments. The policy can also be
adjusted to change the amount of coverage and the amount of
the premium. Note that the policyholder assumes the risk of the
investment return in a variable life policy. The rate of return is
guaranteed at a minimum level in more conventional types of
whole-life insurance. Variable life insurance can be purchased
separately from universal life insurance. Variable life has the
investment management options, while universal life has the
premium and benefit adjustment option.

MAT 107 STUDY GUIDE – Insurance and Risk Management 15

 Endowment life Pays a death benefit to the beneficiary for a specified number
insurance of years if you die within that period. If you live, it pays you the
same amount during your retirement.

Group life Is frequently available through your employer. This is term

insurance insurance. It may be a viable alternative to a private policy, but
premium rates should be compared to assure the best price. It
also stops if you change employment.

Credit life It covers personal debt in the event you die before the loan is
insurance repaid. It is expensive, and this risk can generally be covered
at a lower cost through a decreasing term policy.

LONG-TERM CARE INSURANCE

A fast-growing segment of the insurance industry is for the needs of those who can no
longer take care of themselves due to age and/or extended illness. Life expectancy has
significantly increased over the past several years. As life expectancy grows, there is an
increased need for the care of the elderly. Another factor in this growth is the change in
fertility rates. Families are smaller than they used to be.

While this type of insurance is relatively expensive, you can find a range of coverage from
part-time assistance in your own home up in coverage to full-time complete assistance in
a specialized facility. The costs for a typical nursing home run several thousand dollars
per month. Since many people who enter a nursing home can stay there for years, it can
quickly deplete any retirement assets. It is estimated that this type of insurance coverage
will become increasingly common in the coming years.

There are two basic types of insurance companies – mutual and stock companies. The
policyholders own a mutual company while stockholders own the stock company. This is
similar to the difference between a credit union (owned by depositors) and a bank (owned
by stockholders).

Purchase insurance to cover only the reasonable risks that could impact your financial
independence. You should always use an experienced and reputable agent who
represents highly rated and reputable insurance companies. Make sure you fully
understand the provisions of the policy. It is always wise to compare companies and
policies before making your purchase decision.

You will pay a significant percentage of your income in insurance premiums – next only
to taxes, housing, transportation, and food – so you will want to know you are receiving
good value for your insurance expenditures.

MAT 107 STUDY GUIDE – Insurance and Risk Management 16

PREPARE FOR DISCUSSION

1. What does self-insure mean? When might you self-insure?

2. What do co-insure, co-pay, and deductible mean? Give some examples.
3. Why are speculative risks not insurable? Why are pure risks insurable?
4. What is insurable interest? Why must you have an insurable interest to get an
insurance policy?
5. What is indemnity?
6. Are proceeds from insurance taxable? What is a personal property floater?
7. Do insurance companies pay when you are negligent (you run a red light and crash
into someone)?
8. What is an uninsured motorist?
9. What questions should you ask to make sure that you and your family get adequate
health insurance?
10. What should you know about your auto policy?
11. If a fire destroys your home, how will you prove what items were destroyed and their
value?

ADDITIONAL RESOURCES & SUGGESTED READINGS

Videos

1. Understanding your Health Insurance Costs (4:54) by Consumer Reports

2. Car Insurance Explained – 101 (13;19) by Think Insurance
3. Term vs. Whole Life Insurance (Life Insurance Explained) (16:15) by Marko –
WhiteBoard Finance

Readings

How U.S. Health Insurance Works, by Stanford University.

How Health Insurance Works, by the University of Wisconsin-Madison.

How does life insurance work? By Ashley Kilroy & Jason Metz (Forbes Advisor)

Life insurance guide to policies and companies by Amy Fontinelle (Investopedia)

Auto insurance basics—understanding your coverage by The Insurance Information

Institute.

MAT 107 STUDY GUIDE – Insurance and Risk Management 17

GLOSSARY
Insurance: Insurance is a contract, represented by a policy, in which an individual or
entity receives financial protection or reimbursement against losses from an insurance
company. [3]

Liability: A liability is something a person or company owes, usually a sum of money.

Liabilities are settled over time through the transfer of economic benefits including
money, goods, or services. [1]

Risk: Risk is defined in financial terms as the chance that an outcome or investment's
actual gains will differ from an expected outcome or return. Risk includes the possibility
of losing some or all of an original investment. [2]

REFERENCES FOR COMPENDIUM

[1] Adam Hayes, Liability Definition, Investopedia, New York, 2021.

[2] James Chen, Risk, Investopedia, New York, 2021.

[3] Julia Kagan, Insurance, Investopedia, New York, 2021.

[4] Kenneth L. DuVall, Financial Independence: Lifelong Financial Strategies, LDS

Business College, Salt Lake City, 1998.

[5] Rocky Mountain Insurance Information Association, Auto Insurance Glossary of

Terms, Rocky Mountain Insurance Information Association, Parker, n.d.

MAT 107 STUDY GUIDE – Insurance and Risk Management 18