Chapter 20

Life, Fire, and

Auto Insurance

McGraw-Hill/Irwin

2011 The McGraw-Hill Companies, All Rights Reserved

#20 Life, Fire, and Auto Insurance

Learning Unit Objectives
LU20.1 Life Insurance
1. Explain the types of life insurance;

calculate life insurance premiums

2. Explain and calculate cash value and

other nonforfeiture options

20-2

#20 Life, Fire, and Auto Insurance

Learning Unit Objectives
LU20.2

Fire Insurance
1. Explain and calculate premiums for fire

insurance of buildings and their contents

2. Calculate refunds when the insured and the

insurance company cancel fire insurance

3. Explain and calculate insurance loss when

coinsurance is not met

20-3

#20 Life, Fire, and Auto Insurance

Learning Unit Objectives
LU20.3 Auto Insurance
1. Explain and calculate the cost of auto

insurance

20-4

Life Insurance
Insured - The policyholder
receiving coverage

Beneficiary - The person receiving

the insurance proceeds at the death
of the insured

20-5

Premium - Periodic
payments you make for
the cost of the insurance
(determined by actuaries)

Face amount - The amount

received (proceeds) upon the
death of the insured

Steps in Calculating Annual

Life Insurance Premiums

Step 2. Divide the amount of coverage by

$1,000 and multiply the answer by the
premium cost per $1,000
Step 1. Look up the age of the insured and the
type of insurance in Table 20-1 (for females
subtract 3 years). This gives the premium cost
per $1,000
20-6

Table 20.1 - Life Insurance Rates

Age
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
20-7

Five-year
term
1.85
1.85
1.85
1.85
1.85
1.85
1.85
1.86
1.86
1.87
1.87
1.87
1.88
1.95
2.08
2.23
2.44
2.67
2.95
3.24
3.52

Age
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

Straight
life
5.90
6.13
6.35
6.60
6.85
7.13
7.43
7.75
8.08
8.46
8.85
9.27
9.71
10.20
10.71
11.26
11.84
12.46
13.12
13.81
14.54

Age
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

Twentypayment life
8.28
8.61
8.91
9.23
9.56
9.91
10.29
10.70
11.12
11.58
12.05
12.57
13.10
13.67
14.28
14.92
15.60
16.30
17.04
17.81
18.61

Age
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

Twenty-year
endowment
13.85
14.35
14.92
15.54
16.05
17.55
17.66
18.33
19.12
20.00
20.90
21.88
22.89
23.98
25.13
26.35
27.64
28.97
30.38
31.84
33.36

Calculating Insurance Premiums

Bob Brady, age 40, wants to purchase a 5 year $200,000
insurance policy. Determine her annual premium
$200,000 (Coverage) = 200
1,000

20-8

Step 1

Term Insurance -- Pays face amount only if

you die within the period of the the insurance.
The cheapest coverage. $200 x $3.52 = $704

Step 2

Straight Life (Ordinary Life) -- Provides permanent

protection. The insured pays the same premium each
year or until death. Has a built in cash savings feature.
$200 x $14.54 = $2,908

Step 2

Calculating Insurance Premiums

Twenty-Payment Life -- Similar to straight life
but insurer pays premiums for only the first 20
years. $200 x $18.61 = $3,722

Step 2

Twenty-Year Endowment -- Most expensive.

Combination of term and cash value. After 20
years your protection ends and you receive the
face value of the policy. $200 x $33.36 = $6,672

Step 2

Universal Life - A whole life insurance plan with

flexible premium schedules and death benefits.
Greater risk to the holder because premiums are
subject to interest rate fluctuations
20-9

Nonforfeiture Options - Figure 20.1

The value of an insurance policy that has built up cash value and provides
an opportunity for insurance coverage without additional premiums.
Option 1: Cash value (cash surrender value)
a. Receive cash value of policy.
b. Policy is terminated.
The longer the policy has been in effect the higher the cash value because
more premiums have been paid in.
Option 2: Reduced paid-up insurance
a. Cash value buys protection without paying new premiums.
b.

Face amount of policy is related to cash value buildup and age of insured.
The face amount is less than original policy.
c. Policy continues for life (at a reduced face amount).
Option 3: Extended term insurance
a. Original face amount of policy continues for a certain period of time.
b. Length of policy depends on cash value built up and on insureds age.
c. This option results automatically if policyholder doesnt pay premiums and
fails to elect another option.
20-10

Table 20.2 - Nonforfeiture Options based on

$1,000 Face Value
Years
insurance
policy in
force
5
10
15
20

20-11

Cash
value
29
96
148
265

Straight life
Amount of
Extended
paid-up
term
Insurance Years
Day
86
9
91
259
18
76
371
20
165
550
21
300

Cash
value
71
186
317
475

20-payment life
Amount of
Extended
paid-up
term
insurance Years
Day
220
19
190
521
28
195
781
32
176
1,000
Life

Cash
value
92
319
619
1,000

20-year endowment
Amount of
Extended
paid-up
term
insurance Years
Day
229
23
140
520
30
160
790
35
300
1,000
Life

Nonforfeiture Options
Assume Bob Brady purchased a 20-payment life
policy and decided to stop the policy after it was in
force for 10 years. What would be his options?
1. Cash Value
$200,000 = 200 x $148 = $29,600
$1,000
2. Reduce paid-up insurance

3. Extended term insurance

Continue this $200,000 policy
for 20 years and 165 days
20-12

$200,000 = 200 x $371 = $74,200

$1,000

Fire Insurance

Table 20.3 - Fire insurance rates per $100 of coverage

Classification of building
Class A
Class B
Rating
of area
1
2
3
20-13

Building
.28
.33
.41

Contents
.35
.47
.50

Building Contents
.41
.54
.50
.60
.61
.65

Calculating Fire Insurance Premiums

Premium = Insured value x Rate
$100
Calculate the premium of a building with an
insured value of $190,000 and a Class B, Area
No. 2 rating. Insured contents are $80,000.
Premium = $190,000 = 1,900 x $.50 = $950
$100
Premium = $80,000 = 800 x $.60 = $480
$100
Total Premium = $950 + 480 = 1,430
20-14

Table 20.4 - Fire Insurance short-rate

and cancellation table
Time policy is
in force
charged

Days

10
20
25
Months 1
2
3
4

20-15

Percent of annual rate Time policy is Percent of annual rate

to be charged
in force
to be

8%
10
15
17
19
27
35
44

Months

5
6
7
8
9
10
11
12

52%
61
67
74
81
87
96
100

Calculating What Insurance Company

Pays with Coinsurance Clause
The insured and the insurer share the risk. Encourages
property owners to purchase adequate coverage
Step 2. Multiply the fraction by the
amount of loss (up to the face value of
the policy)
Step 1. Set up a fraction. The numerator is the actual
amount of the insurance carried on the property. The
denominator is the amount of insurance you should be
carrying on the property to meet coinsurance (80%
times the replacement value)
20-16

Coinsurance
Suppose we carry $60,000 of fire insurance on
property that will cost $100,000 to replace. The
coinsurance clause is 80%. If we suffer a loss of
$20,000, how much will the insurance company pay?
Coverage

What you
should have
carried
$100,000 x .80
20-17

$60,000 x $20,000 = $15,000

$80,000

Loss

Auto Insurance
Liability Insurance (Compulsory Insurance) - Covers
any physical damages that you inflict on others or
their property. (Mandatory)

Bodily injury - injury

or death to people in
passenger car or
other cars, etc.
Property damage - injury
to other someone elses
property, i.e. autos, trees,
buildings, hydrants, etc.
20-18

Problem
Calculate the annual auto premium for
Shirley who lives in Territory 5, is a
driver classified 17, and has a car with
age 3 and symbol 4. Her state has
compulsory insurance, and Shirley wants
to add the following options:
1. Bodily injury, 250/500
2. Property damage 5M
3. Collision, $200 deductible

20-19

4.

Comprehensive, $200
deductible

5.

Substitute transportation

6.

Towing & Labor

Problem
Calculate the annual auto
premium for Julie Fox who lives
in Territory 5, is a driver classified
17, and has a car with age 3 and
symbol 4. Her state has
compulsory insurance, and Julie
wants to add the following
options:
1. Bodily injury, 250/500

Compulsory
Bodily
Property

$ 98
$160

(Table 20.5)
(Table 20.5)

$228
$168
$191

(Table 20.6)
(Table 20.7)
(Table 20.8)

Options
Bodily
Property
Collision

($148 + $43)

2. Property damage 5M
3. Collision, $200 deductible

Comprehensive $ 56

(Table 20.9)
($52 + 4)

4.

Comprehensive, $200
deductible

Substitute trans.

16

5.

Substitute transportation

Towing & Labor

6.

Towing & Labor

Total annual premium - $921

20-20