Chapter 8 Solutions
PROBLEMS (p. 277)
1.Most home insurance policies cover jewelry for $1,000 and silverware for $2,500 unless items are covered with additional insurance. If a family had $3,500 of jewelry and $3,800 of silverware stolen, what amount of the claim would not be covered by insurance?
($3,500 - $1,000) + ($3,800 - $2,500) = $3,800
2.What amount would a person with actual cash value (ACV) coverage receive for two-year-old furniture destroyed by a fire? The furniture would cost $1,000 to replace today and had an estimated life of five years.
$1,000 - [($1,000 = 5) 2] = $600
3.What would it cost an insurance company to replace a family’s personal property that originally cost $18,000? The replacement costs for the items have increased 15 percent.
$18,000 1.15 = $20,700
4.If Carissa Dalton has a $130,000 home insured for $100,000, based on the 80 percent coinsurance provision, how much would the insurance company pay on a $5,000 claim?
$4,807.96 = ($100,000/$104,000 $5,000)
5.For each of the following situations, what amount would the insurance company pay?
a.Wind damage of $785; the insured has $500 deductible.
$285 = $785 - $500
b.Theft of a stereo system worth $1,300; the insured has a $250 deductible.
$1,050 = $1,300 - $250
c.Vandalism that does $375 of damage to a home; the insured has a $500 deductible.
Zero; deductible exceeds loss.
6.Becky Fenton has 25/50/10 automobile insurance coverage. If two other people are awarded $35,000 each for injuries in an auto accident in which the insured was judged at fault, how much of this judgement would insurance cover?
The maximum amount the insurance company would pay is $50,000 for all claims in an accident.
7.Kurt Simmons has 50/100/15 auto insurance coverage. One evening he lost control of his vehicle hitting a parked car and damaging a store front along the street. Damage to the parked car was $5,400 and damage to the store was $12,650. What amount will the insurance company pay for the damages? What amount will Kurt have to pay?
The insurance company will pay $15,000 (policy limit); Kurt will be liable for $3,050.
8.Beverly and Kyle Nelson currently insure their cars with separate companies paying $450 and $375 a year. If they insure both cars with the same company, they would save 10 percent on the annual premiums. What would be the future value of the annual savings over ten years based on an annual interest rate of 6 percent?
($450 + $375) .10 = $82.50 13.181 (FVA 6%, 10 years) = $1,047.43
9. When Carolina's house burned down, she lost household items worth a total of
$25,000. Her house was insured for $80,000 and her homeowners' policy
provides coverage for personal belongings up to 55 percent of the insured value
of the house. Calculate how much insurance coverage Carolina's policy provides
for her personal possessions and whether she will receive payment for all of the
items destroyed in the fire.
Multiply the insured value of the house ($80,000) by the percentage of the coverage (55 percent) that is:
$80,000 x .55 = $44,000
Because the value of the lost items was $25,000, Carolina will receive payment for all of the items destroyed by fire.
10. Matt and Kristin are newly married and living in their first house. The yearly premium on their homeowners insurance policy is $450 for the coverage they need. Their insurance company offers a 5% discount ifthey install deadbolt locks on all exterior doors. The couple can also receive a 2% discount if they install smoke detectors on each floor. They have contacted a locksmith, who will provide and install deadbolt locks on the two exterior doors for $60 each. At the local hardware store, smoke detectors cost $8 each, and the new house has two floors. Kristin and Matt can install them themselves.
What discount will Matt and Kristin receive if they install the deadbolts? If they install
smoke detectors?
$450 x .05 = $22.50 for the deadbolts
$450 x .02 = $9 for the smoke detectors
11.In the preceding example, assuming their insurance rates remain the same, how many years will it take Matt and Kristin to earn back in discounts the cost of the deadbolts?
$120 ÷ $22.50 = 5.33 years
The cost of the smoke detectors?
$16 ÷ $9 = 1.77 years
Would you recommend Matt and Kristin invest in the safety items? Why or why not?
Yes, they should invest in the safety items, especially if they plan to live in that house for about 5 years. Even if they do not live there for 5 years they should invest this amount for their safety and peace of mind.