21

Conceptual Questions

A1: Insurance helps transfer financial risk from an individual to an insurance company in exchange for regular payments (premiums). Its purpose is to protect against potentially devastating financial losses due to unexpected events like illness, accidents, or theft.

A2: A premium is the regular amount you pay (monthly or annually) to maintain insurance coverage. A deductible is the amount you must pay out of pocket before the insurance company begins to pay its share of a claim.

A3: Liability insurance covers costs if you are at fault in an accident and damage someone else’s property or injure someone. Comprehensive insurance covers damage to your own vehicle from non-collision events like theft, weather, or vandalism.

A4:

• • HMO (Health Maintenance Organization): Requires you to use in-network providers and get referrals for specialists, usually cheaper.
  • PPO (Preferred Provider Organization): Offers more flexibility in choosing providers without referrals, but often comes with higher premiums.

A5: Actual cash value (ACV) reimburses you based on the depreciated value of the item lost. Replacement cost reimburses you for the amount needed to replace the item at current market prices, without considering depreciation.

A6: It sets a limit on how much you’ll have to pay in a year for covered services. Once you hit that maximum (through deductibles, copays, and coinsurance), the insurance company pays 100% of your remaining covered costs for the rest of the year.

A7: Life insurance is necessary when others rely on your income (e.g., children, spouse). For young adults, term life insurance is usually the best option because it’s affordable and provides coverage for a specific period.

Scenario-Based

Kevin’s Case

A1: He assumed his credit card’s insurance would cover collision damage, when it only covered theft.
A2: He could have reviewed his credit card’s insurance policy details or called the credit card provider to confirm what was covered.
A3: Always verify existing coverage ahead of time and consider short-term travel insurance to cover gaps, especially for high-cost risks like rental cars or medical emergencies.

Aisha’s Case

A1: She chose a low-premium plan with a very high deductible, which made her responsible for most healthcare costs upfront.
A2: She focused only on the monthly cost and didn’t consider how high the out-of-pocket expenses would be in case of a medical event.
A3: Evaluate both the premium and the deductible, and consider your health risk and ability to pay a large bill out of pocket before choosing a plan.

Mark’s Case

A1: He needed higher liability coverage—or an umbrella insurance policy—to cover large lawsuits.
A2: By increasing the liability limit on his homeowners policy or purchasing umbrella insurance.
A3: Major accidents at your home can lead to lawsuits, and inadequate liability coverage can put your savings and future income at risk.

Problem-Solving

Natalie’s Case

A1:

• Plan A: $4,200
• Plan B: $1,800

A2:

• Plan A: $3,200
• Plan B: $7,100

A3:

• Plan A total: $7,400
• Plan B total: $8,900
  → Plan A is cheaper by $1,500

Lena’s Case

A1: $400
A2: $1,200
A3: $800

Miguel’s Case

A1: $50,000
A2: $35,000
A3: Umbrella insurance — it provides additional liability protection beyond the limits of auto or home insurance policies.