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MBA572 Financial Planning and Insurance

Assignment 10

Required Readings:

Book 1 (R. Frasca): Chapter 13. Book 2 (Gitman): Chapters 13.

Knowledge Points:

1. Auto insurance, homeowner’s insurance and medical insurance.

Case Study:

John Conner is a 33-year old man working as a computer engineer. He bought his single house 8 years ago in 2004 for $150,000 and has been living in it since. The house value was once at its height of $400,000 but is now $300,000 after crumbling down for the last two years. The current construction cost for a similar house is $200,000.

Throughout the years, Conner has been adding things such as appliances, computers, furnitures, antique arts to the house. The values are $2,000 for all appliances, $2,000 for computers and softwares, $3,000 for furnitures, and $10,000 for antique arts.

Conner drives a 2010 Pontiac GXP with a price tag at $29,800. His policy details are as follows:

TYPE LIMIT DEDUCTIBLE BODILY INJURY LIABILITY EA. PERSON/EA. OCCURRENCE $50,000/$100,000

PROPERTY DAMAGE LIABILITY $25,000 COLLISION $300,000 $1,000 DED

UNINSURED MOTORISTS BODILY INJURY $50,000/$100,000 PROPERTY DAMAGE $25,000

COMPREHENSIVE $100,000 $1,000 DED

Conner has a comprehensive homeowner’s insurance policy covering risks of hazards, crimes and liability. Details are in the following table. The policy also has deductibles that help bring down Conner’s homeowner’s insurance premium from $489 to $465.

TYPE LIMIT DEDUCTIBLE STRUCTURE $250,000 $1,000

PERSONAL PROPERTY PROTECTION $25,000 $1,000 LIABILITY PROTECTION $50,000/$10,000

GUEST MEDICAL PROTECTION 5,000 PER PERSON

Last week, Conner invited friends over to his house for party. At midnight, a lightening set the house on fire and destroyed the entire house. He and a friend also had minor injury and were rushed to hospital for emergency care and physical examination. The hospital bills were $4,000 for him and $3,000 for his friend.

He had to move to his parent’s house temporarily. Although he knew the insurance would cover much of the damages, he was still very uneasy about it and kept thinking about it. Yesterday, he was scheduled to meet an insurance agent from his homeowner’s insurance company, but he had a car accident on his way. It was not his fault though. The other car missed a red light at an intersection and struck his car on the passenger’s side. Conner exchanged the driver’s insurance card and found that they had the same insurance coverages and deductibles.

The car was towed to a mechanic shop and it needed replacements of the frond door on the passenger’s side, a tire and the front bumper. The tow fee was $75, and the body work was $3,725. The other’s car also

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was towed for repair, and the costs were: tow fee $75, and the body work is $1,725. Last night, Conner felt a strong headache caused by the car accident and went to hospital for treatment. He stayed in the hospital over night and the doctor prescribed some medicine after that. The bill was $5,250 for the stay and body check and $50 for the medicine.

Conner is in a No-fault-insurance state.

Questions

1. How much will Conner’s homeowner insurance cover the damage to the house based on the building structure replacement cost method?

(a) $200,000

(b) $250,000

(c) $199,000

(d) $300,000

2. How much will the homeowner insurance cover Conner and his friend?

(a) Conner only, $4,000

(b) Conner’s friend only, $3,000

(c) both Conner and his friend, $7,000

(d) Up to maximum coverage, $5,000

3. Which insurance will pay Conner for cost of the car accident initially?

(a) Conner’s insurance

(b) The other driver’s insurance

4. How much will insurance cover Conner for cost of the car accident, both car damages and hospital costs?

(a) Initially, Conner’s insurance will pay for the costs less deductibles.

(b) Conner’s insurance will pay for the full costs.

5. Whose insurance company (companies) will eventually pay for the accident? How much in total for both cars and hospital bills?

(a) Eventually, the other driver’s insurance will cover Conner for car damage and hospital care in full, $9,100.

(b) Eventually, the other driver’s insurance will pay for the full cost less deductibles of car damage and hospital care for Conner and the driver, $8,900.

(c) Eventually, the other driver’s insurance will cover the full costs for Conner and total less de- ductibles for the driver, $9,900.

(d) Eventually, the other driver’s insurance will cover the full costs for Conner and the driver, $10,900.

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