Home Insurance Basics: Replacement Cost vs. ACV

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Questions and Answers

What does Replacement Cost not take into account when settling a claim?

Original purchase price

Depreciation and wear-and-tear (correct)

Replacement cost of similar items

Market value of the item

What is one key characteristic of Actual Cash Value in home insurance claims?

It accounts for depreciation and obsolescence. (correct)

It does not consider depreciation.

It only applies to furniture losses.

It reimburses full replacement cost.

Which of these steps should be taken first after experiencing an insured loss?

Begin repairs on the damaged property.

Check for uninsurable perils.

Contact the police immediately.

Notify the insurer as soon as possible. (correct)

What action can an insurer take if a third party is responsible for the insured's loss?

Utilize subrogation to recover damages. Signup and view all the answers

What type of expenses are often covered when a home becomes unfit to live in?

Additional living expenses Signup and view all the answers

Which of the following is typically considered an uninsurable peril?

Insect or rodent infestation Signup and view all the answers

How is lost net rental income typically treated in home insurance policies?

It is included when the residence is damaged. Signup and view all the answers

What is a common requirement for reimbursement under Replacement Cost policies?

The lost item must be replaced with a similar item. Signup and view all the answers

Under what circumstances is it necessary to report an automobile accident to the insurance carrier?

If the insured plans to claim benefits or if required by law Signup and view all the answers

What does comprehensive home insurance typically cover?

All risks except those specifically excluded Signup and view all the answers

What type of home insurance provides named-peril coverage for contents?

Broad policy Signup and view all the answers

What may an insurer request if vehicle repairs lead to significant improvement post-accident?

A contribution towards the cost of betterment Signup and view all the answers

Which type of home insurance is referred to as a minimal insurance plan for properties not meeting normal standards?

No-frills insurance Signup and view all the answers

What does comprehensive insurance cover?

Loss or damage from fire, theft, or vandalism Signup and view all the answers

Which of the following can be a feature of an automobile insurance policy?

Loss of Use Signup and view all the answers

Which factor affects automobile insurance premiums based on the driver's profile?

Driving experience and record Signup and view all the answers

When assessing vehicle-specific factors for insurance premiums, which of the following is considered?

Total value of the vehicle Signup and view all the answers

How does geographic location affect automobile insurance premiums?

Urban areas typically result in higher premiums Signup and view all the answers

What is 'waiver of depreciation' in automobile insurance?

A feature that guarantees full cash value at the time of loss Signup and view all the answers

What type of automobile insurance covers specific named perils?

Specified perils insurance Signup and view all the answers

Which of the following components is crucial for determining the cost of an insurance policy?

Insurance Deductible Signup and view all the answers

What is the definition of 'preferred premiums' in insurance?

Reduced premiums for individuals with superior personal risk profiles Signup and view all the answers

Which factors are considered in the underwriting process?

Current health, family health history, character, and occupation Signup and view all the answers

What can happen if a person's occupation presents a higher risk?

The insurance carrier may adjust the premium or deem the risk uninsurable Signup and view all the answers

What is the purpose of a rider in an insurance policy?

To increase the features and benefits of the basic policy Signup and view all the answers

Which of the following best describes the 'face amount' of a life insurance policy?

The amount paid to beneficiaries upon the death of the insured Signup and view all the answers

What does the 'adjusted cost basis' (ACB) refer to in life insurance?

Total premiums paid minus net cost of pure insurance Signup and view all the answers

Which of the following is NOT a type of insurance rider?

Comprehensive Coverage Signup and view all the answers

Who is identified as the beneficiary in a life insurance policy?

The individual receiving the death benefit Signup and view all the answers

What is the primary purpose of an Exempt Policy?

To offer life insurance protection Signup and view all the answers

What distinguishes a Non-Exempt Policy from an Exempt Policy?

It is treated as an investment and taxed annually Signup and view all the answers

Which insurance product is specifically designed for temporary needs?

Term insurance Signup and view all the answers

What is meant by 'living benefit' in life insurance?

A pre-payment of death benefit for terminally ill insured Signup and view all the answers

What determines the expiry of a term life insurance policy?

The age specified in the contract Signup and view all the answers

Which of the following is NOT a common form of term insurance?

Whole life insurance Signup and view all the answers

How can term insurance be structured in terms of coverage?

It can have either fixed or decreasing levels of coverage Signup and view all the answers

A common feature of a renewable term insurance policy is that it allows for?

Renewal at the end of each term Signup and view all the answers

What is the focus of permanent insurance?

Insurance that lasts for a lifetime Signup and view all the answers

What characteristic of term insurance can vary in length?

The coverage period specified in the contract Signup and view all the answers

Study Notes

Replacement Cost vs. Actual Cash Value

Home insurance policyholders typically have the option to choose between replacement cost and actual cash value for loss reimbursement.
Replacement Cost: Reimbursement is based on the current cost of replacing the damaged item, without accounting for depreciation, age, or wear and tear.
Actual Cash Value: Reimbursement is based on the item's current market value, taking into account depreciation and other factors.

Claims

Contact your insurer immediately after an insured loss.
If the loss involves burglary, robbery, or theft, report it to the police.
Insurers can use "subrogation" to sue a third party responsible for the loss to recover their payments.

Additional Living Expenses

Home insurance policies typically cover additional living expenses when the insured's home is uninhabitable due to a covered peril.
Policies also cover lost rental income for tenants forced to vacate due to damage to the insured residence.

Uninsurable Perils

Home insurance primarily protects against unforeseen and sudden events.
Damage caused by insects, rodents, or floods is typically not covered.

Comprehensive Automobile Insurance

This policy covers losses or damages to an insured automobile resulting from various events, including fire, theft, vandalism, or glass breakage.
Collision insurance is typically not included.

Other Automobile Insurance Variations

Common variations include "all perils" and "specified perils" coverage.

Automobile Insurance Features

Features like "waiver of depreciation" and "loss of use" coverage (rental car reimbursement) can be incorporated into an automobile insurance policy.

Automobile Insurance Premiums

Premiums are determined based on risk factors associated with the specific policyholder and vehicle.

Driver Factors Affecting Premiums

Policyholder's geographic location.
Driving region (urban areas generally have higher premiums).
Driving experience, record, age, sex, and marital status.
Vehicle usage (pleasure vs. commuting).

Vehicle Factors Affecting Premiums

Total value of the vehicle.
Repair or replacement cost.
Vehicle type, make, and model (sporty cars may lead to higher premiums).

Automobile Insurance Policy Design

The design of an automobile insurance policy impacts the overall cost.
Key components include:
- Insurance deductible.
- Liability coverage.
- Collision coverage.

Automobile Insurance Claims

Report any automobile accidents to the insurer if:
- A claim will be filed.
- The accident is legally required to be reported to the police.
Notification timelines apply to reporting accidents and claim payments.

Home Insurance

Although not mandatory, home insurance covers the building and its contents.

Home Insurance Policy Types

Policies are generally bundled into predefined packages:
- Comprehensive: Covers both building and contents for all risks, except those explicitly excluded.
- Basic/Named Perils: Covers only perils specifically named in the policy.
- Broad: Provides "all perils" coverage for the building and named-peril coverage for the contents.
- No-Frills: A minimal insurance plan for properties that don't meet standard underwriting standards.

Preferred Rates for Home Insurance

Some insurance carriers offer preferred rates for policyholders with lower risk profiles.

Underwriting Process

Health: The life insured's current health, health history, and family health history are considered.
Character and Occupation: These factors influence underwriting decisions.
- Occupation: Higher-risk occupations may lead to premium adjustments.
- Character: A history of risky behavior (e.g., speeding) may impact acceptance and pricing.

Riders

Riders are optional additions to basic insurance policies, enhancing coverage.
Common riders include:
- Waiver of Premium.
- Accidental Death and Dismemberment.
- Guaranteed Insurability.
- Cost of Living.
- Term Riders (additional term insurance on top of permanent insurance).

Life Insurance Terminology

Face Amount: The stated amount payable upon the death of the insured.
Beneficiary: The individual named to receive the life insurance proceeds.
Adjusted Cost Basis (ACB): The sum of premiums paid minus the net cost of pure insurance.

Exempt and Non-Exempt Policies

Exempt Policy: Designed for life insurance protection, allowing tax-free growth until termination.
Non-Exempt Policy: Not considered primarily for life insurance, treated as an investment and taxed annually.

Temporary vs. Permanent Life Insurance

Temporary (Term) Insurance: Provides coverage for a defined period, suitable for short-term needs.
Permanent Insurance: Provides lifetime coverage, examples include whole life, universal life, and term-to-100.

Living Benefits

Some insurance carriers offer "living benefits" to terminally ill policyholders, allowing partial pre-payment of the death benefit.
Advance payments act as loans against the death benefit.

Term Life Insurance

Provides coverage for a limited time period.
Contracts typically expire at a specified age (e.g., 65, 70, 75, or 85).
Designed for temporary needs when permanent life insurance isn't required.
Various term insurance products exist, some expiring after a specific term and others with renewal options.

Term Life Insurance Benefit Amount

Coverage can be fixed throughout the term or decreasing, like insurance designed to cover a mortgage.

Renewable Term Life Insurance

Common types:
- One-year annual renewable term.
- Five-year, 10-year, and 20-year term insurance.
- Term to age 65, where the premium is fixed until the end of the term.
Many term insurance products allow renewal at the end of each term, up to a maximum age.

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Description

Explore the critical differences between replacement cost and actual cash value in home insurance. This quiz will help you understand how reimbursement options and additional living expenses work in the context of claims. Perfect for policyholders looking to make informed decisions about their insurance coverage.