Why is automobile insurance sometimes referred to as a "packaged policy?" What are the parts of the package?
Before the 1950's, if you wanted to purchase all the coverage today’s auto insurance policy provides, you would have had to purchase at least four separate policies. Changes in the laws that regulate the sale of insurance now allow the insurance industry to sell policies that combine the separate parts into one all-encompassing policy. The main advantages of combining the parts are lower expenses, and therefore a lower cost to consumers, and the convenience of being able to purchase property, auto liability and other types of coverage in a single policy. Part A of an auto policy is liability coverage that protects you from lawsuits arising from either negligent operation or ownership of a covered automobile. There are two types of coverage in Part A - bodily injury liability (BIL) and property damage liability (PDL). BIL covers the bodily injury claims of people you negligently injure in an accident. PDL covers any third party property damage claims the courts determine you must pay. Part B provides medical payments to you and any other passengers in the car in an accident. Part C provides uninsured motorist and underinsured motorist protection for the policyowner. Both B and C are designed to compensate you when the negligent driver doesn’t have enough liability insurance under his/her policy. Typically, Part C covers only bodily injury losses, but property damage losses are included in some states. Part D covers damages to your car when it is involved in an accident.
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I have an older car whose current market value is very low - do I really need to purchase automobile insurance?
Most states have enacted compulsory insurance laws that require drivers to have at least some auto liability insurance (Part A). These laws were enacted to ensure that victims of accidents are compensated when their losses are caused by someone else being negligent. Except for the minimum liability you may be required to buy, many people with older cars decide not to purchase physical damage coverage. Often, the cost of repairing an older car is greater than its value. In these cases, your insurer will usually just "total" the car and give you a check for the car's market value less the deductible. Many people forgo the Part D coverage because of the relatively low value of their autos.
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Suppose I lend my car to a friend; is that covered under my auto insurance policy?
Whenever you knowingly loan your car to a friend or an associate, he or she will be covered under your policy. In fact, even if you don’t give explicit permission each time a person borrows your car, someone is still covered under your policy as long he or she had a reasonable belief that you would have given permission to borrow the car.
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What does my auto insurance policy cover when I rent a car?
The answer to this question is not simple. In the not-too-distant past, most auto insurance policies would extend coverage to rental cars whenever you rented one. This is not quite true anymore. In most cases, your personal auto insurance policy will cover only vacation car rentals. Many insurance companies no longer extend personal auto insurance coverage for business travel. Find out what rental car coverage you have under your policy is by calling your insurance agent/company.
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What is the difference between collision physical damage coverage and comprehensive physical damage coverage?
Both collision and comprehensive coverage are in Part D. Collision is defined as losses you incur when your auto collides with another car or object. For example, if you hit a car in a parking lot, damages to your car will be paid under your collision coverage. Comprehensive covers most other direct physical damage losses. For example, damage to your car from a hailstorm will be covered under comprehensive coverage. It’s important to know the differences between collision and comprehensive coverage to make an informed buying decision. Also keep in mind that your deductibles in these two categories are often different.
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What should I do if I have an accident?
Your responsibilities after you have an accident are proscribed both by state law and by your insurance contract. Obviously, the first thing you should do is be sure everyone is all right and call an ambulance if needed. Second, for most accidents in most states, the police should be notified. Third, give the other driver(s) involved your name, address, telephone number, and the name of your insurance company and/or your insurance agent. Get this same information from the other driver(s). Fourth, as soon as possible, contact either your insurance agent or your insurance company to notify them that you have been in an accident. Finally, there are conditions in the insurance contract you must satisfy to receive compensation from your insurer. For example, you must cooperate with your insurer during any investigation during the claims settlement process. Not completing any of these actions can result in non-payment by your insurance company for losses that otherwise would have been covered.
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Why does the premium for my auto insurance go up if I have an accident or get a ticket?
Actuaries and statisticians who have studied the behavior of people involved in accidents have shown that people who have either had an accident or received a ticket recently are more likely to have another accident in the next couple of years than people whose recent driving record has been incident-free. Insurance companies use this information not to punish people, but to charge them a premium that reflects their likelihood of having an accident. People who are more likely to have accidents should expect to pay higher premiums.
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How can I insure my motorcycle?
You can add a miscellaneous-type vehicle endorsement to your existing auto insurance policy. This endorsement will also cover mopeds, motor homes, dune buggies and other motorized vehicles.
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What is no-fault insurance?
It’s a type of insurance by which the victims of an auto accident are compensated by their own insurance company, no matter who caused the accident. This outcome is different from what occurs under the traditional tort system of compensating victims of an accident. In the tort system, the party who is at fault is required to compensate the victims of the accident. The idea behind no-fault insurance is to keep small claims from being settled in our expensive legal system. To accomplish its purpose, no-fault insurance restricts the injured person's right to sue the negligent driver in those instances where the loss falls below a certain threshold. Two types of thresholds are typically used: verbal thresholds and dollar thresholds. A dollar threshold proscribes a dollar limit that a claim must reach before the injured person regains his or her tort rights (the ability to sue). A verbal threshold uses a written description to determine when the injured person regains his or her right to sue. For example, someone might regain tort rights if an accident caused a serious handicap, such as permanent loss of a bodily function. A verbal threshold uses a written description to determine when the injured person regains his or her tort rights. For example, a person might regain his or her tort rights when the accident caused a serious handicap, such as permanent loss of a bodily function.
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What do I gain and what do I lose by giving up my tort rights?
Proponents of no-fault insurance argue policyowners gain several things by giving up their right to sue in minor accidents. For example, under no-fault insurance you typically pay lower automobile insurance premiums, collect claims payments faster, and spend less time in court. The biggest thing you lose by giving up your right to sue is the ability to collect payments for pain and suffering. No-fault insurance only pays your direct economic losses, such as hospital bills, lost wages, etc. It does not compensate you for any pain and suffering damages you may incur from an accident. However, in most serious accidents, where the likelihood of incurring these non-economic losses is greatest, you regain your tort rights and therefore the ability to sue the negligent party for pain and suffering.
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I live in a state where I can pick either no-fault coverage or traditional tort coverage. Which one should I choose?
Which one you choose depends on your tolerance toward the chance that you may not be able to sue for pain and suffering damages in all accidents. However, since the thresholds where you regain your tort rights are usually low, many policyowners choose the no-fault coverage because it can mean substantially reduced premium costs.
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What factors affect the cost of my auto insurance?
The type of car you drive, what you use it for, your driving record, where you live and even your marital status can all affect how much your policy will cost. It’s all based on numbers; for example, statistics show that married people have fewer and less costly accidents than single people.
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What should I consider when buying auto insurance?
Things you should consider when purchasing automobile insurance include: Decide how much liability coverage you want to carry. This is highly subjective. The liability levels you have on your other policies can serve as a guideline. Consult a financial professional if you need more advice. Determine which optional coverage you will need to feel protected. For example, do you want the optional physical damage coverage in Part D, or is the market value of your car too low to warrant purchasing them? Once you have decided what you want, you can now choose from which type of company you want to buy a policy. Decide whether you want an insurance agent to assist you in your decisions or if you wish to buy the insurance directly from a company that sells insurance over the phone or through the mail.
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How can I lower my auto insurance rates?
The easiest way is to shop around. It’s not surprising to find quotes on auto insurance that can vary by hundreds of dollars for the same coverage on the same car. When you shop, be careful to make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, which make comparing easy, but this is not always the case. Another way to lower costs is to look for discounts that may apply to you. For example, many insurers will offer a discount if you insure multiple cars under the same policy, or if you have had a driver education class in the last 5 years. Be sure to ask your agent or company about their discount plans. Another easy way to save is to increase your deductible. Simply bumping a deductible from $250 to $500 can lower your premium - sometimes by as much as 5 or 10 percent. However, make sure you have the financial resources necessary to handle the larger out-of-pocket costs in the event of an accident.
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What is homeowners insurance and who should buy this type of coverage?
Homeowners insurance is one of the most popular forms of personal lines insurance on the market today. The typical homeowners policy has two main sections: Section I covers the property of the insured and Section II provides personal liability coverage to the insured. Almost anyone who owns or leases property has a need for this type of insurance. And many times, homeowners insurance is required by the lender as part of the requirements in obtaining a mortgage.
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What is the difference between "actual cash value" and "replacement cost"?
Covered losses under a homeowners policy can be paid on either an actual cash value basis or on a replacement cost basis. When "actual cash value" is used the policyowner is entitled to the depreciated value of the damaged property. Under the "replacement cost" coverage, the policyowner is reimbursed an amount necessary to replace the article with one of similar type and quality at current prices.
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What are the policy limits (i.e., coverage limits) in the standard homeowners policy?
[Note: this answer is based on the Insurance Services Office's HO-3 policy.] Coverages A and B provide protection to the dwelling and other structures on the premises on an all risks basis up to the policy limits. The policy limit for Coverage A is set by the policyowner at the time the insurance is purchased. The policy limit for Coverage B is usually equal to 10% of the policy limit on Coverage A. Coverage C covers losses to the insured's personal property on a named perils basis. The policy limit on Coverage C is equal to 50% of the policy limit on Coverage A. Coverage D covers the additional expenses that the policyowner may incur when the residence cannot be used because of an insured loss. The policy limit for Coverage D is equal to 20% of the policy limit on Coverage A. The coverage limit on Coverage E - Personal Liability - is determined by the policyowner at the time the policy is issued. The coverage limit on Coverage F - Medical Payments to Others - is usually set at $1000 per injured person.
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Where and when is my personal property covered?
Coverage C, which provides named perils coverage, applies to all your personal property (except property that is specifically excluded) anywhere in the world. For example, suppose that while traveling, you purchased a dresser and you want to ship it home. Your homeowners policy would provide coverage for the named perils while the dresser is in transit - even though the dresser has never been in your home before.
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Do I need earthquake coverage? How can I get it?
Direct damages due to earthquakes are not covered under the standard homeowners insurance policy. However, unless you live in an area that is prone to earthquakes, you probably do not need this coverage. If you do live in a part of the country with high earthquake activity you may want to consider adding an earthquake endorsement to your homeowners insurance policy. This endorsement will cover damages due to earthquakes, landslides, volcanic eruptions and other earth movements.
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What factors should I consider when purchasing homeowners insurance?
There are a number of factors you should consider when purchasing any product or service, and insurance is no different. Here is a checklist of things you should consider when you purchase homeowners insurance. First and foremost, purchase the amount and type of insurance that you need. Remember that if your policy limit is less than 80% of the replacement cost of your home, any loss payment from your insurance company will be subject to a coinsurance penalty. Also, determine the amount of personal property insurance and personal liability coverage that you need. Second, determine which, if any, additional endorsements you want to add to your policy. For example, do you want the personal property replacement cost endorsement or the earthquake endorsement? Finally, once you have decided on the coverage you want in your homeowners insurance policy, you can now decide which insurer you would like to purchase the insurance from. Some people like the idea of purchasing insurance from a mutual company rather than a stock company. You should also decide whether you would like an insurance agent to assist you in your purchasing decision or if you would like to buy the product directly from an insurer without the assistance of an agent.
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What is the difference between an "all risks" policy and a "named perils" policy?
A named perils policy covers losses that are due to only those perils listed in the policy. The perils typically covered include fire, windstorm, hail, and other direct physical losses. An all risks policy covers losses that are due to any peril except those specifically excluded in the policy. It is important to note that all risks policy provides broader protection than do named perils policies.
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What can I do to lower the cost of my homeowners insurance?
There are a number of things you can do to lower the cost of your homeowners insurance. The best thing to do is to shop around. It is not surprising to find quotes on homeowners insurance that vary by hundreds of dollars for the same coverage on the same home. When you shop, be careful to make sure each insurer is offering the same coverage. Many insurers use the ISO policy forms, but this is not always the case. Another way to lower the cost of your homeowners insurance is to look for any discounts that you may qualify for. For example, many insurers will offer a discount when you place both your automobile and homeowners insurance with them. Other times, insurers offer discounts if there are deadbolt exterior locks on all your doors, or if your home has a security system. Be sure to ask your agent or company about discounts any that you may qualify for. Another easy way to lower the cost of your homeowners insurance is to raise your deductible. Increasing your deductible from $250 to $500 will lower your premium, sometimes by as much as five or ten percent. However, be careful to make sure that you have the financial resources necessary to handle the larger deductible.
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If I have an accident which I think is covered under my homeowners policy, what should I do?
Insurance contracts are conditional contracts, which means that policyowners have certain duties that they must perform if a covered loss occurs. Failure to complete these actions can, and sometimes does, result in non-payment by the insurance company for losses that otherwise would have been covered. Required duties include: (1) notifying the insurance company or the agent that a loss has occurred -- this should be done as soon as you discover the loss; (2) protecting the property from further damage and/or to making any repairs necessary to prevent further damage; (3) preparing a detailed list of the personal items damaged which contains a description of the items, their actual cash value, or their replacement cost if you have added the replacement cost endorsement to your policy; (4) being prepared to show the company and/or the insurance agent the damaged items; (5) completing a statement for the insurance company that details the events that led to loss -- for example, the time the damage occurred, the cause of the losses, etc.
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Who pays for my legal defense costs if I am sued?
In the unfortunate event that you are sued, your homeowners policy will not only cover the cost of your legal defense, but your insurance company will also provide the legal counsel.
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How much life insurance should an individual own?
Rough "rules of thumb" suggest an amount of life insurance equal to 6 to 8 times annual earnings. However, many factors should be taken into account in determining a more precise estimate of the amount of life insurance needed. Important factors include income sources (and amounts) other than salary/earnings, whether or not the individual is married and, if so, what is the spouse's earning capacity, the number of individuals who are financially dependent on the insured, the amount of death benefits payable from Social Security and from an employer-sponsored life insurance plan, whether any special life insurance needs exist (e.g., mortgage repayment, education fund, estate planning need), etc. It is recommended that a person's insurance adviser be contacted for a precise calculation of how much life insurance is needed.
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What about purchasing life insurance on a spouse and on children?
In certain circumstances, it may be advisable to purchase life insurance on children; generally, however, such purchases should not be made in lieu of purchasing appropriate amounts of life insurance on the family breadwinner(s). It is of utmost importance that the income earning capacity of the primary breadwinner be fully protected, if possible, through the purchase of the required amount of life insurance before contemplating the purchase of life insurance on children or on a non-wage earning spouse. In a dual-earning household, it is important to protect the income earning capacity of both spouses. Life insurance on a non-wage earning spouse is often recommended for the purpose of paying for household services lost at this individual's death.
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Should term insurance or cash value life insurance be purchased?
Although a difficult question--one whose answer will vary depending on circumstances--several principles should be followed in addressing this issue. It must first be recognized that in any life insurance purchasing decision, there are at least two basic questions that must be answered: (a) "How much life insurance should I buy?" and (b) "What type of life insurance policy should I buy?" The question contained in (a) involves an "insurance" decision and the question contained in (b) requires a "financial" decision. The "insurance" question should always be resolved first. For example, the amount of life insurance that you need may be so large that the only way in which this needed amount of insurance can be afforded is through the purchase of term insurance with its lower premium. If your ability (and willingness) to pay life insurance premiums is such that you can afford the desired amount of life insurance under either type of policy, it is then appropriate to consider the "financial" decision--which type of policy to buy. Important factors affecting the "financial" decision include your income tax bracket, whether the need for life insurance is short-term or long-term (e.g., 20 years or longer), and the rate of return on alternative investments possessing similar risk.
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How does mortgage protection term insurance differ from other types of term life insurance?
The face amount under mortgage protection term insurance decreases over time, consistent with the projected annual decreases in the outstanding balance of a mortgage loan. Mortgage protection policies are generally available to cover a range of mortgage repayment periods, e.g., 15, 20, 25 or 30 years. Although the face amount decreases over time, the premium is usually level in amount. Further, the premium payment period often is shorter than the maximum period of insurance coverage--for example, a 20-year mortgage protection policy might require that level premiums be paid over the first 17 years.
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Can an existing life insurance policy be used to provide for the repayment of an outstanding mortgage loan?
Yes; the purchase of a new mortgage protection term insurance policy is usually not required by the lender. An existing policy, either term or cash-value life insurance, can be used for many purposes, including paying off an outstanding mortgage loan balance in the event of the insured's death.
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Credit life insurance is frequently recommended in conjunction with the taking out of an installment loan when purchasing expensive appliances or a new car, or for debt consolidation. Is credit life insurance a good buy?
Credit life insurance is frequently more expensive than traditional term life insurance. Further, if you already own a sufficient amount of life insurance to cover your financial needs, including debt repayment, the purchase of credit life insurance is normally not advisable due to its relatively high cost.
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What is the tax treatment of life insurance cash values, dividends, and death benefits?
The "interest build-up" portion of the annual increase in the policy's cash value is not taxed currently to the policyowner. Dividends generally are considered to be a "return of premium" and are not taxable to the policyowner. Although in the typical case, life insurance death proceeds will not be subject to income taxation, these proceeds may be subject to federal estate taxation. If the insured has any elements of ownership in the policy at the time of his/her death, the proceeds are includible in the insured's gross estate for federal estate tax purposes. State inheritance taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances. You should contact your tax adviser regarding questions concerning the possible income, estate and gift tax consequences surrounding any life insurance that you currently own or are contemplating purchasing.
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What is participating whole life insurance?
Participating (par) whole life insurance has been marketed for many years in the U.S. The participating feature allows for the payment of dividends to policyowners when actual experience justifies such payment. Substantial amounts of participating whole life insurance is still sold today, principally by the large mutuals.
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I have heard a lot about universal life insurance. How is this type of life insurance different from traditional whole life insurance?
Both traditional whole life (WL) and universal life (UL) products are examples of cash-value life insurance. However, there are several important differences between these two products. While WL policies contemplate the payment of fixed, level premiums and provide for level death benefits, UL policies offer adjustable death benefits and flexible premiums that can be varied according to changing circumstances. This is a rather simplistic comparison, however, since policyowner dividends under participating WL insurance contracts can be used to offset a portion of the premium payment otherwise required; in addition, dividends can be used to increase the policy's death benefit. Because of these and other possible uses of policyowner dividends, an argument can be made that participating WL insurance possesses some (but not all) of the same flexibility/adjustability that is possessed by UL policies. Another important difference between WL and UL relates to product transparency. In UL policies, it is easy for policyowners to look at the internal operations of the policy and to examine the relationships among various policy elements (premiums, cash values, interest credits, mortality charges, and expenses) and how they interact with each other.
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Which type of cash value life insurance policy, universal life (UL) or participating whole life (WL) , is a "better buy" financially?
There is no simple answer to this question. The best performing product (from a financial perspective), whether UL, WL or some other type of cash value life insurance, will likely be the one offered by the insurer that enjoys the best future experience as it relates to interest earnings, actual expenses and mortality costs. Insurers earning the highest investment income, and who also incur the lowest expenses and the lowest mortality costs, are in the best position to offer life insurance at the lowest cost. This is true whether the cash value life insurance product being offered is UL or WL. Thus, it will be necessary for prospective insureds and their advisers to carefully examine the financial aspects of each product under consideration, irrespective of whether the product is UL or WL.
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What is variable life (VL) insurance, and how is it different from universal life (UL) and participating whole life (WL)?
Variable life insurance is a type of fixed-premium whole life insurance policy where changes in the policy's cash values and death benefits are directly related to the investment performance of an underlying pool of assets. Policyowners typically can choose among several investment options as to where the assets backing the policy's cash values will be invested. The various investment options offered in the contract generally possess different risk/return relationships and frequently include a money market fund, a bond fund, and one or more common stock funds. Although the policy's death benefit is directly related to the actual performance of the invested assets, the policy prescribes that the death benefit will not fall below a minimum amount (usually the initial face amount) even if the invested assets depreciate in value by a substantial amount. Because the policyowner assumes all of the investment risk, there is no similar "floor" below which cash values may fall. In recent years variable universal life (VUL) insurance has become a more popular product than VL. VUL combines features of both UL and VL and, in essence, is the flexible premium version of VL.
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