Financial Literacy: Insurance: Protecting Against Risk Worksheet

Question 1

In your own words, explain the main purpose of insurance. Include the idea of risk in your answer.

Accepted Answer

The main purpose of insurance is to protect a person from a large financial loss by transferring some risk to an insurance company. The person pays premiums so that the insurer will help pay for covered losses.

Question 2

A car insurance policy costs $125 per month. What is the annual premium for this policy?

Accepted Answer

The annual premium is $1,500 because $125 per month multiplied by 12 months equals $1,500.

Question 3

Maya has health insurance with a $1,000 deductible. She has a covered medical bill of $750 early in the year and has not paid anything toward her deductible yet. How much will Maya likely pay before insurance begins covering costs?

Accepted Answer

Maya will likely pay the full $750 because she has not yet met her $1,000 deductible. After this bill, she would still have $250 left before meeting the deductible.

Question 4

A health plan has a $30 copay for doctor visits. Liam visits the doctor 4 times in a year. How much does he pay in copays for those visits?

Accepted Answer

Liam pays $120 in copays because 4 visits multiplied by $30 per visit equals $120.

Question 5

Compare these two auto insurance options. Plan A has a $180 monthly premium and a $500 deductible. Plan B has a $120 monthly premium and a $1,500 deductible. If Jordan wants lower monthly payments and has emergency savings, which plan might fit better? Explain.

Accepted Answer

Plan B might fit better because it has a lower monthly premium. However, Jordan should be prepared to pay the higher $1,500 deductible if an accident happens.

Question 6

Explain the difference between liability coverage and collision coverage in an auto insurance policy.

Accepted Answer

Liability coverage helps pay for injuries or damage that the driver causes to other people or their property. Collision coverage helps pay to repair or replace the policyholder's own car after a covered crash.

Question 7

A renter owns a laptop, clothes, furniture, and a bicycle worth a total of $6,000. The landlord's insurance covers the building but not the renter's personal belongings. What type of insurance should the renter consider, and why?

Accepted Answer

The renter should consider renters insurance because it can help cover personal belongings if they are stolen or damaged by a covered event. The landlord's policy usually does not cover the renter's possessions.

Question 8

An insurance company groups many policyholders together. Most people will not have a major loss in the same year, so premiums from the group help pay claims for the few who do. What is this concept called, and why does it matter?

Accepted Answer

This concept is called risk pooling. It matters because sharing risk among many people makes large losses more affordable for individuals.

Question 9

A phone insurance plan costs $12 per month and has a $100 deductible for a replacement. A new phone costs $700. If the phone is replaced after 1 year, what is the total cost paid by the customer for insurance and the deductible?

Accepted Answer

The customer pays $244 total because $12 per month for 12 months is $144, and $144 plus the $100 deductible equals $244.

Question 10

A policy has a coverage limit of $50,000. A covered loss costs $65,000. If there are no other limits or deductibles in this problem, how much would the insurance company pay and how much would the policyholder still owe?

Accepted Answer

The insurance company would pay $50,000 because that is the policy limit. The policyholder would still owe $15,000 because $65,000 minus $50,000 equals $15,000.

Question 11

Explain what an exclusion is in an insurance policy. Give one example of why exclusions are important to read before buying coverage.

Accepted Answer

An exclusion is something the insurance policy does not cover. Exclusions are important because a person might assume a loss is covered, such as flood damage or certain high-risk activities, when the policy actually does not pay for it.

Question 12

A homeowner can buy flood insurance for $600 per year. The estimated probability of a flood causing $40,000 in damage this year is 2 percent. Calculate the expected loss without insurance and compare it to the premium.

Accepted Answer

The expected loss without insurance is $800 because 0.02 multiplied by $40,000 equals $800. The $600 premium is lower than the expected loss, but the homeowner should also consider the chance of a very large loss.

Question 13

A health insurance plan has 20 percent coinsurance after the deductible is met. Sofia has a covered medical bill of $2,000 after meeting her deductible. How much does Sofia pay, and how much does insurance pay?

Accepted Answer

Sofia pays $400 because 20 percent of $2,000 is $400. The insurance company pays $1,600 because $2,000 minus $400 equals $1,600.

Question 14

Study the following situation: Two people have the same car. Alex chooses the state minimum liability coverage. Brianna chooses higher liability limits plus collision coverage. Identify one advantage and one disadvantage of Brianna's choice.

Accepted Answer

One advantage of Brianna's choice is that she has more protection if she causes a serious accident or damages her own car. One disadvantage is that her premium will probably be higher than Alex's premium.

Question 15

Create a short recommendation for a recent high school graduate who is starting a first full-time job and renting an apartment. Name two types of insurance they should consider and explain why each one matters.

Accepted Answer

The graduate should consider health insurance because medical care can be very expensive without coverage. They should also consider renters insurance because it can help replace personal belongings after theft, fire, or another covered loss.

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Financial Literacy: Insurance: Protecting Against Risk

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