STUDENT MODULE 11.

2 RISK MANAGEMENT AND INSURANCE

PAGE 1

Standard 11: The student will describe and explain how various types of
insurance can be used to manage risk.

Different Types of Insurance

The ambulance pulled up

while people were looking
at the smashed cars. At
least no one was badly
injured.
Jermaine had gotten his
car last week. His mom
said he needed to get
insurance, but he had
been so busy with school
and work that he forgot.

Lesson Objectives
Examine the different types of insurance available.
Identify key terms associated with insurance and risks:
natural disaster, liability, disability, deductibles, and risk
management.
Explain the purpose and importance of different types of
insurance protection as a risk management strategy (e.g.,
life, health, property, liability, disability, and
automobile).

His arm hurt. He could get

health insurance at work,
but he needed the money
to
make
his
car
payments. Now his arm
was broken, and he had
no health insurance. The
ambulance could take
him to City Hospital, but
he would have to pay the
bill. How would he work
with a broken arm?
He did not mean to hit the
car in front of him. He
was in a hurry and just
did not see it was
stopped. And, he was
talking to Dominique on
the phone because he did
not have time to call her
earlier.
Can you find anything that
Jermaine could have done
differently to reduce his
risk and his losses?

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

Personal Financial Literacy Vocabulary

Claim: A written request submitted to your insurance carrier to cover a loss.
Deductible: The dollar amount or percentage of a loss that is not insured, as specified
in an insurance policy.
Premium: The fee paid for insurance protection.

Introduction
Insurance is one of the most important parts of your risk
management plan. By purchasing insurance, individuals can
transfer their personal risk to a third partythe insurance
company. Today, it is possible to insure almost anything.
Understanding the different kinds of insurance available and
evaluating potential losses helps consumers make more informed
risk management choices.

Lesson

loyds of London is one of the most famous insurance groups in the world. It has
been known to issue insurance policies on several very interesting and unique
items, including Brooke Shields and Tina Turners legs, Jimmy Durantes nose,
Celine Dions vocal chords, and America Ferreras smile.
Most insurance companies are not quite as exotic with their policies. They tend to sell
insurance for things such as cars, houses, and boats. People like you pay premiums to
insurance companies to cover potential losses associated with their belongings. The
insurance company takes those premiums and pulls them together in one pool of
money. Those funds are available to pay for the losses suffered by members of the
pool. By using this process, insurance companies can charge lower premiums and
provide more services for their customers.
Insurance premiums are based on the potential risk and potential losses they will have
to pay to the group members. While insurance premiums sometimes seem rather high,
the rates vary from person to persondepending upon personal risk factors such as
age, health, personal behaviors, employment, and, yes, credit ratings. In return for
paying the premium, you receive an insurance policy from the company explaining
your rights and responsibilities when using the insurance. An insurance policy is simply
a contract between you and the insurance company outlining what is covered, the
2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

limits of your coverage, and whatever procedures you must follow to maintain the
policy and collect any payments for your losses.
While the insurance company will pay the greatest part of your loss, generally you will
also pay a small part as wellin addition to your premium. The additional amount you
pay when filing a claim with the insurance company is called the deductible. The
deductible is the term used for the amount you, the insured, are willing to pay before
your insurance policy picks up the risk. It represents the portion of the risk you are
prepared to cover from your personal savings. You will often hear the phrase after
you meet your deductible to indicate the amount you must pay before the insurance
policy takes effect.
When making insurance choices, you should consider the following.

Is this insurance necessary? If the potential loss is large, it could be financially

devastating to you and your family. If the potential loss is small, you may have
savings or other financial resources to cover it without insurance.
How much insurance is needed? Do you want to cover the minimum loss, or do
you need to cover the cost to replace whatever you may lose?
How much will it cost? Do the benefits of purchasing the insurance outweigh
the costs?

INSURANCE WEB SITE

Go to the following Web site for more information on insurance for young
people: http://www.insureuonline.org/.

Types of Insurance
There are many types of insurance, almost more than you can list. Whether it is
health, disability, life, homeowners, renters, or auto insurance, understanding how
insurance companies calculate risk and the standard features of insurance policies will
help you make the best choices for your personal needs.
Health Insurance
What happens when you go to the doctor? Perhaps one of your family members has
medical insurance that covers your medical expenses. While you may be covered by
someone elses insurance now, you will soon be in a position to make your own
choices about health insurance.
2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

Health insurance, also called medical insurance, helps protect you and your family
from expensive or unexpected health care-related expenses. It is designed to
estimate your overall risk of health-related expenses and supplement your cost for
care, including doctors appointments, hospitalization, prescriptions, and other
similar costs. Originally, health insurance was designed to
cover catastrophic health-related expenses, but has been
gradually expanded to include more preventative care.
You make monthly payments called premiums to pay for
your insurance coverage, and those premiums are based on
a variety of factors. Some employers will pay your
premiums as part of your benefit package with the
company. Having insurance through an employer is
generally much less expensive than buying it on your own
because employers can pool those who are healthy and
spend minimal amounts on health care with those who have
numerous health problems and frequently use their health
care benefits. If purchased individually, the insurance company will base the
premiums on your personal risk factors such as age, overall health, and previous
health problems.
Most insurance policies do not cover all health care costs. You are still responsible for
certain out-of-pocket costs and the deductible. Other costs can really add up and
often include.
Copayment: The amount you will have to pay each
time you visit a health care provider. A copay is
generally $25 to $35 and is collected when you sign
in for your doctor appointment.
Coinsurance: The percentage of your medical costs
you will need to pay after meeting your deductible.
Traditionally, your insurance company would pay
about 80% of your medical costs, and you would
pay the other 20%. However, coinsurance amounts
today vary greatly, making it an important feature
to check out before making a decision.
Most major medical insurance policies have a limit on
coverage. For example, if your policy has a $1 million
maximum lifetime coverage, your insurance company will
pay up to that amount for your health care. Once you
reach that amount, you will no longer be covered by that
specific policy.

I
N
S
U
R
A
N
C
E
T
I
P

Health insurance
costs increase as
you age. Buy
health insurance
while you are
healthy instead
of waiting until
you need it.

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

Copayments, premiums and out-of-pocket expenses depend upon the type of health
insurance you have. A plan called a PPO tends to have more out-of-pocket costs than
an HMObut PPOs offer more flexibility when choosing a doctor and other services. A
PPO is a preferred provider organization, and an HMO is a health maintenance
organization. Be sure you are familiar with the options both offer before you agree
to the coverage.
The best health insurance plan for you is the one that gives you the greatest
flexibility and the most benefits for the lowest cost. There is no standard health
insurance plan or a one-size-fits-all policy. You will need to compare costs and
benefits before choosing a plan.
Disability Insurance
Disability insurance, also known as disability income insurance, is another type of
medical coverage. It pays part of your income if you become ill or injured and need
an extended period of time to recover or if you can no longer work.
Medicare
Medicare is a health insurance program provided by the
federal government to people over the age of 65 or with
certain health conditions.
Medicaid
Medicaid is another type of federal health insurance, and
it pays health care costs for low-income citizens of all
ages. It is administered by state and local governments,
which also provide matching funds to offset the costs.
Long-Term Care Insurance
Long-term care insurance helps cover costs associated
with care in a nursing home or other similar facilities if
you become unable to take care of yourself. Generally,
people who need long-term care require assistance with
daily activities such as dressing, bathing, walking, etc.
Because many people require long-term care as a result of an accident, age is not a
determining factor for purchasing long-term care insurance. In fact, about 40% of
those receiving long-term care are between 18 and 64. The late actor Christopher
Reeve became paralyzed following an equestrian accident in 1995 at the age of 42
2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

and required nine years of long-term care, costing millions of dollars. Most people do
not want to think about being severely injured and postpone the decision to buy longterm care insurance. However, it may be too expensive or too late to get coverage
once the insurance is needed.
Life Insurance
The main purpose of life insurance is to insure against loss of income due to death and
can also be used for retirement planning and investing. It is the one kind of insurance
you pay for, but only others benefit from it. Except in rare cases, the purpose of life
insurance is to provide for others at the time of your death.
Life insurance companies offer a wide array of policies to meet your needs as your
personal circumstances change and evolve. Following is a brief description of the
three basic kinds of life insurance.

Term
life
or
temporary
insurance: Provides coverage for a
defined time period, generally five,
10, or 20 years; pays cash benefits
to a named beneficiary if the
insured dies during the term of the
policy.

Whole life insurance: Covers the

insured for their whole life; benefits
are paid to the beneficiaries when
the policyholder dies.

Universal life insurance: Whole life

insurance with more flexibility;
allows the policyholder to maintain
their policy and still make changes,
such as decreasing the death
benefit or changing the premiums.

Like health insurance, life insurance is often provided by your employer as part of
your benefit package. If you purchase life insurance on your own, the premiums tend
to increase as you age. Therefore, it is generally less expensive to purchase life
insurance while you are young instead of waiting until you are older.

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

Liability Insurance
Liability insurance protects you when others claim to be hurt or injured as a result of
something you did or did not do. Generally, it pays medical bills or provides
compensation to anyone who can prove you were negligent or acted improperly. Most
states, including Oklahoma, require you to have liability insurance on your automobile
in case you are involved in an accident. Damage or injuries caused intentionally are
not covered by liability insurance policies.
Homeowners Insurance
For most people, their home is their largest
single
investment.
Having
homeowners
insurance protects your investment against
disasters such as fire, tornadoes, busted pipes,
robbery, and other similar problems.

Take an inventory of all of

your personal property,
along with a photograph
or video of each room.

Most standard homeowner insurance policies

cover your house (the structure itself) and the
contents (any personal property you have in the
house). In addition, the majority of homeowner
insurance policies provide liability coverage in
case someone visiting your home is injured.

Also, save your receipts

for major items and keep
them in a safe place away
from your house or
apartment.

I
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T

You have the option to purchase homeowners Having this information

I
insurance that covers either actual cash value or
will
make
it
easier
if
you
P
replacement costs. Actual cash value is the
ever
need
to
file
a
claim.
amount it would take to repair or replace
damage to your home after normal wear and
tear, commonly called depreciation. Replacement cost is the amount needed to
replace or rebuild your home or repair damages with materials of similar kind and
quality, without deducting for depreciation.
A good rule of thumb is to insure your home for at least 80% of its replacement value;
the other 20% would include the value of your land which probably does not need to
be replaced following a disaster.
Few, if any, homeowners insurance policies cover flood damage. Beware! If you live
in an area prone to flooding from any causehurricanes, rivers, or streamsbe sure to
ask about purchasing flood insurance, which is available through the federal
governments National Flood Insurance Program (NFIP). In some areas, flood insurance
may be required. Consult your insurance or real estate agent for more information.

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

Renters Insurance
As a young person starting out, you are probably more likely to be a renter than a
homeowner. To protect your personal property, you should consider renters
insurance which provides some of the same coverage as a homeowners policy.
Renters insurance protects renters from theft or damage of personal items
furniture, TV, computer, clothing, etc.in their apartments or their cars.
The landlord should carry insurance to cover the building
itself; all you need to insure is your personal property.
Except for a very few circumstances, your items will not
be covered by your parents policy or by the landlords
policy.
A good renters insurance policy will also include liability
insurance. You can be held responsible if someone is
hurt or injured while visiting your apartment; liability
insurance is your best protection.
Generally, renters insurance can be transferred from
one location to another when you decide to move.
Before purchasing renters insurance, make sure you
understand exactly what is covered and what is not covered. If your insurance agent is
not willing to explain it to you, perhaps you need to find another agent. Prices on
renters insurance will differ from company to company. It is always advisable to get
more than one estimate before making a final decision.
Automobile Insurance
Buying a car is an important goal for most young
people. With the payments, gasoline, and
insurance, it can be an expensive purchase.
However, failing to purchase automobile insurance
can be an even more expensive decision. Everything
is fine, until something happens. Before stopping to
ask why insurance is necessary, remember this: It is
the law!
So, why would almost every state in the country
require you to have automobile insurance if you own
a car? Automobile insurance limits financial loss due
to damage or a car accident. If a tree falls on your
car or it is damaged by a hail storm, your

CAR CRASH STATISTICS:

There were about 6,420,000
auto accidents in the United
States in 2005.
The financial cost of these
crashes was over $230
billion.
2.9 million people were
injured and 42,636 people
were killed.
About 115 people die every
day in vehicle crashes in the
United Statesone death
every 13 minutes.

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

comprehensive insurance policy covers your claim and helps

offset the cost of repairs.
More importantly, auto liability insurance pays for someone
elses property or injuries, if you are at fault, in an accident.
It is called bodily injury and property damage coverage on
your policy. In addition, your insurance will pay if the other
person is uninsured. Your policy is required to have uninsured
motorist coverage for your injuries.
You can also purchase comprehensive insurance to cover your
vehicle if it is damaged by an act of nature or if it is stolen. As
an added protection, you can purchase collision insurance to
pay for your car repairs if the person at fault in an accident
does not have insurance.
As you can see, automobile insurance is an important tool for
managing your risk. Trying to cover the costs of repairs and
injuries without insurance is extremely expensive.
With the number of auto accidents and the cost of repairs,
there is a good probability that you will be involved in an
accident and need to use your insurance. Young drivers, aged
15- to 20-years-old, are especially at risk and vulnerable to
death and injury on the roadways. Auto accidents are the
leading cause of death for teenagers in America. Mile for mile,
teenagers are involved in three times as many fatal crashes as
all other drivers.
Since young drivers are more likely to be involved in
accidents, then it helps explain why insurance for young
drivers is more expensive than insurance for drivers in other
age groups. While it may not seem fair that young people pay
higher premiums, it is an economic choice for the insurance
companies. They charge more because it costs them more to
cover the costs for young drivers.
Even with the high premiums, having automobile insurance is a
good risk management tool that can protect your financial
future. Driving without it is high risk. Just ask Jermaine!

Jermaine should have

taken the time to get his
auto insurance. He may
even be charged a big fine
or lose his drivers license
for
failing
to
have
insurance on his vehicle.
Of course, he will need to
repair his car as well as
the one he hit.
While health insurance
can be expensive, it is also
very risky to go without it.
Jermaine will need to
make arrangements with
City Hospital to pay for his
care. The financial burden
is further complicated
because he may not be
able to work, meaning he
may not have any income
until his arm heals. He
also may be at risk of
losing his job since he
cannot work.
While driving and talking
on the phone is not illegal,
it can be distracting. When
sitting behind the wheel of
a vehicle, driving that
vehicle should always be
your first priority.
And if he was in a hurry,
he may have been
speedinganother
high
risk behavior. Hopefully,
you will make better
choices than Jermaine.

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

10

Conclusion
Insurance is generally considered a valuable
risk management tool because it allows a
third partythe insurance companyto
assume part of your risk and your costs.
However, it can become expensive if you buy
coverage you really do not need or pay more
than you should for the premium. While
there are many different kinds of insurance,
you are the only person who can decide what
is best for you. You probably do not need to
insure your legs or your nose like a celebrity,
but you will want to have enough insurance
to cover any losses to your home, your
personal property, or your vehicle. And you
will want some form of health insurance in
case you become ill and need immediate
attention.

GIVING OTHERS YOUR KEYS

If a friend has an accident in
your car, it goes on your
insurance record. Even if they
have insurance, it may not
matter because you are
responsible for who drives
your car. The accident will go
on your insurance record, and
you will pay higher premiums.
So, be careful who gets your
keys!

2008. Oklahoma State Department of Education. All rights reserved.

Student Module 11.2

11

Name: ___________________________ Class Period: __________________________

Different Types of Insurance

Review Lesson 11.2
Answer the following questions and give the completed lesson to your teacher to review.
1. Which kind of insurance should you have if you live in an apartment?
a.
b.
c.
d.

Liability
Renters
Long-Term Care
Whole Life

2. Which kind of insurance protects you if someone is injured on your property or

in your apartment?
a.
b.
c.
d.

Liability
Renters
Long-Term Care
Whole Life

3. Which type of life insurance provides coverage for a specified period of time?
a.
b.
c.
d.

Whole Life
Universal Life
Term Life
Long-Term Care Life

4. The amount of money you pay before your insurance provides coverage is
called a
a.
b.
c.
d.

premium.
copay.
deductible.
benefit.

5. Payments for insurance are called

a.
b.
c.
d.

premiums.
copays.
deductibles.
costs.
2008. Oklahoma State Department of Education. All rights reserved.