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HACE 3200: Exam 3
Risk
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an uncertainty with respect to economic loss:
risk avoidance (don't drive), loss prevention (seat belts), risk assumption (accept certain level of risk), insurance (economically recover from loss)
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Settlements
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hospitals typically receive less than their billing price because insurers and gov. programs "negotiate" discounts on behalf of the patient. The uninsured have no negotiators.
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Patient Protection and Affordable Care Act
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aims to increase the quality and affordability of health insurance, lower the uninsured rate by expanding public and private insurance coverage, provides a # of mechanisms- including mandates, subsidies and insurance exchanges- to increase coverage and affordability
also prohibits insurers from denying coverage to indiv due to pre-existing conditions, requires insurers to offer the same premium price to all applicants of the same age and geo location without regard to gender, allows dependents to stay on parent's insurance til 26
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Major Types of Health Care Coverage
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basic health insurance, major medical expense insurance, dental and eye insurance, dread disease and accident insurance
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Hospital Insurance
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cover hospitalization expenses including room fees, nursing fees and drug fees
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Surgical Insurance
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covers only the direct costs of surgery including the surgeon's fees and equipment fees
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Physician expense Insurance
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covers physicians' fees including office fees, lab fees and x-ray fees
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Major Medical Expense Insurance
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covers medical costs beyond the basic plan, normally requires co-payments and deductible payments, stop-loss prevention, life-time cap
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Stop-Loss Prevention
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limits the total out-of-pocket expenses incurred by the insured to a specific dollar amount
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Life-time Cap
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total amount the insurance company will pay over the life of a policy
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Dread Disease and Accident Insurance
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covers only specific illness or accidents & provides a set dollar amount of reimbursement
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Health Care Providers
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1. Private health care plans
2. non-group coverage plans
3. gov-sponsored health care plans
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Private Health Care Plans
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A) Fee-for-service or traditional indemnity plans
B) Managed health care (health maintenance organizations) and preferred provider organization
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Fee-for-Service Plans
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-provides greatest choices, coinsurance (%), co-payment or deductible ($), relatively expensive and requires more paperwork
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Managed Health Care
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-pays for and provides health care services to policy holders
-limits choices
-monthly premium and co-payment
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HMOs
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the most popular form, a system of doctors and hospitals for a flat fee.. 3 types of HMOs
1) indiv practice association plans
2) group practice plans
3) point-of-service plans
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Preferred Provider Organization
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cross btw. fee-for-service plans and HMO plans
-group of doctors, which work at a reduced cost, additional fees if use a non-member doctor or center
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Individual Insurance
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Provides and expensive, tailor-made policy to the purchaser, shop around
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Government-Sponsored Health Care Plans
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workers' compensation (insurance to workers injured on the job, payment for work-related accidents and illness), Medicare (65+, cost is covered thru SS tax), Medicaid (low income, blind)
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Long-term care Insurance
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provides a daily dollar benefit for the costs of long-term care, expensive
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Risk
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the possibility of experiencing harm, suffering, danger or loss
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Risk Aversion Theory
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-Rational people will try to reduce or avoid risk
-risk is subjective in that indiv. define the level of risk and uncertainty they can handle
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Probability
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person weighing uncertainty and risk is judging the probability of a good or bad outcome
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risk pooling
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insurance is an example of this.
indiv. share their financial risks to reduce catastrophic losses from death, accidents or health problems
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Premium
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monthly cost of the policy
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face value
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benefit due upon death
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insured
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person whose life is covered by the policy
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policy owner
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indiv or business that pays for and owns the policy
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beneficiary
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the recipient or the benefit upon the death of the insured
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Life Insurance Not Necessary for:
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single person, no dependents
DINKS (double income, no kids)
married, but unemployed, indiv without dependents
Retired persons
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Life Insurance Necessary for:
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those with dependents, married, single-income couple with children, business owners, those estate exceeds the estate tax-free transfer threshold
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Earnings Multiple Approach
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replace the annual salary stream of a bread winner for X years, normally 5-15 times gross salary is recommended
adjust salary down to compensate for the reduction in household expenses
choose the PVA to match the assumed after-tax and after-inflation earnings on the policy statement
the longer the income stream replacement, the greater the multiple, the higher the assumed earnings, the lower the multiple.
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Needs Approach
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to meet the needs of the household after the death of a breadwinner both current and in the future
Immediate needs funds, debt elimination, immediate transitional funds, dependency funds, spousal life income funds, educational funds for child or spouse, retirement income funds
Calculation: Add all funding needs to determine total need, subtract current insurance coverage
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Adjust Salary Down
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5-4 = 20% drop
4-3 = 22% drop
3-2 = 26% drop
2-1 = 30% drop
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Term Insurance
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death benefit coverage for a specific term of time, only valid if the insured dies during the term of coverage, least expensive form of insurance
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Cash-Value Insurance
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provides a death benefit and an opportunity to accumulate savings, provides permanent insurance
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Whole life insurance
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permanent protection, fixed premium and death benefit, fixed cash value that grows tax-deferred
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Universal Life Insurance
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permanent protection, flexible premium payments, flexible death benefits, cash-value fluctuates
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Variable Life Insurance
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permanent protection: returns are earned on a tax-deferred basis, allows for either a fixed or flexible premium, flexible death benefit and fluctuating cash value
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Receiving Life Insurance
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if you receive a payment, that means you have suffered a loss
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Lump Sum Settlement
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one time payout upon death of the insured
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interest-only settlement
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periodic payments of the interest earned by the principal
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mortgage/credit group life
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required by your creditor to cover the value of the debt, usually the mortgage until you have 20% equity
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group term
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insurance for a specific group of indiv who don't take a physical exam to be covered (UGA policy)
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convertible term
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can be renewed for an agreed-upon period up to a specific age. Premium increases each time you renew
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decreasing term
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renewable where the premium remains constant, but the face value (death benefit) decreases
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Installment-payments settlement
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periodic payments normally for a fixed period of both the principal and interest
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life annuity settlement
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period payments of both the principal and interest that continue for the life of the beneficiary
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Clauses
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NO COST.
beneficiary provision: (can name whoever you want)
coverage grace period: (unless you pass away)
loan clause: cash value only and term doesn't have
non-for-future clause: what your choices are if you lapse
Policy reinstatement clause: 3-5 years
Suicide/incontestability: 2 years
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Riders
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ADDITIONAL COSTS
waiver of premium for disability
accidental death (ups the death benefit)
guaranteed insurability: increase benefit without exam
cost of living: increased death benefit with inflation
living benefits: cash value grants early payout for terminally ill
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property insurance
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coverage that protects real and personal property from catastrophic losses
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liability insurance
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protects against the financial consequences from the insured's responsibility for property losses or injuries to others
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peril
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cause of a "loss" (fire, tornado, negligence)
negligence = failure to act in a reasonable manner or to take necessary steps to protect others from harm
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deductibles
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limit what a company must pay for small losses
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replacement cost
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the amount necessary to repair, rebuild or replace an asset at today's prices
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premiums
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the monthly payment you pay for your insurance coverage
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Homeowner's Policies
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HO-1: Basic form of homeowner's insurance
HO-2: Broad form homeowner's insurance
HO-3: Special form homeowner's insurance
HO-4: Renter's or tenant's insurance
HO-6: Condo owner's insurance
HO-8: Modified coverage - older homes homeowner's insurance
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HO-1 Basic
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Provides most limited coverage
$15,000 minimum coverage
covers: fire, lightning, tornados, explosions, riots, theft, vandalism, volcanoes
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HO-2 Broad
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covers only named perils (weight of snow, freezing, falling objects)
costs about 5%-10% more than HO-1
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HO-3 Special
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Covers all direct physical losses to your home.
Exceptions include: floods, wars, earthquakes, and nuclear accidents
costs more than HO-1
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HO-4 Renter's
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Coverage is equivalent to HO-2 perils for personal property. Available only to renters and tenants
covers personal property rather than dwelling
provides liability coverage in case an accident is your fault
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HO-6 condo
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similar to HO-4 coverage. Same perils for personal property as HO-2
available to co-op and condo owners
also covers improvements you've made to the dwelling unit
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HO-8 Modified coverage
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similar to HO-1, or named perils
insures the dwelling for the repaired cost or market value, instead of the replacement value
designed specifically for older homes
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Section I: Property coverage
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Coverage A: Dwelling (covers no damage to land)
Coverage B: Other structures (not houses) (doesn't cover other structures used for business purposes)
Coverage C: Personal Property (covers property of guests in your home)
Coverage D: Loss of use (covers losses incurred as a result of your home being uninhabitable)
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Section II: Personal Liability Coverage
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-Protects the policyholder in case someone is injured on their property
-minimum level of coverage is $100,000
-medical payments to others covers small medical
-expenses up to $1000 per person
-does not cover business or professional liability or negligence
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Endorsements
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personal article floaters, earthquake coverage, flood protection, inflation guard, personal property replacement cost coverage
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Umbrella Policies
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cover liability costs after the underlying homeowner's policies have been exhausted
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actual cash value
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the cost to replace with new property of like kind and quality, less depreciation.
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PAP
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Personal automobile policy: 30 million car crashes in the US annually, or about 1 accident for every 5 drivers
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Comprehensive Insurance
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full coverage: applies when your vehicle is encumbered by a loan. You must insure against liability and for the value of the vehicle itself
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premium
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the monthly payment you pay for your insurance coverage
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policy provisions
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the terms or conditions of your coverage
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PAP Part A
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Liability Coverage: covers bodily injury losses, covers property damage losses, can be combined single limit or a split-limit coverage, covers losses due to lawsuit
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PAP Part B
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Medical Expense Coverage: covers all reasonable medical costs and funeral expenses incurred, by the insured or the insured's family members within 3 years of an accident
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PAP Part C
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Uninsured Motorists: provides coverage if injured by an uninsured motorist or a hit-and-run driver
the other driver must be at fault to collect on this coverage
also covers costs in excess of the other driver's liability coverage, if inadequate to pay for your losses
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PAP Part D
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Comprehensive Physical Damage Coverage: Covers
-collision loss
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Standard Exclusions
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intentional injury or damage, use without permission, vehicle has less than 4 wheels, indiv not listed on your policy, driving in a race
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No-Fault Insurance
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only available in "no-fault" states
your insurance pays for your losses and their insurance pay for their losses- no legal battles
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Gap Insurance
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coverage that pays for the difference btw. the vehicle's value and what you may still owe on the loan
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Determinants of the Cost of Auto Insurance
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-type of auto
-use of auto
-your personal characteristics
-your driving record
-where you live
-discounts you qualify for
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Keeping Costs for Auto Insurance Down
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shop comparatively, consider only high-quality insurers, use discounts, raise deductibles
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investing
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putting all your money into an asset that generates a return (stocks, bonds, mutual funds, real estate)
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speculating
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putting your money into an asset that the future value, or return, relies on supply and demand (collectors items, gold, baseball cards)
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