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risk
likelihood that the loss causing event will occur.
rider
additions to a homeowner’s insurance policy that alter the policy’s coverage and terms; also called an endorsement. excess coverage above and beyond the liability limits of a standard insurance policy.
umbrella policy
underwriter
the insurer.
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I. Insurance Would you buy, own, or invest in an asset or business if just one accident or error could completely and permanently wipe out all of your investment? Would you risk all your hard-earned wealth if you could lose it all in an instant due to a disaster, theft, fraud, or fire? The obvious answer to this question is “no!” If one accident or a single mistake could completely wipe out your wealth, no one would buy, invest in or acquire assets, or start a business. It would be far too risky! But people do buy homes. They buy and drive cars. They run businesses providing all sorts of products and services. What enables them to take such risks? Insurance! Insurance. You’ve heard the word and have probably seen plenty of TV ads about insurance. What is insurance and how does it work to protect wealth? As you build wealth, you will start to acquire things of value, such as a house with furniture and appliances, a car, possibly a business, and other assets. These things become part of your net worth. If there’s an accident or disaster, or if they’re stolen, their value can drop to zero in an instant! Insurance is an essential part of preserving and protecting wealth because it provides a source of money for recovering the value of an asset that has been destroyed, damaged or stolen . Throughout your life you will have many encounters with insurance, so as a financially literate person, it’s important that you understand basic insurance terms and concepts: Insurance Policy. Insurance works by a contract called the Fin Lit Trivia Fin Lit Trivia Fin Lit Trivia PRODUCT PREVIEW
Plunder Policy The term underwriter
insurance policy . For a monthly, quarterly, or annual fee called a premium , an insurance company, such as Travelers, Geico, or State Farm, makes a contract with the owner of an asset, such as a house, car, business equipment, or artwork. Under the terms of the policy, the insurance company agrees to assume the risk of financial loss in the event the asset is lost or destroyed because of an of accident, error, theft, or in the case of health insurance, illness. The overall objective of insurance is to preserve the insured’s wealth by returning the insured to the same financial position as before their loss. Insurance companies are also referred to as underwriters because the underwrite loss, which simply means they have agreed to be financial responsibility for any potential losses.
relates back to the days of the great and dangerous sea voyages. Shipwrecks and pirate attacks made these voyages very risky! Potential losses would be divided up among a number of different merchants. Each would write their name under the total amount of risk (loss) he was willing to cover in the event of loss.
THE 21st CENTURY STUDENT’S GUIDE TO FINANCIAL LITERACY 285
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