Life’s Greatest Risks
A FIN 230 Honors Project
“Introduction to Insurance”
By:
Erin M. Kelso &
Allison C. Tiller
(Idea for Project by Mil Grauer)
TABLE OF CONTENTS
What are the Odds?...……………………………………………………………………3
Life Insurance……………………………………………………………………………4
Disability………………………………………………………………………………….6
Fire………………………………………………………………………………………..7
Automobile Insurance…………………………………………………………………...8
Liability…………………………………………………………………………………..9
Long Term Care………………………………………………………………………...10
Risk of Living too Long and Running Out of Assets…………………………………11
Health Risks……………………………………………………………………………..13
Homeowners Claims……………………………………………………………………14
Bibliography…………………………………………………………………………….16
2
What are the odds?
In the next hour:
 194 people will be injured in car accidents
 57 homes will catch fire
 230 people will die
 1,027 people will become disabled
So the question is…
How can you as an individual plan ahead in order to
protect yourself against these things that you potentially
have no control over?
How should you manage all these risks in your everyday
life?
The answer is insurance!
3
1. Life Insurance
Life insurance protects your family if you should die because of an
unexpected circumstance. It can provide financial help in your absence,
cover funeral costs, and provide an income for your family, if you were the
primary breadwinner prior to your death. These are only just a few reasons
that support why an individual should definitely plan on buying a life
insurance policy in the event that someone else would incur a financial loss
if they died.
How many people are expected to die at a certain age?
*numbers are out of 1000 people per year at the specified age.
Age in 1990
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85 and over
Total U.S.
8.35
0.26
0.14
0.62
1.02
1.13
1.39
1.80
2.30
3.01
4.35
6.66
10.14
14.35
19.21
24.52
29.38
324.28
White Male
7.55
0.24
0.15
0.76
1.28
1.41
1.77
2.22
2.73
3.46
4.97
7.67
11.91
17.25
22.58
27.91
31.35
239.75
White Female
6.03
0.20
0.12
0.35
0.45
0.47
0.61
0.85
1.19
1.82
2.92
4.72
7.56
11.08
15.84
21.99
29.20
425.13
Black Male
18.27
0.43
0.16
1.50
3.07
3.42
4.01
5.11
6.67
8.18
10.31
13.57
17.07
19.90
23.18
23.31
21.69
131.98
Black Female
14.64
0.42
0.23
0.39
0.74
1.15
1.61
2.32
3.06
4.19
5.87
8.29
11.41
15.21
19.91
23.41
26.60
300.96
**The source for this table is the Statistical Abstract of the United States 1996, 116th
edition, published by the Department of Commerce (page 89).
4
Cumulative Death Table
*numbers are out of 1000 people per year at the specified age.
Age in 1990
25
35
45
55
65
Total U.S.
11.52
14.71
20.02
31.03
55.52
White Male White Female
11.39
7.62
15.38
9.08
21.57
12.09
34.21
19.73
63.37
38.37
Black Male
26.85
35.97
50.82
74.7
111.67
Black Female
17.57
21.5
28.75
42.91
69.53
Cumulative Death Chart Out of 1,000
120
# Deaths
100
25
80
35
60
45
40
55
65
20
0
Total U.S.
White Male
White
Female
Black Male
Black
Female
What are the chances of death from one of the following causes:
Chances of dying from selected causes (USA)
Cause of Death
Probability
Motor Vehicle Accident
1 in 100
Homicide
1 in 300
Fire
1 in 800
Firearms Accident
1 in 2,500
Electrocution
1 in 5,000
Asteroid/Comet Impact
1 in 20,000
Passenger Aircraft Crash
1 in 20,000
Flood
1 in 30,000
Tornado
1 in 60,000
Venomous bite or sting
1 in 100,000
Fireworks Accident
1 in 1 million
5
2. Disability
The main reason for buying disability insurance is to ensure that when a
working person gets an illness or disability, he or she will still have a
monthly income. Many people do not realize how high their chances are of
incurring a disability at some point in their life, and how their income alone
may not be able to cover their expenses.
“A Census Bureau study found that a typical 35-year-old making $50,000 a
year had enough savings on hand to cover only two months of expenses. Yet
most disabilities last 90 days or longer, and more than 1.5 million
Americans are considered permanently disabled and unlikely ever to return
to work.”
What is the probability of a person having at least one long term disability
that lasts three months or longer before that person reaches the age of 65?
Age (year)
25
30
35
40
45
50
55
Probability (%)
45
42
41
39
36
33
27
How many people have recovered, died, or are still disabled for five years
after incurring a disability?
Age at Onset of Disability
25
35
45
55
Recovered (%)
44.1
34.0
21.5
11.8
Died (%)
9.7
12.3
19.9
28.5
Still Disabled (%)
46.2
53.7
58.6
59.7
6
3. Fire
Fires are not something that most people think about anymore, when they
consider catastrophes that could occur to their home and belongings.
Nowadays the population is more concerned with tornados and hurricanes
and other things of that nature. However, fire is still a very real and
dangerous threat that could wipe out your home and all of your possessions.
You need to make sure that you protect yourself against this kind of loss,
because otherwise your entire future could be significantly impacted, should
your home and possessions burn down.
 Out of 100,000 homes, how many would burn down or be damaged from fire
annually?
12 out of 100,000 homes would burn down in 1 year.
 Fire is the largest single cause of property loss in the United States.
In the last decade, fires have caused direct losses of more than $120 billion and
countless billions more in related costs.
 Number of acres burned. Therefore, the upper west coast of the United States is the
most prone to fires.
less than 1,000 acres
1,000-10,000 acres
greater than 10,000 acres
7
4. Automobiles
Automobile accidents are extremely common, because there are a lot of
drivers on the road who may not be as conscientious as you are. Even if you
are careful and abide by the rules of the road, the person next to you may
have total disregard for them and then you’ll both end up in an accident
whether you planned on it or not. Car Insurance is a complete necessity for
anyone who sits down behind the wheel of a car or considers owning a
vehicle.
 Out of 100,000 automobiles, how many are involved in claims annually?
1,163 out of 100,000 are involved in Bodily Injury Claims annually.
3,846 out of 100,000 are involved in Property Damage Claims annually.
 In 2004, about one in 86 automobile liability policyholders made a bodily injury
claim; approximately one in 26 made a property damage claim.
 The average cost of car insurance nation wide is $684.09
 Want to know where it will be most expensive to drive and insurance your car? Can
you get car insurance for less based on where you live? Below are the Top 5 most
expensive and least expensive places to drive and have car insurance.
Most Expensive Cites for Auto Insurance
Ranking
1
2
3
4
5
City
Detroit, MI
Philadelphia, PA
Newark, NJ
Los Angeles, CA
New York City, NY
Average Auto Premium
$5,162
$4,142
$3,482
$3,225
$3,127
Least Expensive Cities for Auto Insurance
Ranking
City
Average Auto Premium
1
Roanoke, VA
$758
2
Wapakoneta, OH
$871
3
Chattanooga, TN
$911
4
Green Bay, WI
$948
5
Raleigh, NC
$949
** data in the graphs are from the Insurance Information Institute website.
8
5. Liability
Liability suits can quickly become one of the most costly financial tragedies
that you can incur in your lifetime. A liability lawsuit can completely
deplete all of your wealth if you do not have any kind of liability insurance.
Liability insurance is extremely useful to firms because they can incur much
larger liability suits that could bankrupt their company. This is also known
as “third party insurance”.

Liability premiums must be large enough to cover the damages that the company
would incur as a result of the lawsuit, as well as the defense charges by their attorney.
Firms need to determine what the maximum loss that they could possibly incur would
be, and the premium is determined by the insurance company based on this.
Obviously as the possible maximum loss grows, so will the company’s premium.

If you already have any of the following then you probably already have liability
insurance!
 Automobile Insurance
 Homeowners Insurance
 Renters Insurance
 Boat Insurance

It is not unlikely to see liability claims arise that are in the ballpark of $1-10 million!
The average individual can’t cover this on their own, so it would be very wise to
purchase liability insurance in addition to your other personal policies as mentioned
above.

So you’re probably still asking yourself: Why would I need liability insurance? Well
see how many of these questions you answer yes to, and then you may start to see the
big picture of why liability insurance is so important in today’s crazy world:

Do you entertain often? (Having guests in your home, serving alcohol, etc., can
open the door to potential liability claims.)

Do you operate a home-based business that is covered under your homeowners
policy?

Do you have a long commute to work?

Do you take frequent auto trips?

Do you have teenage children? Do they drive?

Does your lifestyle make you a likely target for a lawsuit (i.e., do you give the
appearance of having "deep pockets")?
9
6. Long Term Care
Once you start reaching old age, the prospect of living in a nursing home or
another full-time care facility becomes more realistic and the probability of
you needing long term care increases. To protect against the high costs a
family can incur from placing a family member in a long term care facility,
there is long term care insurance. On average, long term care costs $7,000
a month, or about $84,000 a year. This is a lot of money for a family to
incur and that is why there is long term care insurance to protect against
this kind of financial liability.
 If you are age 65, what is the probability of needing long term care in a nursing home
and for what period of time over the course of your lifetime?

56% won’t need any long term care in nursing home

12% will need long term care for less than 3 months

9% will need long term care for 3 months to 1 year

15% will need to be in a nursing home for 1 to 5 years

8% will need long term care for more than 5 years over the course of their
lifetime.

44% will therefore be disabled 90 days or longer!
 Is there a chance that you will need long term care before the age of 65? How rare is
this?
Yes…unfortunately, however the possibility is quite small. Information from the
Insurance Information Institute, Inc. shows that there were over 5 million
individuals last year that needed long term care and who were all between the
ages of 18 and 64. While this number is not nearly as large as the number of
individuals in nursing homes that are over 65, it is still important to consider
purchasing this insurance at a younger age. By purchasing this at a younger age
you can lower your premiums by proving insurability while you are still healthy
and protect yourself against unforeseen illnesses.
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7. Risk of Living too long and Running out of Assets
Compared to earlier generations, our population as a whole is starting to
live longer. This has a direct correlation to how much money you need to
save up for retirement. Since earlier generations did not live long after
retirement, they did not require a huge amount of saved funds and assets to
sustain their lifestyle after retirement. Nowadays, since the life expectancy
of the average individual is increasing, people should be planning on saving
more money earlier in their career, in order to accommodate for the
possibility of living longer.
 What is the life expectancy of a female or male reaching age 65?
Female
19.5 years left
Male
16.6 years left
 If you are already age 70 and you have never smoked, then you have about a 33%
chance of living until you reach age 90. However, if you were a smoker, then you
only have a 7% chance of living to 90.
 Why should I start saving for retirement as early in my life as possible?
Through the magic of compound interest you can save a lot more money this way.
Social Security may not be enough to cover all of your expenses after retirement should
you live longer than the government expects you to. By saving early though you can
avoid this risk as seen in the table below.
 How much money can you save for retirement at age 65, just by putting away $1,000
a year into different banking accounts with different rates of interest?
Compound Interest - Start saving $1,000 annually at the following ages to age 65.
Interest Rate
4%
6%
8%
Ages
$95,025.52
$154,761.97
$259,056.52
25
$56,084.94
$79,058.19
$113,283.21
35
$29,778.08
$36,785.60
$45,761.96
45
$12,006.12
$13,280.79
$14,486.56
55
11
 What is the average life expectancy at various ages?
*data is in number of years left until death.
Age
Female
Male
Total *
(years)
*
*
(Male&Female)
79.9
74.5
77.3
0 (at birth)
79.4
74.1
76.8
1
75.4
70.2
72.9
5
70.5
65.3
67.9
10
65.5
60.3
63.0
15
60.7
55.6
58.2
20
55.8
51.0
53.5
25
51.0
46.3
48.7
30
46.1
41.6
44.0
35
41.4
37.0
39.3
40
36.7
32.6
34.8
45
32.2
28.3
30.3
50
27.7
24.1
26.1
55
23.5
0.2
22.0
60
19.5
16.6
18.2
65
15.8
13.2
14.7
70
12.4
10.3
11.5
75
9.4
7.8
8.8
80
6.9
5.7
6.5
85
5.0
4.2
4.8
90
3.7
3.2
3.6
95
2.8
2.5
2.7
100
*This information is from the National Vital Statistics Reports for the US in 2002.
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8. Health Risks
People get sick. It’s just a fact of life. And unfortunately if you, or one of
your family members gets sick enough, the medical bills can get
astronomical. Health Insurance helps protect you against these exorbitant
costs that doctors, hospitals and other practitioners are charging in today’s
growing medical industry. Should you get into an accident and need
immediate emergency health care or just get really sick with the flu one day,
health insurance will help to off set the costs that you will be charged in
order to determine and cure your illnesses.
 $1.7 trillion was spent in 2003 on health care costs alone! This can be broken down
to $5,671 per capita, which is a lot of money for one individual to be spending on health
care! This is why health insurance is such a necessity nowadays.
 The average annual growth rate in inpatient expenditures per health plan member is
5.9%. Also, there was a slight decline in hospital costs in the 1990s, but they are now
currently rising at 6-7% each year. What is interesting though is that the costs are
increasing while the length of hospital stays is decreasing.
 The cost of a hospital stay across the U.S. varies greatly. (Percentages describe how
much the costs are above or below the national average)
 More expensive states include: California (45%), Nevada (34%), Hawaii (40%),
New Jersey (52%), Florida (29%)
 Less expensive states include: Idaho (-28%), Montana (-33%), North Dakota
(-28%), South Dakota (-27%), Iowa (-22%), West Virginia (-31%),
Maryland (-38%), Vermont (-23%)
 All other states are within –20% to +20% of the average
 Causes for the increase in hospital costs:
 Hospital payrolls are increasing very rapidly
 Nursing shortage
 Lower hospital competition in most markets = higher prices
 Increases in the quantity of services used
 Rising number of outpatient visits
 Increasing Drug Costs
13
9. Homeowners Claims
Homeowners Insurance is extremely vital to have because no one really
knows when a tragedy can happen that will wipe out your home and all of
your possessions. The typical homeowners policies covers property damage
as well as liability issues that may arise as a result of owning property.
 How many homeowners claims are filed per year out of 100,000 policies held?
7,330 out of 100,000 homeowners polices file claims each year. This includes
everything from fire, lightning, debris removal, theft and random damage or
destruction to your house and possessions.
 What is the average size of a homeowners policy claim?
$5,082 is the average severity of a Homeowners claim.
 So you may be asking yourself what the probability of certain events happening that
would cause you to need Homeowners Insurance. Below is a chart of the various
possibilities that a typical Homeowners policy would cover.
Percent of Losses Incurred on Homeowners Policies
Type of Damage/Year
Property Damage
Fire, Lightning, Debris
Removal
Wind and Hail
2000
2001
2002
2003
2004
32.82%
31.03%
32.72%
32.92%
22.49%
20.45%
21.69%
20.81%
25.56%
48.61%
Water Damage, Freezing,
Mold
Theft
22.6%
22.14%
21.71%
22.01%
16.62%
4.91%
4.65%
4.53%
3.29%
2.35%
Other Property Damage,
(Vandalism and Mischief)
Liability
Bodily Injury and Property
Damage
Medical Payments
11.63%
13.11%
12.23%
10.62%
6.01%
6.43%
6.47%
7.00%
5.29%
3.17%
1.13%
0.88%
0.98%
0.94%
0.74%
Credit Card Fraud (forgery
and counterfeit currency)
0.03%
0.03%
0.01%
0.00%
0.00%
**data from the Insurance Information Institute Website in the Homeowners Statistics section.
14
 The average premium that people pay for Renters insurance nationwide is $186 and
the average premium for Homeowners insurance is $593.
 Recent data shows that out of all the money that gets paid out for homeowners claims,
84% of this goes towards property damage (which includes theft) claims, and only
4% goes towards paying liability suits. The remaining 12% of the costs of the
homeowners claims covers the costs of settling these homeowners claims.
 In a recent insurance survey done in 2003, about 95% of homeowners have insurance
for their home and belongings. This shows that a significant portion of the population
realizes what kind of risk they have in owning their own property and how to insure
their possessions.
15
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