UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS AND HOSPITALITY

First Semester
A.Y. 2024-2025

COURSE LEARNING MODULE

FINA 1023- Personal Finance

Prepared by:

FE ROSE-ANNE B.MARAMAG, DBM

Instructor

WARNING: No part of this E-module/LMS content can be reproduced or transported or shared to others
without permission from the University. Unauthorized use of the materials, other than personal learning use,
will be penalized.

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 School of Accountancy, Business and Hospitality
Business Administration Department
Curriculum 2018-2019

Lesson 10: Insurance and Risk Management

Learning Outcomes:
At the end of this module, you are expected to:

1. Create a plan to buy life insurance

2. Feel the importance of having insurance as a way of reducing risks encountered in their lives
3. Choose the best life insurance policy of their own to achieve their goal and reduce their risks

LEARNING CONTENT
Introduction:

Insurance involves property and people. By providing protection against the risk of financial
uncertainty and unexpected loses, insurance makes it possible to plan for the future.

Lesson Proper:

Insuring your Resources

https://www.youtube.com/watch?v=Cp_XEhexcDw

Life is full of risks. You can try to avoid them or reduce their likelihood and consequences, but you
cannot eliminate them. You can however, pay someone to share them. That is the idea behind
insurance.
What is Insurance?
Insurance is protection against possible financial loss. Although many types of insurance
exist, they all have one thing in common: They give you the peace of mind that comes
from knowing that money will be available to meet the needs of your survivors, pay
medical expenses, protect your home and belongings and cover personal or property
damage.

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Insurance is based on the principle of pooling risks, in which thousands of policyholders
pay a small sum of money (premium) into a central pool. The pool is then large enough
to meet the expenses of the small number of people who actually suffer a loss.
An insurance company, or insurer, is a risk sharing firm that agrees to assume
financial responsibility for losses that may result from an insured risk. A person joins the
risk sharing group by purchasing a policy. Under the policy, the insurance company
agrees to assume the risk for a fee that the person (the insured or policyholder) pays
periodically.
Types of Risks
You face risks every day. You can’t cross the street without some danger that you’ll be
hit by a car. Risk, peril and hazard are important terms in insurance.

Basically, risk is uncertainty or lack of predictability. Peril is the cause of a possible loss
and hazard increases the likelihood of loss through some peril.
The most common risks are classified as personal risks, property risks and liability
risks. Personal risks are the uncertainties surrounding the loss of income or
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life. Property risks are the uncertainties of direct or indirect losses to personal or real
property. Liability risks are possible losses due to negligence.
Personal, property and liability risks are types of pure risks or insurable risks since
there would be chance of loss if the specified events occurred. Pure risks are accidental
and unintentional risks.
A speculative risks is a risk that carries a chance of either loss or gain. Most
speculative risks are considered to be uninsurable.
Risk Management Methods
Risk management is an organized strategy for protecting assets and people. It helps
reduce financial losses caused by destructive events. Most people think of risk
management as buying insurance. However, insurance is not the only method of dealing
with risk; in certain situations, other methods may be less costly. Four general risk
management techniques are commonly used which are: Risk Avoidance, Risk
Reduction, Risk Assumption and Risk Shifting.

When you assume risk, you do nothing to minimize the financial impact of loss should a hazard occur. For
example, you don't buy fire or flood insurance on your home or you don't have life, disability, or health
insurance coverage. Should a risk occur, you must pay the full cost of the loss out of your own assets. This can
adversely affect your financial goals for you and your family.

Avoiding risk may not be easy, but there are ways to lower risk management costs by doing so. Risk avoidance
can lower the financial cost of risk, which is why insurance premiums are lower for persons and businesses that
take measures to lower risk. For example, automobile insurance premiums are lower for drivers with good
driving records (no accidents and no cited violations of driving laws), and non-smokers pay lower medical
insurance and life insurance premiums than smokers do.

There is no way to eliminate all risk, but there are ways to avoid, minimize, or protect yourself
and your family from risk.

Sharing risk divides the cost of risk among those who participate. In a household where there are two earners,
although the family income might be reduced should one earner lose his or her income, all is not lost,
especially if only one earner's income is necessary to achieve the financial goals. Some insurance policies
allow you to share the risks with the insurer in order to get a lower premium. If you can assume a certain
amount of financial risk, then the insurance premium on the balance of the risk will be lower. For example,
some automobile policies have lower premiums if you are willing to take responsibility for the first $500
of liability, known as a deductible. Medical insurance premiums can also be lowered if you have higher co-
payments.

Finally, for those who cannot tolerate any financial risk, risk can be transferred to someone else, usually an
insurance company, who assumes full responsibility for it. Of course, this method of risk management has the
highest premium cost. An insurer will pay the costs of loss to an insured in consideration of a fee called a
premium, which is usually a very small fraction of the benefits to be paid.

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Insurance works because an insurer can determine the mathematical probability of a risk occurring, and the
financial risk at stake. Anyone who owns an automobile knows that he or she is required to have automobile
insurance to cover the risk of damage to someone else. With many years of statistics on automobile damage
costs, insurers are able to determine the amount of premium necessary to provide benefits to insure
automobile owners. Using the same principles, one can buy insurance to minimize financial loss due to
accident, natural disaster, legal liability, illness, disability, and even death. The purpose of insurance is to
provide financial relief from catastrophic losses. Money from many people is pooled to pay for losses incurred
by a few.

When planning your financial goals, you need to consider the risks to your income, capital, and investments.
Prudent investors evaluate their risk tolerance and make appropriate investments to assure that they will
achieve their goals despite the potential risks that may befall them.

Planning an Insurance Program

REFERENCES

Textbooks

Hughes, K. (2008).Focus on personal finance. Boston: McGraw Hill

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