Answers26-27 Ignite Financial Literacy Personal Finance - EL3403Homeowners InsuranceQuestion 4
4
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Homeowners Insurance

Question 4 • 26-27 Ignite Financial Literacy Personal Finance - EL3403

Tara and Levi are trying to decide between homeowners insurance policies offered by two different agencies. AAA Insurance has offered to insure their home for an annual premium of $0.38 per $100 with a $500 deductible. Thompson’s Insurance has offered to insure the same home for an annual premium of $0.26 per $100 with an deductible of $1,000.Insurance CompanyAnnual Premium (per $100)DeductibleAAA Insurance$0.38 $500 Thompson's Insurance$0.26 $1,000 The house Tara and Levi purchased is valued at $425,000. Which of the following statements accurately describes the difference between the two plans?

Answer
A
AAA Insurance is cheapest if Tara and Levi experience an incident that results in severe damage or loss to their home.
B
AAA Insurance would be cheapest if Tara and Levi can avoid any incidents that result in severe damage or loss to their home.
C
Thompson’s Insurance is cheaper even if Tara and Levi experience an incident that results in severe damage or loss to their home.
D
Thompson’s will be more expensive whether or not Tara and Levi experience an incident that results in severe damage or loss to their home.

Explanation

The $425,000 home represents 4,250 units of $100. AAA’s annual premium is 4,250 × $0.38 = $1,615, while Thompson’s is 4,250 × $0.26 = $1,105. If there is a claim, adding the deductibles gives $2,115 for AAA and $2,105 for Thompson, so Thompson’s Insurance is still cheaper, by $10. That matches the statement that Thompson’s is cheaper even after severe damage or loss.

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