Suppose you are 28 and married. You and your spouse file for income taxes jointly. You are in the 25% tax bracket. You are considering a few personal investment issues. While insurance is an effective way to protect against undesirable risk, it is by no means the only way. There exist many other tools for personal risk management. Cash reserve is one such example. By keeping cash reserve, you self-insure against unexpected future loss. Compared with self-insurance using cash reserve, buying insurance has both pros and cons. The biggest pro is mortality pooling—more efficient to manage risk on the group level than on the individual level. The biggest con is the high price of insurance policy. The high insurance premium results not just from an insurance company’s costs of producing the insurance but also from the high costs to market it (e.g.,commissions paid to insurance agents) and the additional costs caused the prevalent adverse selection and moral hazard problems in the insurance market as well as the insurance company’s profit. So, you need to weigh the pros against the cons to decide whether to buy insurance. All of the following insurances are worth buying EXCEPT__ a. Liability insurance b.Homeowner insurance c.Extended warranty on consumer electronics d.Umbrella insurance

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Suppose you are 28 and married. You and your spouse file for income taxes jointly. You are in the 25% tax bracket. You are considering a few personal investment issues.

While insurance is an effective way to protect against undesirable risk, it is by no means the only way. There exist many other tools for personal risk management. Cash reserve is one such example. By keeping cash reserve, you self-insure against unexpected future loss. Compared with self-insurance using cash reserve, buying insurance has both pros and cons. The biggest pro is mortality pooling—more efficient to manage risk on the group level than on the individual level. The biggest con is the high price of insurance policy. The high insurance premium results not just from an insurance company’s costs of producing the insurance but also from the high costs to market it (e.g.,commissions paid to insurance agents) and the additional costs caused the prevalent adverse selection and moral hazard problems in the insurance market as well as the insurance company’s profit. So, you need to weigh the pros against the cons to decide whether to buy insurance. All of the following insurances are worth buying EXCEPT__

a. Liability insurance

b.Homeowner insurance

c.Extended warranty on consumer electronics

d.Umbrella insurance

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