Question

Ricardo paid an annual premium of $1,000 in total liability coverage for his car, including up to $200,000 in bodily injury coverage and $100,000 in property damage coverage. Ten years into his policy, Ricardo caused an accident that resulted in the other driver claiming $60,000 in medical costs and $20,000 in car damage. Ricardo's insurance company paid the claims. Did the benefit of transferring the risk to the insurance company outweigh the cost of the premium?

Answer 1

The benefit of transferring the risk to the insurance company outweighs the cost of the premium.

Step-by-step explanation:

The benefit of transferring the risk to the insurance company outweighs the cost of the premium in this case.

Ricardo paid an annual premium of $1,000 for his car insurance, which included up to $200,000 in bodily injury coverage and $100,000 in property damage coverage. When Ricardo caused an accident that resulted in $60,000 in medical costs and $20,000 in car damage, his insurance company paid the claims.

If Ricardo did not have insurance, he would have had to pay $80,000 out of pocket. However, because he had insurance, his out-of-pocket expense was only the annual premium of $1,000. Therefore, the insurance coverage saved Ricardo $79,000 ($80,000 - $1,000), outweighing the cost of the premium.