Question

Colton Gentry of Lancaster, California, has owned his home for ten years. When he purchased it for $178,000, Colton bought a $160,000 homeowner's insurance policy. He still owns that policy, even though the replacement cost of the home is now $300,000.

A) If Colton suffered a $23,000 fire loss to the home, what percentage of the loss would be covered by his policy? Round your answer to one decimal place.%


B) What dollar amount of the loss would be covered by his policy? Enter the amount of the loss as a positive number. Round your answer to the nearest dollar.$


C) How much insurance on the home should Colton carry now to be fully reimbursed for a fire loss? Round your answer to the nearest dollar. $

Answer 1

Answer and Explanation:

The computation is shown below:

a. The percentage of loss covered is

= Bought price of insurance policy ÷ purchase price × 100

= $160,000 ÷ $178,000 × 100

= 89.89%

b. The dollar amount of loss covered is

= Percentage of loss covered × suffered amount

= 89.89% × $23,000

= $20,674.70

c. For reimbursement of the fire loss the amount should be equal to the replacement cost of the home i.e $300,000. It is fully reimbursed

We simply applied the above formula