Question

The house Tara and Levi purchased is valued at $425,000. Which of the following statements accurately describes the difference between the two plans?
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.

Answer 1

I don’t have the details of the two insurance plans (premiums, deductibles, coverage limits/percentages), so I can’t pick one of the choices yet. Please provide the plans’ numbers (annual premium and what you would pay if there is a “severe” loss — e.g., deductible or percent not covered).

How to compare once you have those numbers:
- No-incident case: compare annual premiums. The cheaper premium plan is cheaper if no incident occurs.
- Severe-incident case (assume loss L — if L is the whole house value use L = 425,000): compare total cost = premium + out-of-pocket for the claim. If the insurer pays everything beyond a deductible d, out-of-pocket = d (or = L if d > L). So
- cost_A = Premium_A + min(d_A, L)
- cost_T = Premium_T + min(d_T, L)
- Use those two comparisons to determine which statement (a–d) is true.

If you paste the premium and deductible (or coverage rule) for AAA and Thompson, I’ll compute the two scenarios and pick the correct answer.