Valued vs Indemnity Contracts ***

MR. WATSON: Next are valued contracts versus indemnity contracts .

MR. WATSON: Valued contracts pay the value of the contract if a defined event should occur. Life insurance is a valued contract. You buy $500,000 of life insurance. The event is death. And what are you going to be paid? $500,000.

MR. WATSON: With indemnity contracts , the amount we pay out depends on how much you lost. Let's say we had a $100,000 home, insured for $100,000, and my kitchen burns down, I suffer a $75,000 loss. Big kitchen, huh? How much would they pay out? $75,000. That's indemnity: the amount we pay out depends on how much you lost. Got it?

STUDENTS: Yes.

MR. WATSON: So if a policy pays a fixed value if a defined event should occur, it is a valued contract. Life insurance is a Valued contract . Hospitalization is an indemnity because the amount we pay out depends on how much was lost. Does that make sense? Automobile insurance is indemnity.

MR. WATSON: Now, I have a disability policy that will pay me $5,000 per month for 20 years should I become disabled. Is that valued or indemnity?

STUDENTS: Valued.

MR. WATSON: Does it pay a stated amount?

STUDENTS: Yes.

MR. WATSON: How much?

STUDENTS: $5,000.

MR. WATSON: If what event happens?

STUDENTS: Disability.

MR. WATSON: Don't confuse it with just paying one time. Understand?

MR. WATSON: When must insurable interest exist?

WOMAN: At the beginning, at inception date.

MR. WATSON: That's my girl.