Question

Tyler just wrecked his new​ Nissan, and the accident was his fault. The owner of the other vehicle got two estimates for the​ repairs: one was for ​$613 and the other was for ​$674. Tyler is thinking of keeping the insurance companies out of the incident to keep his driving record​ "clean." Tyler's deductible on his comprehensive coverage insurance is ​$550, and he does not want his premium to increase because of the accident. In this​ regard, Tyler estimates that his​ semi-annual premium will rise by ​$50 if he files a claim against his insurance company. In view of the above​ information, Tyler's initial decision is to write a personal check for ​$613 payable to the owner of the other vehicle. Assume that Tyler keeps his Nissan for four more years and that his premiums do not change each subsequent year. What is the cost of claiming to the insurance​ company? Did Tyler make the most economical decision​ (as opposed to claiming to the insurance​ company)? What other options should Tyler have explored depending on assumptions​ made?

Answer 1

Another option: submit the claim, and the insurance company would pay $550 towards the bill, most likely. That means Tyler has to pay the remainder, i.e. 613-550=$63, using the lower estimate. His rates may (or may not) increase by $60 50 semi-annually. If they do, that is $120 100 more per year. In his first thought, he pays $613. If he uses his insurance, his immediate out-of-pocket expense is $63, which is $550 less. Even though his insurance premium goes up by $50 every six months, it will take 11 six-month periods for that extra cost to add up to $550.

By using his insurance (which he paid for), he keeps more of his money in his own pocket for his own use. A $60 50 increase in his premium every 6 months is only $8.33 a month. In his initial decision, he is 'out' $63 right now. If he uses the insurance, he is only 'out' $63 right now, and it will take 6 years before the added premiums add up to the other $550. It would be wiser to use the insurance,

Thus the answers of the questions will be:-

What is the cost of claiming to the insurance company? :- $8.33 per month

Did Tyler make the most economical decision (as opposed to claiming to the insurance company)? No, he should use insurance