Financial Assets

Cash Accounts (definition)

accounts who store cash

Value of cash is an

objective metric

Common cash accounts

checking account, savings account, CD, money market account

Checking account

regular and normal cash inflows and outflows

Checking account created so an account owner can

make payments to third parties, via check to bank

Savings account

storing money for future use

Savings account purpose

regular outflows, some limits on # of withdrawals, pays stated rate of interest

Certificate of Depoist (CD)

stated rate of interest in exchange that bank can use money for set period of time (maturity period)

For a CD if account holder takes money out prior to agreed term

some/all of interest may be forfeited

CD periods

three, six, twelve, eighten, twenty four months

Money Market Fund

low yield investment, functions like saving account

Money market fund process

invested in short term commercial paper (t-bonds, overnight transfers) larger rate of return than traditional savings account

Whole life insurance has elements of both

insurance and assets

Whole life insurance

financial instrument that pays a specified face amount of money to the contract holder at contract maturity

Why is whole life insurance an asset

contract builds monetary value over time that the contract holder can use

when holder passes the full face amount is

immediately paid to named beneficiary

process of whole life insurance

require payments by contract holder (premiums)

premium paid until contract maturity

What do the premiums pay

mortality costs (life insurance death benefit) and admin costs

What does the rest of premium go to

invested on behalf of the contract holder

Invested asset grow to be worth the

face amount of the contract at time of maturity

invested money is set aside in an account known as the

cash value or contrasts equity

accessing cash value: withdrawl

reduces face amount, taxes are not due unless withdrawl exceeds the amount of money paid in premium

acessing cash value: poicy loan

flexible terms, not paid back loan is deducted from face amount

acessing money: contract surrender

forefeit entire contract, stop paying premiums and withdrawl all cash , taxes due on amount of growth

Stop paying premiums what happens

contract becomes “paid up”

cash value exists grows

contract is reduced in face amount

where are the invested protion of premiums invested

insurance companys general account

rate of whole life insurance cash value

1-2 annual growth rate

1-2 percent growth rate is known as the

crediting rate - gaurnetted amount, higher than the insurance companys earns a profit

mutual insurance companioes

profiuts are owned by contract hodlers (4-5 percent)

stock companies

shareholders get the profit, not contract hodlers

Dividends paid by mutual insurance company can be paid in differnt ways

in cash, reduciton of premium, purchase paid up additons

in cash

check for amount of dividend

reduction of premium

reduce premium, policy values remain, premium decreases over time

paid up addtions

purchase pieces of paid up insurance, increase maturity value and cash value