Personal Finance Exam 3- Harding University

What is a budget?

Is a written plan of what you expect your income and expenses to be over a certain period of time

Important monthly expenses

mortgage

car payments

student loans

insurance

groceries

utilities

contribution

28/36 rule

28 = housing

36= debt

Budget steps (planning/control)

1. estimate in advance your expenditures

2. record actual expenditures

3. compare actual to estimates

What percent of Americans do not think they need a budget?

27%

How to experience more freedom while budgeting

give it 3-4 months to start working

spend every dime on paper before it ends

over-fund groceries

spouses need to loosen up

spouses should work together

five money gotchas

1. Eating out

2. Car payments

3. Groceries

4. Utilities

5. Clothing

6. DoorDash

7. Pets

What is life insurance

insurance that pays out a sum of money either on the death of the insured person or after a set period.

Catastrophic events

Premature death

Natural disasters

9/11 attacks

Risk

chance of economic loss

Risk avoidance

avoidance of any act that creates risk

Loss prevention

any activity that reduces the probability that a loss will occur

Loss Control

any activity that lessens the severity of loss once it occurs

Risk Assumption

the choice to accept and bear the risk of loss

Insurance policy

a written contract between the insured and an insurance company that promises to pay for all or part of a loss

Underwriting

the process of selecting, classifying, and pricing applicants for insurance

Why should you buy Life Insurance

protect dependents from financial loss in the event of an untimely death

Benefits of Life insurance

-financial protection for dependents

-protection from creditors

-tax benefits

-savings vehicle

Steps for Life Insrance

1. Assess family's total economic needs0

2. Determine what financial resources will be available after death

3. Amount of additional life insurance required to protect your family

Term Life Insurance

Life insurance that pays a death benefit if the policyholder dies within a specific time period but has no remaining value at the end of this time.

straight term policy

Coverage remains unchanged throughout the effective period

Whole Life Insurance

Insurance that is kept in force for a person's entire life and pays a benefit upon the person's death, whenever that may be.

Cash Value

Accumulated refundable value of an insurance policy

Strategies involved in buying life insurance

-Compare costs and features of competitive policies

-Select a financially healthy insurance company

-Choose a reputable agent

Beneficiary Clause

Policy holder names who the payout will go to

Policy Loan

Advance secured by the cash value of a whole life insurance policy

multiple indemnity clause

Doubles or triples the policy's face amount if the insured dies in an accident

Disability Clause

a clause in a life insurance contract containing a waiver-of-premium benefit alone or coupled with disability income

Guaranteed Purchase Option

an option in a life insurance contract giving the policyholder the right to purchase additional coverage

Suicide Clause

states that if the insured commits suicide within two years after the policy is issued, the face amount of insurance will not be paid; there is only a refund of the premiums paid

Viatical Settlement

the sale of a life insurance policy by a terminally ill insured to third party, typically to investors or investor groups, who hope to profit by the insured's early death

health insurance

Insurance that covers medical illness or injury.

Why is health insurance needed

1. Costly advances in medical technology

2. aging US population

3. poor supply & demand distribution of healthcare facilities and service

Private Health Insurance plans

- Group health insurance

- Indemnity (fee-for-service) plan

- Managed Care plan

Group Health Insurance

health insurance consisting of contracts written between a group, (employer, union, etc.) and the health care provider

indemnity (fee-for-service) plan

Health care provider is separate from the insurer, who pays the provider or reimburses for a specified percentage of expenses after a deductible amount has been met

80%

Managed Care Plans (HMO)

Care plans that provide members with a list of health care providers they may visit and then either cover the entire cost or collect co-pays from members,

Copay

an out-of-pocket fee paid by a person with health insurance at the time a covered service, such as an office visit or a prescription, is received

Deductible

Specified amount of money that the insured must pay for covered medical expenses before the insurance policy begins to pay; usually annual amount per individual or family

Types of Managed care plans

HMO & PPO

Health Maintenance Organization (HMO)

an organization that provides comprehensive medical care to subscribers for a fixed fee

PPO (Preferred Provider Organization)

a type of health insurance plan in which a company forms a contract with certain hospitals and doctors to provide health care at a reduced rate

Medicare

A federal program of health insurance for persons 65 years of age and older or disabled

Medicaid

A federal and state assistance program that pays for health care services for people who cannot afford them.

Workers Compensation

state programs that provide benefits to workers who suffer work-related injuries or illnesses, or to their survivors. Paid nearly in full by employers.

Affordable Care Act

An expansion of medicaid, most of employers must provide health insurance, have insurance or face surtax, prevents rejection based on pre-existing condition. Also referred to as "Obamacare", signed into law in 2010.

Health savings account

A tax-advantaged personal savings account, set up to be used exclusively for medical expenses; must be paired with a high-deductible health insurance policy

Health Insurance Portability and Accountability Act (HIPAA)

protects patient information

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Employees who leave insured group are given up to 18 months of coverage paid in premiums from employer.

long term care

provide assistance and care mainly for elderly patients

$124,000

Disability Income Insurance

Health insurance that provides periodic payments to replace an insured's income when he/she is injured or ill.

Property Insurance

Protects real and personal property from losses caused by various perils

Liability Insurance

protects against the financial consequences from the insured's responsibility for property losses or injuries to others

peril

cause of loss

property inventory

How do we know what we own? How do we know what we own after a fire burns down our house?

Negligence

failure to be responsible

Renters Insurance

a type of insurance that covers the loss of a tenant's personal property as a result of damage or theft

Principle of Indemnity

The principle that insurance policies should provide a benefit no greater than the loss suffered by an insured.

comprehensive policy

Covers all perils unless they are specifically excluded

Named peril policy

Individually names the perils covered

Factors that affect home insurance cost

Location, type of structure, credit score, amenities ( trampoline & swimming pool)

Personal Automobile Policy (PAP)

A standardized automobile insurance policy for an individual or family.

Liability coverage for PAP

Bodily injury and property damage liability losses

25/50/25

-25,000 for 1 person injured

-50,000 for multiple people injured

-25,000 for property damages

Unisured Motorist Coverage

pays if you are struck by someone who is uninsured, underinsured, or a hit & run

Collision Coverage

covers accidents

Comprehensive coverage

covers what is not an accident

Factors that affect automobile insurance premiums

rating territory

amount of use the automobile receives

personal characteristics of the driver

type of automobile

insured's driving record

Property and Liability Insurance agencies

captive agents and independent agents

Captive Agent

an insurance agent who represents only one insurance company and who is, in effect, an employee of that company

Independent Agent

works for self and sells products for many companies

First steps following and accident

1. notify law enforcement

2. record contact details of all involved

3. record license plate number of cars involved

Steps in Claim Settlement

-notice to insurance company

-investigation

-proof of loss

Claims Adjustment

Insurance company will assign a claims adjustor if the loss is complex