fin 310 - personal finance - midterm 2 - ch 6 thru 10

fin 310 - personal finance - midterm 2 - ch 6 thru 10

Liability

a legally enforceable obligation

Title

• The legal document and public records establishing ownership rights to property or a home

• Represents the official, registered proof of ownership, which often requires title insurance

Elements of Negligence

1. Duty

2. Breach of duty

3. Proximate or legal cause

4. Damages

   1. Special = $x for car

   2. General = pain and suffering

   3. Punitive = to punish

5. Respondeat superior

   1. If an employee is responsible, their employer is liable/sued/paying

Adjustable-Rate Loan

• aka Variable-Rate Loan

• Interest rate varies based on the market interest rate

Res Ipsa Loquitur

• An example of legal/proximate cause

• “The Thing Speaks for Itself” – no contributory negligence involved

COBRA

• Consolidated Omnibus Budget Reconciliation Act

• Purpose: allows employees/dependents to temporarily keep health coverage

• Continuation of health coverage

Condominium Insurance

• HO-6

• Provides personal property and liability insurance for Co-Op or condominium owners

• HO-6: condo form covering dwelling, personal property, loss of use, liability, and medical payments

• It is essential for covering flooring, fixtures, and personal liability, which the HOA master policy typically excludes

Home Warranty

• Covers wear and tear from long-term use

  • Heaters and AC

  • Garage door openers

  • Kitchen appliances

  • Some electrical and plumbing

  • NO structures or patio

Mortgage Insurance PMI

• Private mortgage insurance

• Required if the down payment is less than 20%

• **Your mortgage is the minimum you will spend, and it can limit flexibility

Home Equity

• pro of buying a condo or house

•  Home Equity Loan (HELOC) aka Second Mortgage

  • Secured loan using equity in home as collateral

  • Advantages

    • Lower interest than other consumer loans

    • Another type of credit for FICO

  • Disadvantages

    • Puts your home at risk

    • Interest is no longer tax-deductible

    • Limits future financing flexibility

Identify and be prepared to Explain/Describe: Credit Score

• Your Credit Score

  • Affects…

    • The rates you pay on credit cards

    • The size of your credit line

    • The insurance rates

    • The mortgage rate

• Strong credit score = lower interest rate

• A 3-digit number based on your credit report

• 3 companies issue their own reports, so you have 3 credit scores

• FICO is the leading score in the industry and was developed by Fair, Issacs & Company 

• FICO score range from 300 to 850 with most in the 600-700 (median 720)

Identify and be prepared to Explain/Describe: Factors related to credit scores

• How is Your Credit Score Determined?

  • Payment History (35%)

  • Balances Owed (30%)

  • Time You’ve Had Credit (15%)

  • Last Application For C

Identify and be prepared to Explain/Describe: Three Methods of getting out of Debt

1. Math Method

   • Pay off the debt with the highest interest rate first, while paying a minimum payment on the rest 

   • Highest savings, but takes longer

2. Momentum Method

   • Pay off the lowest balance debt first, and the next lowest, etc, while paying the minimum on the rest 

   • Most satisfying

3. Shotgun Method

   • Pay more than the minimum payment on most or all of your debt accounts 

   • Least effective

Identify and be prepared to Explain/Describe: Risks of Adjustable-Rate Loans

• The rates vary based on market conditions rather than staying fixed

• While offering lower initial rates, they carry high interest rate risk for the borrower

• Hard to project future expenses with variable rate, which complicates long-term financial planning and limits flexibility

Identify and be prepared to Explain/Describe: 4 Requirements of all Legal Contracts

1. Agreements must be for a legal purpose

2. Parties must have legal capacity to contract

3. There must be a valid offer and acceptance 

4. Promises must be supported by the exchange of consideration

Identify and be prepared to Explain/Describe: Common Loan Clauses

• “Insurance Agreement Clause” = credit life insurance

• “Acceleration Clause” = miss one payment, balance becomes due

• “Deficiency Payments Clause” = repossess collateral

• “Recourse Clause” = lender can garnish wages

• “Early Payoff Clause” = agreed upon up front

Identify and be prepared to Explain/Describe: Costs of Property Repossession

• The borrower is liable for all expenses

• Repossessions don’t absolve the loan, as the cost of the repossession and the difference between what was owed vs what they got for the repossessed vehicle is paid by borrower 

Identify and be prepared to Explain/Describe: Considerations for a New, Used, or Leased Vehicle

• Step 1: “Want” vs “Need”

  • Features and qualities wanted

  • Features and qualities needed (short and long term)

• Step 2: How much can you afford?

  • Down payment

  • Monthly payment

  • Which vehicle is right for you?

    • Comparison shop – price and attributes

    • Operating and insurance costs and warranty

• Step 3: Make a purchase

  • Manufacturer’s Suggested Retail Price (MSRP): the price that the manufacturer nationally recommends that the retailer sells the product

• Consider your lifestyle as well

Identify and be prepared to Explain/Describe: Prepare to describe Term, Whole and Universal Life Insurance

• Term Life Insurance

  • temporary coverage, lower premiums, no cash value, rent policy

  • like renting a house that definitely serves the purpose it's needed for at the time, yet there is no ownership

• Whole Life Insurance

  • permanent coverage, higher premiums, builds cash value, own policy

  • like buying a house because you have permanent ownership and you can borrow money from the equity that builds in the house

    • you can borrow money from the cash value in a whole life policy

• Universal Life

  • 2 Parts: Insurance & Investment

    • Policy splits out the insurance portion from the investment (cash value) portion

• Variable Life

  • The interest credited component of the cash value is tied to the performance of an underlying equity/bond fund

  • Like a mutual fund

Identify and be prepared to Explain/Describe: HSAs & FSAs

• Both are financing options

• Flexible Spending Account (FSA)

  • Allows pre-tax dollars to be used for qualified healthcare and childcare expenses (use or lose)

• Health Savings Account (HSA)

  • Pay for health care expenses tax-free

  • Can build up over years

Identify and be prepared to Explain/Describe: Parties to a Life Insurance Policy

• Owner

  • Person or company who has an insurable interest buys policy, can also be the beneficiary or names some other beneficiary(ies)

• Insured

  • Person whose life is insured

• Beneficiary

  • Receives death benefit

  • No Taxes

• Conditional Beneficiary

  • Good idea

  • Otherwise, the proceeds pass to the estate of the owner if the beneficiary predeceases the insured

Identify and be prepared to Explain/Describe: Auto Insurance Policy Coverage Types

• Personal Automobile Policy (PAP)

  • A–Liability

    • Split limits formerly 15-30-5, 2025 CA statute changed to 30-60-15

  • Commercial auto–Combined single limits

  • B–Medical Payment

  • C–Uninsured Motorist

  • D–Property

    • Comprehensive & collision 

    • Rental car (loss of use) & towing

  • Total Loss–Actual Cash Value (ACV)

Identify and be prepared to Explain/Describe: Explain the use of an Umbrella Policy

• If a lawsuit judgment exceeds your insurance liability limit, the umbrella policy pays the difference, up to the policy limit.

• A type of personal liability insurance that provides extra protection beyond the limits of standard homeowners or auto policies

• It acts as a safety net, covering major claims or lawsuits for bodily injury, property damage, and personal liability (e.g., libel, slander) to protect personal assets and future earnings

Identify and be prepared to Explain/Describe: Prepare to Identify HO 1, 2,3,4,6 & 8 Policies

• HO–1

  • Basic form

  • Provides such very narrow coverage that it isn’t available in most states

• HO–2

  • Broad form

  • A named perils form of insurance

  • Covers a set of named perils (fire, lightning, windstorm, etc.)

  • If a peril isn’t specifically named in this policy, it isn’t covered

  • Typically costs 5-10% more than HO–1 coverage

• HO–3

  • All-Risk form

  • Covers all direct physical losses to your home

  • Offers open perils protection (covers all perils except those specifically excluded)

    • Excluded might include food, earthquake, war, nuclear accident

  • Typically costs 10-15% more than HO–1 policy

• HO–4

  • Renters form

  • Aimed at renters or tenants 

  • Covers personal belongings 

  • Does not include liability insurance

• HO–6

  • Condominium form

  • Provides personal property and liability insurance for Co-Op or condominium owners

• HO–8

  • Older Homes form

  • Designed for older homes

  • Insures them for repair costs or actual cash value rather than replacement cost

Identify and be prepared to Explain/Describe: Respondeat Superior

• If an employee is responsible, their employer is liable/sued/paying

• If an employee harms someone while performing job duties, the employer can be held legally responsible for damages

• For liability to apply, the wrongful act must occur while the employee is doing their job or acting in the employer's interest