Introduction to Personal Finance: Risk Management and Insurance

Introduction to Personal Finance

• Human Capital and Health
  • Human capital: Ability to work, learn, and make financial decisions.
  • Valuable asset, but vulnerable to health deterioration.

The Risk Matrix and Health

• Risk Severity vs. Probability Matrix
  • High Risk: Avoid if possible (e.g., don’t text while driving)
  • Medium Risk: Manage risk (e.g., wearing a helmet while biking)
  • Low Risk: Accept or monitor (e.g., getting caught in the rain)

Protecting Your Health

• Effective health policies can help mitigate risks and promote well-being.

Overview of Insurance Companies

• Transfer Risk: Insurance moves financial risk to providers.
  • Charges:
  • Premium: Cost of insurance.
  • Deductible: Amount paid before coverage begins.
  • Copayment: Cost-sharing for services.

How Insurance Companies Operate

• Minimize Risks: Provide protection when likelihood of claims is low.
• Spread Risk: Pool premiums from multiple clients to manage potential losses.
• Premium Adjustments: Increase premiums as risk severity or frequency rises.

Insurance Companies' Profit Model

• Premium Collection: Clients pay insurance premiums.
• Investment Strategy: Pool funds and invest to generate returns.
• Claim Payments: Utilize investment earnings to cover claims.

Overview of Health Care

• Health Insurance as a Tool: Essential for managing healthcare costs, crucial for households.

Healthcare Expenses

• Major expenditures include:
  • Hospital Stays
  • Emergency Visits
  • Doctor Visits
  • Prescription Drugs

Health Insurance Costs

• Monthly Premium: Cost for health coverage.
• Deductibles: Amount paid before insurance steps in.
• Coinsurance: Cost-sharing between insurer and insured.
• Copayment: Fixed fee for services (e.g., $20-$30).

Out-of-Pocket Maximum

• Capped expenses for deductibles and coinsurance limit financial risk; above cap cost is borne by insurance.

Types of Health Insurance Policies

• Preferred Provider Organization (PPO):
  • Flexible fee-for-service insurance.
  • Reduced costs for using in-network services.

Consumer Driven Plan

• High Deductible Health Plan (HDHP):
  • Lower premiums, higher up-front costs.
  • Deductibles: $1,600 (individual), $3,200 (family) for 2024.
  • Maximum out-of-pocket: $8,050 (individual), $16,100 (family) for 2024.

Obtaining Health Insurance

• Marketplace Plans:
  • Platinum: High premium, low out-of-pocket.
  • Gold & Silver: Mid-range options.
  • Bronze: Low premium, high out-of-pocket.
  • Catastrophic: High deductibles, low premiums for those under 30.

Health Savings Accounts (HSAs)

• Tax-advantaged accounts for eligible medical expenses.
• Funds can grow tax-deferred.

Flexible Spending Accounts (FSAs)

• Pre-tax contributions for healthcare expenses must be used within the year.
• Eligible expenses include:
  • Medical and dental for self, spouse, dependents.
  • Prescription costs, eyeglasses, and certain medical equipment.

Overview of Disability

• Definition by Social Security Administration:
  • Inability to work for over a year due to medical condition.
  • Prior job skills cannot be adjusted.

The Costs of Disability

• Financial implications of disability:
  • Less than 40% can cover bills without income.
  • Under 50% have disability insurance.

Disability Insurance

• Short-Term Policy: Replaces salary for limited duration (3-12 months).
• Long-Term Policy: Kicks in after extended period (6-12 months).
• Need Calculation:
  • 65% of gross income, halved for short-term needs.

Workers’ Compensation Insurance

• Provides benefits for job-related injuries.
• Covers injuries during job functions, unlike general disability insurance.

Overview of Automobile Insurance

• Personal Automobile Policy (PAP): Covers accidents and damages.
• Responsibilities include:
  • Medical and property damage costs for others.
  • Vehicle repair costs if beyond liability coverage.

Split Limit Requirements

• States like Missouri require specific minimum liability limits (e.g., 25/50/10).
  • Medical expenses for others ($25,000)
  • Total medical for accident ($50,000)
  • Property damage coverage ($10,000)

Homeowner’s Insurance

• Six components:
  • Coverage for dwelling, structures, personal property.
  • Liability and medical payments for injuries on property.