HACE Exam 3

DesMoines, Iowa

1 of every $12

• The possiblity of experiencing harm, suffering, danger, or loss
• In insurance: Uncertainty with respect to economic loss
• ie- Lost wages

• Rational ppl will try to reduce or avoid risk
• Risk is subjective in that indiv's define the level of risk & uncertainty they can handle

A person weighing uncertainty & risk is judging the probability (likelihood) of a good or bad outcome

• Avoidance (ie- don't drive)
• Reduction (loss prevention; ie- use seat belts)
• Assumption (ie- accept a certain level of risk)
• Insurance (share risk; recover economically)

Individuals share their financial risks to reduce catastrophic lisses from death, accidents, or health problems

The monthly cost of an insurance policy

• Life insurance
• The benefit due upon death

• Life insurance
• The person whose life is covered by the policy

• Life insurance
• The indiv. or business that pays for & owns the policy

• Life insurance
• The recipient of the benefit upon the death of the insured

• Singe person w/ no dependents
• DINKS (double-income, no kids)
• Married but unemployed w/ no dependents
• Retired people

• Those w/ dependents
• Married, single-income w/ dependents
• Business owners
• Those whose estate exceeds the estate tax-free transfer threshold ($1 million)

$1 million

• Earnings Multiple Approach
• Needs Approach

• Used to determine life ins. needs
• To replace annual salary stream of breadwinner for x years
• Normally 5-15 times gross salary is recommended

• Used to determind life ins. needs
• To meet the needs of the household after the death of a breadwinner, both current & in the future
• Adjust salary down to compensate for reduction in household expenses
• Adjust your plan annually b/c you have less time until retirement (the N in the formula)

• Life insurance
• Part of needs approach
• 5 to 4: 20% drop
• 4 to 3: 22% drop
• 3 to 2: 26% drop
• 2 to 1: 30% drop

• Immediate needs funds (burial, etc.)
• Debt elimination funds
• Immediate transitional funds
• Dependency funds
• Spousal life income funds
• Educational funds for child or spouse
• Retirement income funds

• Add all funding needs to determine total need
• Subtract current ins. coverage & other available assets (whatever else you have in place to support your family)
• This determines amount of add'l ins. coverage necessary

• Life insurance
• Death benefit coverage for a specific term of time
• Only valid of the insured dies during the time of coverage
• Least expensive form of life insurance
• Everytime you renew, they do a physical, etc.

• Life insurance
• Provides a death benefit & an opportunity to accumulate savings
• Provides permanent insurance
• Three different types: Whole life ins., Universal life ins., and Variable life ins.

• Part of cash-value ins
• Permanent protection
• Fixed premium & death benefit
• Fixed cash-value that grows tax-deferred
• Much less death protection than term for the same price
• Yield on cash value portion isn't competitive w/ yields on alternative investments

• Part of cash-value ins.
• Permanent protection
• Flexible premium payments
• Flexible death benefits
• Cash-value fluctuates depending on the amount paid into the policy

• Part of cash-value ins.
• Premanent protection
• Returns are earned on a tax-deferred basis
• Allows for either a fixed (straight variable) or flexible (variable universal) premium
• Fleixble death benefit & fluctuating cash value (reflecting the mutual fund investment performance)
• Can take a loan out against it

• Life ins.
• One time payout upon death of the insured

• Life ins.
• Periodic payments of the interest earned by the principal

• Life ins.
• Periodic payments, normally for a fixed period, of both the principal & interest

• Life ins.
• Periodic payments of both the principal & interest that continue for the life of the beneficiary

About 17% of the GDP (2,500,000,000,000)

$13,375

500,000 (that's 40%!!)

• Hospital Insurance
• Surgical Insurance
• Physician Expense Insurance

• Basic health ins.
• Covers hospitalization expenses (room fees, nursing fees, & drug fees)

• Basic health ins.
• Covers only the direct costs of the surgery incl. the surgeon's fees & equipment fees

• Basic health ins.
• Covers physicans' fees incl. office fees, lab fees, and x-ray fees

• Covers costs beyond the basic plan
• Normally requires co-payments & deductible payments
• Stop-loss provision (limits the total out-of-pocket expenses incurred by the insured to a specific dollar amount)
• Lifetime cap (total amt. the ins. co. will pay over the life of a policy)

• Part of major medical ins.
• Limits the total out-of-pocket expenses incurred by the insured to a specific dollar amt

• Part of major medical ins.
• Total amt. the ins. co. will pay over the life of a policy

• Eye exams, Glasses, Contacts, Dental work, Dentures
• Expensive unless provided thru employer plan

• Covers only specific illness or accidents
• Provides a set dollar amt for reimbursement

• Fee-for-service or traditional indemnity plans
• Managed health care

• Private health care plan
• Provides greatest choice
• Coinsurance (ie- 90/10)
• Co-payment or deductible (meet deductible before ins. pays anything)
• Relatively expensive & require more paperwork

Smaller premium!!

• Pays for & provides health care services to policy holders
• Limits choices
• Monthly premium & co-payment
• HMOs & PPOs

• Health Maintenance Organizations
• Managed health care plan
• Most popular form
• A system of doctors & hospitals for a flat fee
• 3 types: Individual practice association plans, Group practice plans, Point-of-service plans

• Preferred Provider Organizations
• Managed health care plan
• A cross btw. fee-for-service plans & HMO plans
• A group of doctors, which work @ a reduced cost
• Add'l fees if use a non-member doctor or center

• Health insurance
• Provides an expensive, tailor-made policy to the purchaser
• Shop around

• Worker's Compensation
• Medicare
• Medicaid

• Ins. to workers injured on the job
• Payment for work-related accidents & injuries
• Coverage is deter. by state law & varies by state
• Go to your employer's doctor, not your own

• Medical benefits to disabled & those 65+
• Cost is covered thru SS tax
• Divided into 2 parts- A & B

• Health care for low income, blind, or aged ppl
• Payments may be used to offset the premiums, deductibles, & co-payments incurred w/ Medicare

• Flex accounts
• Disability insurance

• Funded w/ pre-tax dollars
• Pays reiumbursed medical expenses
• Very flexible, but some expenses aren't eligible for coverage
• Use it or lose it!
• Need to know how much you spend each year- lose it all if you don't use it all!!

Provides income in the event of a long-term loss or injury

• Provides a daily dollar benefit for the costs of long-term care
• Expensive
• Covers help in your home, community activities (like adult day care), assisted living, visiting nurses, & care in a nursing home

Coverage that protects real & personal property from catastrophic losses

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

• The cause of a loss
• ie- tornado, fire, negligence

Limit what a company must pay for small losses

The amt. necessary to repair, rebuild, or replace an asset at today's prices

The amt. you pay for your ins. coverage

• Basic Form HO Ins
• Provides the most ltd. coverage
• Covers fire, lightning, tornados, explosions, riots, vandalism, theft, volcanic eruptions

• Broad-Form HO Ins
• Covers only named perils (ie- weight of snow, freezing, falling objects)

• Special Form HO Ins
• Covers all direct physical losses to your home - open perils protection
• Exceptions incl floods, wars, earthquakes, & nuclear accidents

• Renter's Ins
• Covers property rather than the dwelling
• Provides liability coverage in case an accident, causing damage to the structure, is your fault

• Condo Owner's Ins
• Similar to HO-4 (renters)
• Covers improvements you've made to the dwelling unit

• Older Homes HO Ins
• Insures the dwelling for the repair cost or market value, instead of the replacement value

• Protects the dwelling & any attachments
• Doesn't cover damage to the land

• Protects unattached dwellings on the property
• Covers landscaping, but not the land
• Doesn't cover structures used for business purposes

• All personal property owned or used by the policyholder
• Regardless of its location (ie- students away at college)
• Covers property of guests in your home

Covers losses incurred as a result of your home being uninhabitable

• Protects policyholder in case someone's injured on their property
• Doesn't cover business or professional liability or negligence

Personal article floaters (above & beyond)

Above & beyond what's normal (ie- $500,000 e-ring)

Cover liability costs after the underlying HO's policies have been exhausted

The only ins you need if your car is fully pd off

• Full coverage
• Applies when you still owe money on your car

The terms/conditions of your coverage

• Covers bodily injury & property damage
• Can be combined single limit or split-limit coverage
• Covers losses due to a lawsuit

• 100/300/50
• per person / total medical / property damage

• Both bodily injury & property damage
• Doesn't designate what money goes to pay for which damage

• Covers all reasonable medical costs & funeral expenses incurred
• Within 3 years of the accident

• Provides coverage if injured by an uninsured motorist or a hit-and-run driver
• Other driver must be at fault to collect
• Also covers costs in excess of other person's coverage

• Collision loss
• Regardless of fault

• Your ins pays for your losses & theirs pays for theirs
• Helps cut down on legal fees b/c no one is responsible

Pays the diff btw the vehicle's value & what you might still owe on the loan

Putting $ into an asset that generates a return

• Putting $ into an asset that the FV (or return) relies on supply & demand
• Guesswork

• Savings acct
• Bonds

Lending acct where your rate of return is predetermined

You become part owner in the corporation & receive a portion of the profits as dividends

You generate a return thru rent or capital appreciation

• (ending value- beg. value) + income
• beg. value

• (ending value - beg. value) + income * 1/4
• beg. value

Compensation for the anticipated inflation over the life of an investment

Compensation for the possibility that the issuer may not pay the interest or repay the principal

Compensation for longer-term bonds for value fluctuations in response to interest rate changes

Compensation for a bond that can't be quickly converted into cash at fair market value

• Risk associated w/ fluctuations in security prices due to changes in the market interest rate
• A rise in market interest rate reduces the value of your lower rate security
• Impossible to eliminate

• Risk that rising prices will erode purchasing power
• Almost impossible to eliminate

The risk assoc. w/ poor company management or product acceptance in the marketplace

The risk assoc. w/ the company's use of debt

Risk assoc w not being able to liquidate a security quickly & cost effectively

Risk assoc w/ swings in the overall market

How bills & laws impact our investing

• Risk that a callable security may be taken back before maturity
• Only applies to callable bonds

Risk assoc w/ all securities & can't be reduced through diversification

Risks assoc w/ 1 particular investment & can be reduced thru diversification

Stocks/bonds

• We don't get these
• For new (first) issues

• Primary market
• 1st time the company's stock is traded publicly

• Primary market
• New shares being issued by a company that's already publicly traded

• Gtd. minimum per stock
• They sell for more to make $

Trade previously owned shares of stock

NYSE

• "Over the Counter" Market
• Secondary market
• Computer network of dealers

In charge of their stocks to make sure order is maintained

Price the buyer is willing to pay for the shares

Price the seller will sell the shares for

• Where the $ is made
• They make the seller & buyer come to an agreement
• Make commission

• Broker authorized to make trades for you
• Use caution! Some participate in churning to make more $$

Orders of 100 shares

Orders of 1-99 shares

Good until the end of the trading day

Good until filed or cancelled

Must be filled or cancelled immediately

An order to sell or buy a specific # of shares @ the best avail. price

An order to sell or buyh a specific # of shares @ a certain price or better

An order to sell a specific # of shares if the stock falls below x price or buy a specific # of shares if the stock rises above x price

Requires disclosure of relevant financial info in a timely manner