Financial planning exam 4

Name and describe three basic types of orders.

An order to buy or sell a security at the best price available at the time it's placed is a market order. An order to buy at a specified price (or lower), or sell at a specified price (or higher) is known as a limit order. An order to sell a stock when the market price reaches or drops below a specified level is called a stop-loss, or stop order.

Describe the role that discount brokers play in carrying out security transactions. To whom are their services especially appealing?

In contrast, investors who simply want to execute trades and aren't interested in obtaining all those brokerage services should consider either a discount broker or an online broker. Discount brokers tend to have low-overhead operations and offer fewer customer services than do full-service brokers. The full service brokers have repositioned themselves as money managers who buy and sell for their clients. Most stock transactions are handled by discount brokers.

What is the SIPC, and how does it protect investors?

As a client, you're protected against the loss of securities or cash held by your broker by the Securities Investor Protection Corporation (SIPC), a nonprofit corporation authorized by the Securities Investor Protection Act of 1970 to protect customer accounts against the financial failure of a brokerage firm. Although subject to SEC and congressional oversight, the SIPC is not an agency of the U.S. government. SIPC insurance covers each account for up to $500,000 (of which up to $100,000 may be in cash balances held by the firm). Note, however, that SIPC insurance does not guarantee that the dollar value of the securities will be recovered. It ensures only that the securities themselves will be returned.

Discuss the basics of the Blue Cross/Blue Shield plans.

Blue Cross/Blue Shield plans historically were not insurance policies, but rather are prepaid hospital and medical expense plans. In recent years the Blues have incorporated as for profits organizations and work like an insurance company. Most offer both PPOs and HMOs as well as fee-for-service policies.

Describe the features of traditional indemnity (fee-for-service) plans and explain the differences between them and managed care plans.

Both types of plans provide financial aid for the cost of medical care arising from illness or accidents, but they do so in somewhat different ways. The indemnity (fee-for-service) plans pays 80% of the usual, customary, and reasonable charges. The patient selects the medical provider who has no relation to the insurance company. In a managed care plan, subscribers/users' contract with and make monthly payments directly to the organization that provides the health care service. An insurance company may not even be involved, although today most major health insurance companies offer both indemnity and managed care plans. Once you select the managed care organization, that organization selects the specific doctors or other providers of care.

What is the difference between the broker and dealer markets?

Broker markets are the national and regional stock exchanges. At the stock exchange the buyer and seller meet and exchange the stock. The Dealer market does not have a central point where transactions are completed. A dealer may be anywhere and will offer a stock for sale at the ask price, while another dealer will offer to buy at a bid price. When the two prices are the same, a transaction takes place between the two dealers. The dealers may be trading for themselves or for others.

Why might an investor buy securities on margin?

Buying on margin, as it's called, is a practice that allows investors to use borrowed shares if stock to make security transactions. The use of margin allows you to increase the return on your investment when stock prices increase. When buying on the margin, you borrow shares of stock, not money.

Why is it important to consider benefit duration when shopping for disability income coverage?

The benefit duration determines whether the disability coverage will be for a specific time period or for a lifetime. The choice depends on whether the insured has good pension benefits that start at age 65 so that disability coverage would no longer be necessary. Also, the average length of stay in a nursing home is about two years.

What's the difference between an investment plan and a capital accumulation plan?

Capital accumulation, which is saving, is necessary in order to have funds to invest. Investing is what you do with the capital you accumulate before you spend it to support your lifestyle.

Describe how the co-insurance feature works.

Co-insurance, a provision commonly found in property insurance contracts, requires policyholders to buy insurance in an amount equal to a specified percentage of the replacement value of their property, or else the policyholder is required to pay for a proportional share of the loss. If the policyholder has the stipulated amount of coverage (usually 80 percent of the value of the property), then the insurance company will reimburse for covered losses, dollar-for-dollar, up to the amount of the policy limits

What is group health insurance? Differentiate between group and individual health insurance.

Group health insurance refers to health insurance contracts written between a group and the health care provider: a private insurance company, Blue Cross/Blue Shield plan, or a managed care organization. With group policies the underwriter uses the statistics of the group to set the premium. Typically, a group will include some with very few health issues as well as some with many health issues. The sharing of the cost reduces the premium costs. With an individual health insurance policy, the individual policy must cover all of the costs of health care, thus the premium is higher than group coverage.

What are the steps in the typical insurance claim settlement process?

1. Giving notice of loss. 2. Investigation of the claim. 3. Providing proof of loss. 4. Payment by insurer.

How does a primary market differ from a secondary market? Where are most securities traded: in the primary or the secondary market?

In the primary market, new securities are sold to the public, and one party to the transaction is always the issuer. In contrast, old (outstanding) securities are bought and sold in the secondary market, where the securities are "traded" between investors. Securities are sold in the primary market only one time; they are sold many times in the secondary market. The volume of sales in the secondary market overwhelms that in the primary market.

What are the features of a major medical plan? Compare major medical to comprehensive major medical insurance.

Major medical coverage is designed to finance medical costs of a more catastrophic nature and provides benefits for nearly all types of medical expenses resulting from either illnesses or accidents. A comprehensive major medical insurance plan combines the basic hospital, surgical, and physician's expense coverages with major medical protection to form a single policy and is usually the most desirable type of coverage to have. Usually the deductible is low, often $100 to $500. There may be no coinsurance feature. Comprehensive major medical is frequently written as a group policy, although individual policies are available.

Briefly explain the fundamental concepts related to property and liability insurance.

Property and liability insurance should be as much a part of your personal financial plans as life and health insurance. Such coverage protects the assets you've already acquired and safeguards your progress toward financial goals. Property insurance guards against catastrophic losses of real and personal property caused by such perils as fire, theft, vandalism, windstorms, and other calamities. Liability insurance offers protection against the financial consequences that may arise from the insured's responsibility for property loss or personal injuries to others.

Describe how the return on an investment is calculated.

Rate of return is the increase or decrease in the price of an investment as well as any income received over the investment period, both stated as a percentage of the initial investment. It is calculated as: Rate of Return =

What should you do after an accident?

Record names, addresses, phone numbers, license numbers, insurance details, sketch the accident, take pictures, notify law enforcement and insurance company, avoid admitting liability.

Explain four methods for controlling the risks associated with health care expenses.

Risk avoidance: Look for ways to avoid exposure to health care loss before it occurs. For example, people who don't take illegal drugs never have to worry about disability from overdose, people who refuse to ride on motorcycles avoid the risk of injury from this relatively dangerous means of transportation, and people who don't smoke in bed are a lot less likely to doze off and start a fire in their house. Loss prevention and control: People who accept responsibility for their own well-being and live healthier lifestyles can prevent illness and reduce high medical costs. Smoking, alcohol and drug dependency, improper diet, inadequate sleep, and lack of regular exercise contribute to more than 60 percent of all diagnosed illnesses. Risk assumption: Consider the risks that you're willing to retain as you deal with health insurance decisions. Some risks pose relatively small loss potential; you can budget for them rather than insure against them.

Briefly describe several types of online investment tools and note how they can help you become a better investor.

The Internet offers a wide array of tutorials, online classes, and articles to educate the novice investor. Even experienced investors will find sites that expand their investing knowledge. Although most good investment-oriented Web sites include many educational resources, here are a few good sites featuring investment fundamentals.

What is day trading, and how is it different from the more traditional approach to investing?

The attraction of trading stocks online is so compelling that some investors have become day traders. The opposite of buy-and-hold investors with a long-term perspective, day traders buy and sell stocks quickly throughout the day. They hope their stocks will continue to rise in value for the short time they own them—sometimes just seconds or minutes—so they can make quick profits.

What is a personal liability umbrella policy? Under what circumstances might it be a wise purchase?

A personal liability umbrella policy might be a wise purchase for persons with moderate to high levels of income and net worth who are viable targets for liability claims. An umbrella policy would cover legal judgments in excess of the amount of liability covered by a homeowner's or auto policy. Other persons who might need umbrella insurance would include those who rent out their home or have house sitters or unbonded hired help, such as gardeners and babysitters, and people who have clients visit in their home office. The homeowner would be responsible for any injuries incurred while such individuals are on the premises or in their employ, or for any injuries their workers might cause to other people.

What is a short sale? Explain the logic behind it. How much could be gained or lost on a short sale investment?

A short sale transaction is made in anticipation of a decline in the price of a stock. When an investor sells a security short, the broker borrows the security and then sells it on behalf of the short seller's account—short sellers actually sell securities they don't own. The borrowed shares must, of course, be replaced in the future, and if the investor can repurchase the shares at a lower price, then a profit will result.

What is the objective of workers' compensation insurance? Explain its benefits for employees who are injured on the job or become ill through work-related causes.

Workers' compensation insurance is designed to compensate workers who are injured on the job or become ill through work-related causes. Although mandated by the federal government, each state is responsible for setting workers' compensation legislation and regulating its own program. Typical workers' compensation benefits include medical and rehabilitation expenses, disability income, and scheduled lump-sum amounts for death and certain injuries, such as dismemberment. Employers bear nearly the entire cost of workers' compensation insurance in most states.

What factors have contributed to today's high costs of health care and health insurance?

the demand for health services is a function of supply. In addition to the demand for health services driving the cost up, new technologies are being applied to health problems and the market pays whatever is asked.

Why should health insurance planning be included in your personal financial plan?

With increasing health cost your family wealth is at risk. Health insurance helps reduce that risk.

Differentiate between captive and independent insurance agents. What characteristics should you look for in an insurance agent and an insurance company when you're buying property or liability insurance?

A captive agent represents only one insurance company and is more or less an employee of that company. Independent agents, however, typically represent between two and 10 different property insurance companies. You should find an agent who is knowledgeable and willing to take the time to go over your total property and liability exposures and develop a sound and affordable insurance program. In property insurance, agents who meet various experience and educational requirements and pass a series of written examinations qualify for either the Chartered Property and Casualty Underwriter (CPCU) or Certified Insurance Counselor (CIC) designations. These agents are known to have demonstrated above average knowledge and experience in their field. With respect to the insurance company itself, it is a good idea to pay particular attention to the company's financial soundness, claims settlement practices, and geographic extent of operations. Friends and acquaintances can often provide insight into its claims settlement policy.

Describe these policy provisions commonly found in medical expense plans: (a) deductibles, (b) co-insurance, and (c) coordination of benefits.

A deductible is a fixed amount that the patient must pay before any insurance benefits will be available. The deductible may apply to the total charges or to a class of charges. A participation, or co-insurance, clause stipulates that the company will pay some portion—say, 80 percent or 90 percent—of the amount of the covered loss in excess of the deductible rather than the entire amount. Co-insurance helps reduce the possibility that policyholders will fake illness and discourages them from incurring unnecessary medical expenses. A coordination of benefits provision clause prevents you from collecting more than 100 percent of covered charges by collecting benefits from more than one policy.

Briefly explain how an HMO works. Compare and contrast group HMOs, IPAs, and PPOs.

A health maintenance organization (HMO) is an organization of hospitals, physicians, and other health care providers who have joined to provide comprehensive health care services to its members. As an HMO member, you pay a monthly fee that varies according to the number of people in your family. An individual practice association (IPA) is the most popular type of HMO. IPA members receive medical care from individual physicians practicing from their own offices and from community hospitals that are affiliated with the IPA. As a member of an IPA, you have some choice of which doctors and hospitals to use. A preferred provider organization (PPO) is a managed care plan that has the characteristics of both an IPA and an indemnity plan. An insurance company or provider group contracts with a network of physicians and hospitals that agree to accept a negotiated fee for medical services provided to the PPO customers Unlike the HMO, however, a PPO also provides insurance coverage for medical services not provided by the PPO network, so you can choose to go to other doctors or hospitals. However, you will pay a higher price for medical services not provided by network doctors and hospitals.

Describe the important factors that influence the availability and cost of auto insurance.

A number of factors influence the availability and cost of auto insurance. The factors that are important include: Rating Territory. Since accidents are more likely to occur in some geographic areas than others, higher rates are applied where the probability of claims is greatest. Use of automobile. Both the number of miles driven and whether or not the car is used for business purposes affect cost. Personal Characteristics of Driver. Age, sex, and the marital status of insureds affect the auto insurance premium assessed. Type of automobile. Automobiles are classified with respect to performance. If an automobile is not classified as standard performance, higher rates are usually charged. Driving Record. The driving records of the insured and those that live with them play an important part in the determination of premiums. A poor driving record will increase a given driver's premiums or affect the type of insurance plan the driver is offered. Those who have been refused regular coverage may be assigned to an automobile insurance plan, a plan for high-risk drivers which features less coverage for a much higher premium. Discounts. Some auto insurers give discounts to individuals for special reasons, such as demonstrated safe driving, driver's education, etc. Discounts can knock 5 to 50% off annual premiums. Deductibles. As a rule, the greater the deductible, the less costly the insurance coverage—using a high ($1,000) deductible on your comprehensive and collision insurance can result in premium savings of as much as 45-50%.

Discuss possible sources of health insurance available to supplement employer sponsored health insurance plans.

Additional insurance is normally available from the group insurance provider, although the employee will have to pay the cost. This insurance may be funded with a flexible benefit account. The ACA does limit the amount of insurance an employee may purchase.

Explain the right of subrogation. How does this feature help lower insurance costs?

After an insurance company pays a claim, its right of subrogation allows it to request reimbursement from either the person who caused the loss or that person's insurance company. Since your loss has been compensated, you have no right to make a claim to the person at fault. That right goes to the insurance company. Of course, the insurance may not compensate you for all of your losses, thus, you may have a claim against the person at fault for these additional losses.

What are online brokers, and what kinds of investors are most likely to use them?

Again, most brokers have an online presence and low transaction fees. Investors who manage their own investments tend to use online broker services. Investors who use money managers to manage their investments do not use broker services directly. Their money managers do.

What is arbitration? Does SIPC require the use of arbitration in investor disputes?

Arbitration is a process whereby you and your broker present the two sides of the argument before an arbitration panel, which then decides how the case will be resolved. If it's binding arbitration, and it usually is, then you have no choice but to accept the decision—you cannot go to court to appeal your case. SIPC is not involved in disputes concerning the quality of service provided; this is the type of cases that arbitration panels hear. In fact, many brokerage firms require that you resolve disputes using binding arbitration.

Answer the key questions posed to help you choose a plan, based on your current situation. What type of plan do you think will best suit your needs?

Ask the following questions when choosing among health care insurance plans: • Can I choose to use any doctor, hospital, clinic, or pharmacy? • What coverage, if any, is provided for seeing specialists like eye doctors and dentists? • Does the plan cover special conditions or treatments like psychiatric care, pregnancy, and physical therapy? • Does the plan cover home care or nursing home care? • What kind of limitations are there on the coverage of prescribed medications? • What are the deductible and any co-payment amounts? • What is the maximum that I would have to pay out of health care expenses, either in a calendar year or during my lifetime? • How are billing or service disputes handled under the plan?

Explain the nature of (a) automobile collision insurance and (b) automobile comprehensive insurance.

Collision insurance is auto mobile insurance that pays for collision damage to an insured automobile regardless of who is at fault. The amount of insurance payable is the actual cash value of the loss in excess of your deductible. Remember that actual cash value is defined as replacement cost less depreciation. Comprehensive automobile insurance protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision. The maximum compensation provided under this coverage is the actual cash value of the automobile. This broad coverage includes, but is not limited to, damage caused by fire, theft, glass breakage, falling objects, malicious mischief, vandalism, riot, and earthquake. Contrary to popular belief, the automobile insurance policy normally does not cover the theft of personal property left in the insured vehicle. However, the off-premises coverage of the homeowner's policy may cover such a loss if the auto was locked when the theft occurred.

What are deductibles? Do they apply to either liability or medical payments coverage under the homeowner's policy?

Deductibles, which limit what a company must pay for small losses, help reduce insurance premiums by doing away with the frequent small loss claims that are proportionately more expensive to administer. Deductibles don't apply to liability and medical payments coverage because insurers want to be notified of all claims, no matter how trivial. Otherwise, they could be notified too late to properly investigate and prepare adequate defenses for resulting lawsuits.

What is disability income insurance? Explain the waiting-period provisions found in such policies.

Disability income insurance provides families with weekly or monthly payments to replace income when the insured is unable to work because of a covered illness, injury, or disease. Social Security offers disability income benefits, but you must be unable to do any job whatsoever to receive benefits. Benefits are payable only if your disability is expected to last at least one year (or to be fatal), and they don't begin until you've been disabled for at least five months.

Describe both the liberal and strict definitions used to establish whether an insured is disabled.

Disability policies vary in the standards you must meet to receive benefits. Some pay benefits if you're unable to perform the duties of your customary occupation—the own occupation (or "Own Occ") definition—whereas others pay only if you can engage in no gainful employment at all—the any occupation (or "Any Occ") definition. Under the "Own Occ" definition, a professor who lost his voice—yet could still be paid to write or do research—would receive full benefits because he couldn't lecture, a primary function of his occupation. With a residual benefit option, you would be paid partial benefits if you can only work part-time or at a lower salary. The "Any Occ" definition is considerably less expensive because it gives the insurer more leeway in determining whether the insured should receive benefits. Individual disability policies may contain a presumptive disability clause that supersedes the previously discussed definition of disability when certain types of losses occur. Loss of both hands, sight in both eyes, and hearing in both ears are examples where the insured may be presumed totally disabled and may receive full benefits even though he or she still can be employed in some capacity.

Explain why it might be preferable for a person to invest in a portfolio of securities rather than in a single security.

Don't put all your eggs in one basket. In essence, a portfolio is a collection of investment vehicles assembled to meet a common investment goal. But a portfolio is far more than a collection of investments. It breathes life into your investment program as it combines your personal and financial traits with your investment objectives to give some structure to your investments. Seasoned investors often devote much attention to constructing diversified portfolios of securities. Such portfolios consist of stocks and bonds selected not only for their returns but also for their combined risk-return behavior. The idea behind diversification is that, by combining securities with dissimilar risk-return characteristics, you can produce a portfolio of reduced risk and more predictable levels of return.

Briefly describe the DJIA, S&P 400, S&P 500, NASDAQ Composite, Russell 2000, and Dow Jones Wilshire 5000 indexes. Which segments of the market does each measure track?

Dow Jones Industrial Average (DJIA). The Dow Jones averages, which began in 1896, are made up of four parts: (1) an industrial average, the DJIA, which is based on 30 stocks; (2) a transportation average based on 20 stocks; (3) a utility average based on 15 stocks; and (4) a composite average based on all 65 industrial, transportation, and utility stocks. A variation of the S&P discussed below is a the MidCap 400 (made up of 400 medium-sized companies with market values ranging from about $1.4 billion to $5.9 billion). The Standard & Poor's (S&P) indexes are similar to the Dow Jones averages in that both are used to capture the overall performance of the market. However, some important differences exist between the two measures. For one thing, the S&P uses a lot more stocks: the popular S&P 500 composite index is based on 500 different stocks, whereas the DJIA uses only 30. What's more, the S&P index is made up of all large NYSE stocks in addition to some major AMEX and Nasdaq stocks, so there are not only more issues in the S&P sample but also a greater breadth of representation. Finally, there are some technical differences in the mathematical procedures used to compute the two measures; the Dow Jones is an average, whereas the S&P is an index. Behavior in the Nasdaq market is also measured by several indexes, the most comprehensive of which is the Nasdaq Composite index, which is calculated using virtually all the stocks traded on Nasdaq A widely followed measure is the Russell 2000, which tracks the behavior of 2,000 relatively small companies and is widely considered to be a fairly accurate measure of the small-cap segment of the market.

Briefly describe the following supplemental property insurance coverage: (a) earthquake insurance, (b) flood insurance, and (c) other forms of transportation insurance.

Earthquake Insurance is a type of homeowner's insurance that provides financial protection from earthquake damage. Although this form of insurance is fairly inexpensive to purchase, policies typically carry a 15% deductible on the replacement-cost coverage of the home, meaning homeowners will have to bear significant out-of-pocket costs before they are able to collect on the policy. b. Flood Insurance is a type of coverage provides protection against the financial consequences of flood damage. This insurance is subsidized by the federal government and is sold in cooperation with private insurance agents to homeowners living in flood-prone areas. c. Other Forms of Transportation Insurance is available for other forms of transportation in addition to automobiles. Mobile home insurance provides homeowners with coverage similar to that for conventional homes. However, due to total losses occurring more frequently on mobile homes than on more permanent structures, rates per $100 of protection are typically higher for mobile homes. Recreational vehicle insurance is available for a variety of vehicles, including all-terrain vehicles, antique autos, minibikes, and camping vehicles. While full coverage is generally available, some restrictions may apply and rates can vary substantially. Boat insurance may be provided to some extent through the owner's homeowner's policy. However, a boat and motor endorsement may need to be added to the policy in order to attain sufficient coverage, or the owner may need to purchase a specially designed boat-owner's policy.

Discuss the role of financial responsibility laws and describe the two basic types currently employed.

Financial responsibility laws attempt to force motorists to be financially responsible for the damages they become legally obligated to pay as a result of automobile accidents. Two basic types of laws compel motorists to assume financial responsibility. The first variety is one in which all automobile owners in a given state are required to show evidence that they have liability insurance coverage prior to obtaining registration for their motor vehicles. In the second type of financial responsibility legislation, motorists do not have to show their insurance coverage until after they are involved in an accident. If they then fail to demonstrate compliance with the law, their registration and/or driver's license is suspended. This latter type of law has been criticized on the basis that it allows negligent motorists to have one "free" accident. Even though the motorists who are not financially responsible lose their driving privileges, the losses to their victims may remain uncompensated.

Explain what factors should be considered in evaluating available employer-sponsored health insurance plans.

Group plans are less expensive than individual plans. So, the factors to examine are the alternatives that are offered. For example, a single person would not opt for family coverage. Vision and hearing options may not apply at this time and may be added at a later date. Many employers will offer a flexible benefit plan, referred to as a cafeteria plan by the enabling tax code. Under this plan, employees may request employers to withhold pretax funds that may be used to provide various benefits, including additional health coverage. Some employers will offer a Health Savings Account where the employer and employee may contribute pretax income to the plan. The funds may be used for health services in the current or later years. If by age 65 the funds have not been used, they may be added to retirement accounts although at that point they will be taxable when withdrawn. Another possible benefit is insurance for retirees. The employer may continue to pay some portion of insurance costs for their retired employees.

What are the two main sources of health insurance coverage in the United States?

Health insurance coverage is available from two main sources: private and government-sponsored programs.

Briefly discuss the four basic types of information that you, as an investor, should follow.

Here are the four types of investment information that you should follow on a regular basis: • Economic developments and current events: To help you evaluate the underlying investment environment • Alternative investment vehicles: To keep you abreast of market developments • Current interest rates and price quotations: To monitor your investments and stay alert for developing investment opportunities • Personal investment strategies: To help you hone your skills and stay alert for new techniques as they develop

Explain the differences between hospitalization insurance and surgical expense insurance.

Hospitalization policies usually pay for a portion of: (1) the hospital's daily semiprivate room rate, which typically includes meals, nursing care, and other routine services; and (2) the cost of ancillary services, such as laboratory tests, imaging, and medications you receive while hospitalized. Surgical expense coverage is provided as part of a hospitalization insurance policy or as a rider to such a policy. Most plans reimburse you for reasonable and customary surgical expenses based on a survey of surgical costs during the previous year. They may also cover anesthesia, nonemergency treatment using imaging, and a limited allowance for diagnostic tests

What is the relationship between investing and personal financial planning?

Investing is a major tool in providing the financial resources necessary to obtain financial goals defined through personal financial planning.

How is investing related to long-term financial perspective?

Investing is generally considered to take a long-term perspective, providing stability of value and somewhat predictable returns.

What, if anything, can be gained from keeping track of your investment holdings?

Knowledge is power. If you do not know how you are doing, you do not if you need to make a change in what you are doing. You need to monitor your portfolio by keeping track of what your investment holdings consist of, how they've performed over time, and whether they've lived up to your expectations.

Why should a consumer consider purchasing a long-term care insurance policy?

Long-term care insurance covers the cost of medical, personal, and social services provided at home, in a community program such as an adult day-care center, or in a nursing home for those who require long-term care as a result of a catastrophic illness such as Alzheimer's disease, heart disease, and stroke. This care can be very expensive, and it is therefore important to consider adding long-term care coverage when developing financial plans.

Describe the Internet's impact on the world of investing.

The Internet is a major force in the investing environment. It has opened the world of investing to individual investors, leveling the playing field and providing access to tools and market information formerly restricted to professionals. Not only can you trade all types of securities online, you can also find a wealth of information, from real-time stock quotes to securities analysts' research reports. The internet adds access and speed to the investing process.

Who is eligible for Medicare and Medicaid benefits? What do those benefits encompass?

Medicare is a federally funded and operated plan that provides health insurance to all who are 65 and older or receiving disability from Social Security. The doctors and other providers agree to accept the UCR fees and the patient will pay nothing for many services. Services include basic hospital services such as room, board, and other (Part A); supplementary medical insurance which covers services of physicians and surgeons (Part B); Medicare Advantage plans administered by private insurance companies (Part C); and prescription drug coverage (Part D). Medicaid is a state-run public assistance program that provides health insurance benefits only to those who are unable to pay for health care. Each state has its own regulations about who is eligible for Medicaid coverage and the types of medical services that are covered. Although Medicaid is primarily funded by each state, the federal government also contributes funds. More than 65 million people are covered by Medicaid.

8 Contrast the Nasdaq and National Market System with the OTCBB.

NASDAQ sets various listing standards, the most comprehensive of which are for the 2,000 or so stocks traded on the NASDAQ National Market (NNM). The other part of the dealer market is made up of securities that trade in the over-the-counter (OTC) market. This market is separate from Nasdaq and includes mostly small companies that either can't or don't wish to comply with Nasdaq listing requirements. They trade on either the OTC Bulletin Board (OTCBB) or in the so-called Pink Sheets. The OTCBB is an electronic quotation system that links the market makers who trade the shares of small companies. The OTCBB is regulated by the Securities and Exchange Commission (SEC), which requires (among other things) that all companies traded on this market file audited financial statements and comply with federal securities law

Define no-fault insurance and discuss its pros and cons.

No-fault automobile insurance is a system under which each insured party is compensated by his or her own company, regardless of which party caused the accident. In return, legal remedies and payments for pain and suffering are restricted. Pro, you deal only with your insurance company. Con, you give up the right for recovery of some types of losses.

What is the role of personal financial planning in achieving financial objectives?

Personal financial planning helps define financial goals and develop appropriate strategies, including investment plans, debt management, retirement planning, insurance planning, and other activities.

Explain the difference between a bull market and a bear market. Discuss the frequency with which returns as bad as those during 2007-2009 occur. How would you characterize the current state of the stock market?

Prices go up in bull markets; these favorable markets are normally associated with investor optimism, economic recovery, and growth. In contrast, prices go down in bear markets, which are normally associated with investor pessimism and economic slowdowns. Exhibit 11.2 reports the historical performance of U.S. stocks. The table shows that over the past 50 years there have been more bull markets than bear markets. In 2018, the market was volatile and ended up as a bear market for the year. The previous three years have been bull markets as was the 2019

What are the perils that most properties are insured for under various types of homeowner's policies?

Property and liability insurance agreements, called comprehensive policies, cover all perils except those specifically excluded, whereas named peril policies name particular, individual perils covered. Perils are types of accidents that can happen to property, for example fire, flood, wind damages, auto accidents, etc.

What are the key provisions of the ACA? How is it likely to affect your health care insurance?

The ACA has two key goals: · Reduce the number of uninsured citizens in the country. All citizens not covered by Medicare or Medicaid are required to purchase insurance. Low income citizens may qualify for a tax credit to help pay for the insurance. · Reduce the increases in health care costs by providing a "state based" health insurance exchange in each state. If the state elects not to operate a state exchange, its citizens may use the federal exchange. insurance policies listed on the exchanges must offer levels of coverage from 60% to 90% of costs.

Discuss some of the questions one should ask before buying long-term-care insurance. What guidelines can be used to choose the right policy?

The Financial Planning Tips covers buying long-term care insurance. The major points are: Buy the right amount and the right kind of coverage. Buy at the right time. Be aware of the "restoration of benefits" rider, as well as the rest of the fine print. Take inflation into account. Additional questions to ask are: Do you have many assets to preserve for your dependents? Can you afford the premiums? Is there a family history of disabling disease? Are you male or female? Do you have family who can care for you?

Describe replacement-cost coverage and compare this to actual cash value coverage. Which is preferable?

The amount necessary to repair, rebuild, or replace an asset at today's prices is the replacement cost. When replacement-cost coverage is in effect, a homeowner's reimbursement for damage to a house or accompanying structures is based on the cost of repairing or replacing those structures. This means that the insurer will repair or replace damaged items without taking any deductions for depreciation. Although coverage on a house is often on a replacement-cost basis, standard coverage on its contents may be on an actual cash-value basis, which deducts depreciation from the current replacement cost for claims involving furniture, clothing, and other belongings. Replacement cost coverage will give more to the policy holder and will allow that person to be "made whole" after the casualty. Of course, the cost of the policy will reflect the amount of coverage. The additional cost may be small and therefore, should be purchased.

What types of property are covered under a homeowner's policy? When should you consider adding a PPF to your policy? Indicate which of the following are included in a standard policy's coverage: (a) an African parrot, (b) a motorbike, (c) Avon cosmetics held for sale, (d) Tupperware® for home use.

The homeowner's policy offers property protection under Section I for the dwelling unit, accompanying structures, and personal property of homeowners and their families. Coverage for certain types of loss also applies to lawns, trees, plants, and shrubs. However, the policy excludes structures on the premises used for business purposes (except incidentally), animals (pets or otherwise), and motorized vehicles not used in maintaining the premises (such as autos, motorcycles, golf carts, or snowmobiles). Business inventory (for example, goods held by an insured who is a traveling salesperson, or other goods held for sale) is not covered. Although the policy doesn't cover business inventory, it does cover business property (such as books, computers, copiers, office furniture, and supplies), typically up to a maximum of $2,500, while it is on the insured premises. (a) an African parrot, Not covered (b) a motorbike, Not covered—you have a separate policy on the motorbike. (c) Avon cosmetics held for sale, Not Covered, business inventory (d) Tupperware® for home use Covered Your homeowner's policy may not protect your expensive personal property adequately. To overcome this deficiency, you can either add the personal property floater (PPF) as an endorsement to your homeowner's policy or take out a separate floater policy. The PPF provides either blanket or scheduled coverage of items that are not covered adequately in a standard homeowner's policy.

Briefly describe the concept of asset allocation and note how it works.

The investor's needs shape one's financial goals. But to create a portfolio geared to those goals, you need to develop an asset allocation strategy. Asset allocation involves a decision on how to divide your portfolio among different types of securities. Typically you are dividing your investment between short-term securities such as money market funds, longer term bonds (7 to 10 year maturities, and equity funds invested in stocks for the long-term.

Briefly explain the major types of coverage available under the personal auto policy (PAP). Which persons are insured under (a) automobile medical payments coverage and (b) uninsured motorists coverage?

The personal automobile policy (PAP) is a comprehensive, six-part automobile insurance policy designed to be easily understood by the "typical" insurance purchaser. The policy's first four parts identify the coverage provided. • Part A: Liability coverage • Part B: Medical payments coverage • Part C: Uninsured Motorists coverage • Part D: Coverage for damage to your vehicle Part E pertains to your duties and responsibilities if you're involved in an accident, and Part F defines basic provisions of the policy, including the policy coverage period and the right of termination. The named insured and family members have Part A liability coverage regardless of the automobile they are driving. However, for persons other than the named insured and family members to have liability coverage, they must be driving a covered auto. Uninsured Motorists coverage is available to meet the needs of "innocent" victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists. Nearly all states require uninsured motorists insurance to be included in each liability insurance policy issued.

Explain the principle of indemnity. Are any limits imposed on the amount that an insured may collect under this principle?

The principle of indemnity states that the insured may not be compensated by the insurance company in an amount exceeding the insured's economic loss. Most property and liability insurance contracts are based on this principle. Several important concepts related to the principle of indemnity include actual cash value, subrogation, and other insurance. The "actual cash value" may be defined as the replacement cost minus the value of physical depreciation. Alternatively, it may be defined as just the replacement value.

6 What are regional exchanges, and what role do they play?

The regional exchanges operate much like the New York Stock Exchange. They have brokers who tend to focus on local or regional stock, but who also will offer stock listed on the NYSE. The listing requirements are more lenient than those of the NYSE, but since the stock being sold is from a regional company, the buyer presumably know more about the companies.

Why is it important to have investment objectives when embarking on an investment program?

There are a wide variety of securities available for investing. Some provide annual income in the form of dividends. Other provide increase wealth but no dividends. Your goal for investing will guide you in your selection of alternative securities.

Describe (a) types of losses, (b) persons, and (c) locations that are covered under a homeowner's policy.

There are three types of property-related losses when misfortune occurs: 1. Direct loss of property 2. Indirect loss occurring due to loss of damaged property 3. Additional expenses resulting from direct and indirect losses Homeowner's insurance contracts offer compensation for each type of loss. b. A homeowner's policy covers the persons named in the policy and members of their families who are residents of the household. Visitors would be covered as part of liability coverage. c. Most homeowner's policies offer coverage worldwide. Consequently, an insured's personal property is fully covered even if it is lent to the next-door neighbor or kept in a hotel room in Tibet. The only exception is property left at a second home (such as a beach house or resort

Discuss the role of asset allocation in portfolio management.

There's overwhelming evidence that, over the long run, the total return on a portfolio is influenced far more by its asset allocation plan than by specific security selections. Asset allocation deals in broad categories and does not tell you which individual securities to buy or sell.

Describe the operations of the Nasdaq market. Compare it with an exchange, such as the NYSE.

To be traded on Nasdaq, all stocks must have at least two market makers—although the bigger, more actively traded stocks (such as Apple) will have many more than that. These dealers electronically post all their bid/ask prices so that, when investors place (market) orders, they're immediately filled at the best available price. With the broker market or the exchange, the buying and selling broker are at the exchange and strike a deal between them. The brokers typically will be buying and selling for other people.

What is the role of a claims adjustor?

To work for the insurance company, investigate claims, question parties involved, offer service to minimize settlement delays, and protect the company's interests.

Describe the differences among long-term-care policies regarding (a) type of care, (b) eligibility requirements, and (c) services covered. List and discuss some other important policy provisions.

Type of care: Policies will cover care in either a nursing home or in the home of the insured, or both. Obviously, a better policy will cover both situations. b. Eligibility requirements: These are used to determine whether a person qualifies for payment and use "gatekeeper provisions" that may vary considerably. Some policies pay if a physician orders long-term care; others base their determination on the number of activities of daily living (ADLs) the insured cannot perform. c. Services covered: Policies may differ in the levels of care that they will cover (skilled, intermediate, or custodial care). The broader the coverage, the better, because even custodial care at a nursing home can be very expensive over a long period of time. Other long-term care policy provisions include: Daily benefits—sets a daily maximum for reimbursement. Benefit duration—how long the benefits will be paid; ranges from one year to the insured's lifetime. However, most common policy limits coverage to three years. Waiting period—period after eligibility begins during which no benefit payments are made; the longer the waiting period, the lower the premium. Renewability—guaranteed renewability assures continued coverage as long as premiums are paid; an optional renewability provision means that the insurer can terminate coverage and should obviously be avoided. Preexisting conditions—excludes coverage for conditions that exist when the policy is issued, usually for 6 to 12 months. Inflation protection—provides for increased coverage to keep up with inflation; an additional premium is charged for this rider. Premium levels—the age of the individual when the policy is initiated determines the premium; premiums go up dramatically with age.

Explain the cost containment provisions commonly found in medical expense plans. How might the provision for second surgical opinions help an insurer contain its costs?

Typical cost containment provisions include the following: Pre-admission certification: Insurance company must approve scheduled hospitalization and an estimated length of stay. Continued stay review: Insurer must approve extensions of hospital stay beyond the number of days set in pre-admission certification. Second surgical opinion: Many group policies require second opinions on specific nonemergency procedures to confirm the surgical need and, in their absence, may reduce the surgical benefits paid. Waiver of coinsurance: Provides waiver of co-payment and/or deductible (pays 100%) for certain cost-saving procedures, such as outpatient surgery and use of generic pharmaceuticals. Limitation of Insurer's Responsibility: Many policies limit the amount of costs the insurer must pay to those considered "reasonable and customary" This provision sometimes limits the type and place of medical care for which the insurer will pay. Requiring a second surgical opinion reduces the number of unnecessary, nonelective, and/or elective surgeries, thereby holding down the insurer's costs. Many conditions can now be treated without surgery or with surgery that is not so invasive and requires less hospital and recovery time for the patient. This provision obviously benefits patients as well in that they are not subjected to the trauma and recovery from unnecessary su

What role do market averages and indexes play in the investment process?

Usually presented in the form of averages, or indexes, market data describe the general behavior of the securities markets. The averages and indexes are based on the price movements of a select group of securities over an extended period. They're used to capture the overall performance of the market as a whole. They also may be used as a standard to compare against your performance, that is, are you beating the market? Most likely not.

What are some products and services that you, as an individual investor, can now obtain online?

Whatever there is, it is available online. Some commonly available stuff include brokerage services, reports, "heard on the street", business news, and many other. Brands include CNN/Money, Yahoo.com, Fidelity.com, etc.

What are the key provisions of COBRA? How do they relate to continuation of group coverage when an employee voluntarily or involuntarily leaves the insured group?

When employees voluntarily or involuntarily (except in the case of gross misconduct) leave their jobs and therefore give up membership in the insurance group, they can lose their health insurance. In 1986, Congress passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) to allow employees to elect to continue coverage for themselves and eligible family members through the group for up to 18 months. Exercising the COBRA conversion involves timely payment of premiums by the former employee (up to 102% of the company cost) to the former employer. Retirees and their families are also eligible. Most states provide for conversion of the group coverage to an individual policy without evidence of insurability.