Personal Finance Exam 2

ACTUAL CASH VALUE Replacement cost minus the value of physical depreciation which is estimated as percent of useful life REPLACEMENT COST full replacement cost, with no reduction for use by owner

"Actual Cash Value" or "Replacement Cost"? Replacement cost minus the value of physical depreciation which is estimated as percent of useful life full replacement cost, with no reduction for use by owner

Replacement cost is usually provided for the dwelling unit. Actual cash value is usually provided for personal property.

(Actual cash value or replacement cost) is usually provided for the dwelling unit. (Actual cash value or replacement cost) is usually provided for personal property.

medicaid

A *federal and state* assistance program that pays for health care services for people who cannot afford them. Primarily intended for low income

medicare

A *federal program* added to the Social Security system in 1965 that provides hospitalization insurance for the elderly and permits older Americans to purchase inexpensive coverage for doctor fees and other health expenses. Primarily intended for the elderly

true

A good rule to remember when considering the use of credit is that the product purchased on credit should outlive the amount of time it takes to pay it off true or false

A loan with an interest rate that does not change over the life of the loan. FIXED a loan in which the interest rate does not stay fixed but varies based on the market interest rate. VARIABLE Generally speaking, variable interest rates are not desirable. The only time you might want one is if market interest rates are expected to fall in the near future. However, you's still be better off to wait for the rates to come down and then get your loan.

A loan with an interest rate that does not change over the life of the loan. Fixed or variable a loan in which the interest rate does not stay fixed but varies based on the market interest rate

discount interest

A procedure for determining the interest on a loan in which the interest is deducted from the face value in advance. Or another way of saying it: refers to a loan where the interest on the loan is deducted from the loan up front. This means that the borrower only receives a loan that is net of the interest payment

credit life insurance It is noted in your teacher's notes that this is very costly and gives the lender more

A special type of coverage written to pay off the balance of a loan in the event of the death of the debtor.

c). using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck.

Acceptable uses of credit include all of the following except a. using credit for convenience to avoid having to carry cash; convenience users keep track of their expenditures and pay their credit card bills in full each month. b. using credit to spread payments over time for big ticket items, allowing us to use and enjoy these assets now. c. using credit to meet basic living expenses, such as buying groceries on credit because there's no money left from your paycheck. d. using credit to meet financial emergencies, such as borrowing to meet living expenses during a time of unemployment.

independent agents

Agents that sell the insurance products of several companies and work for themselves or other agents.

participation

Another word used for coinsurance is

RISK

Basic concept of insurance is ____________ (four letter word)

Total debt payments = $2,750 divided by take-home pay of $4,500 =61% Answer is expressed as a percent

Be able to calculate a debt safety ratio. The formula is to take all the debt payments divided by take-home pay. Zach's debts: Student loan - $250 Car payment - $700 Credit cards - $300 Mortgage - $1500 Take-home pay - $4,500

Value of home multiplied by the percent of value the lender will allow (they will provide this percentage). Take this amount minus the remaining balance on your mortgage. This results in the amount you are eligible to borrow.

Be able to calculate home equity loan amount eligibility. (Read the answer and then see the next slide)

$1,500 is the insured's deductible so as the insurance company you don't pay anything yet. The remaining balance of $3,000- the $1,500 deductible leaves an amount of $1,500 for which the insurance company pays 80%. $1,500 * 80% = $1,200

Bill: $3,000 YOU are now the insurance company. The insurer. How much do you pay to the insured? The deductible is $1,500 and the coinsurance is 80/20

LOAN $10,000 at 8%, 2 years STEP 1 - Average annual finance charge [($10,000 * 8% * 2)/2] = $800 [(Loan amount * interest rate * life of loan) / life of loan] So this is total interest divided by the number of years of loan which gives you the average. STEP 2 - divide by loan amount $800 / $10,000 = 8% APR

Breaking down the formula for APR: 1) First calculate the average annual finance charge. 2) Then divide by loan amount $10,000 at 8%, 2 years

Not really sure what they are going for here but should work similar to health care. There would be a deductible the insured has to pay first and then a coinsurance about like 80% for the insurance company and 20% for the insured. Then there is probably out of pocket maximums and/or maximums on how much the insurance company will cover. For example maybe a roof is covered up to $50,000

Calculate insurance settlements based on a scenario where there is damage to dwelling and personal property. Deductibles and limitations will apply.

I would like to go over this with you. TERMS to understand: out-of-pocket is what the insured person pays (you) a deductible is the amount that you have to pay before anything else kicks in co-insurance is the split cost the insurance company pays vs you after the deductible has been met. So if there is an 80/20 split and you have met your deductible. Out of a $1,000 bill, the insurance company would be $800 and you would pay $200 out-of-pocket max is the total dollar amount that you are subject to in a year. There are also lifetime maximums but I don't think he is going into that. So if you have an out-of-pocket max of $5,000 and you have paid that, anything over that you wouldn't pay. So if you have paid out $5,000 out of your own pocket and another bill comes in for $1,000, you would pay nothing and the insurance company would pay all of it. These limits reset each calendar year

Calculate out-of-pocket costs to the insured when a deductible, co-insurance, and out-of-pocket limits apply

$10,000 * 8% * 2 years = $1,600 Total amount due in 2 years is $11,600

Calculate simple interest on a loan. LOAN: $10,000 at 8%, 2 years

STEP 1: Calculate average annual finance amount ($10,000 * 8% * 2)/2 = $800 STEP 2: Divide by annual loan amount In this example of $10,000 for 2 yrs, that would be $10,000 / 2 = $5,000 So $800 / $5,000 = 16% APR

Calculate the APR for an add-on loan $10,000 at 8% for 2 yrs

Yes and it can also be converted to whole life insurance at the end of the term without submitting evidence

Can you renew term life insurance without submitting evidence of insurability?

prepayment penalties One method that creditors use to discourage prepayment penalty is the Rule of 78 (also know as sum-of-the digits method)

Charges, designed to discourage prepayment, incurred when a mortgage is repaid before maturity.

co-payment

Co-payment or deductible? A flat fee that you pay every time you receive a covered service.

deductible

Co-payment or deductible? Amount you must pay before you begin receiving any benefits from your insurance company

life insurance agent

Does an underwriter or life insurance agent do the following: 1) sell life insurance policies and annuities to clients; and 2) to work with clients and beneficiaries to process insurance claims promptly.

an underwriter

Does an underwriter or life insurance agent do the following: a member of a financial organization. They work for mortgage, insurance, loan or investment companies. They assess, evaluate and assume the risk of another party for a fee

1) *Don't getting overextended* 2) Fulfill all credit terms 3) *Make your payments on time* 4) Notify creditors if unable to pay 5) Be truthful

How do you maintain good credit?

It looks like the key terms here are what the book has italicized. Reread that part.

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.

Both plans partner with a group of physicians for negotiated fees but with a PPO network, you can see doctors outside the network (you can't with an HMO). However, if you go out of network, the costs are higher than if you go to an in-network doctor.

If both PPO and HMO are managed care plans, what is the difference between the two?

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.

PROS: 1) no approval process. Easy. Borrowing from your own assets 2) make payments whenever you want (or not at all but it will reduce your final payment when you die. Remaining balance and also the interest on that amount) 3) ot taxable income as long as the amount borrowed is equal to or less than the amount of premiums paid CONS: 1) If you were to die before paying back your policy loan, the loan balance plus interest accrued is taken out of the death benefit given to your beneficiaries. This could be a problem if your beneficiaries need the entire amount of the intended benefit. 2) If the loan balance increases above the amount of the cash value, your policy could lapse and risk termination by the insurance company. In the event of a policy lapsing or being surrendered, the loan balance plus interest is considered taxable income by the IRS, and the taxes owed could be a fairly large amount depending on the initial loan and interest accrued

Is it a good idea to borrow funds from a life insurance policy? See pros/cons

No but the interest on it is (if there is interest)

Is the payment your beneficiary receives from your life insurance taxable?

coinsurance or participation

Is this a deductible, a coinsurance amount or an out-of-pocket maximum? 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.

for consumable goods (example groceries). The items purchased on credit should last longer than it takes to pay them off.

It is not a good idea to use credit for...

Insured: pays $1,500 deductible first Balance: $78,500 80% of that is $62,800 but the out of pocket max is $5,000 so the insurance company is going to pay $73,500

Lets do a large amount where the out-of-pocket maximum of $5,000 applies. Bill: $80,000 $1,500 deductible, 80/20 coinsurance, $5,000 out of pocket max

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.

installment loan More popular as most people like to have a monthly payment to work into their budget. Maturities range from 6 most to 6 years

Loan with equal number of payments of the same amount over a fixed period of time. Is this single-payment or installment?

IPA (individual practice association)

Most popular type of HMO is an _______

STEP 1: Average Annual Finance Charge [$10,000 *8% * 2)/2] = $800 (borrower still owes $10,000) STEP 2: Divide by loan amount $800 / $8,400 = 9.5% APR

Now calculate the APR on the same loan with the discount method: Remember that the same $10,000 loan at 8% with 2 years gives the borrower $8,400 BUT the borrower still owes on the full $10,000.

PPOs

One difference between HMOs and PPOs is that members of _____ can choose their own doctors and treatment facilities and still receive benefits.

Section I Perils Comprehensive covers all perils except those specifically excluded, like floods and earthquakes. Named perils policy will only cover the perils listed in the policy. Section II Perils Covers the negligence of the person Exclusions include libel, slander, defamation of character, and contractual or intentional wrongdoing.

Perils covered in a property insurance policy

HO-4

Renter's insurance is form HO-1, HO-2, HO-3, HO-4, HO-5, HO-6, HO-7, or HO-8

total loan payments divided by take-home pay

Repeat for practice: How do you calculate debt safety ratio?

uncertainty concerning a potential economic loss

Risk is defined as

Insurance company decides whom to insure and rate to be charged Company must guard against adverse selection—a disproportionate number of bad risks. A significant problem facing underwriters is how to determine the criteria for classifying the people that they choose to insure. Criteria will vary between companies—you need to shop around to find best policy for you.

Study guide says to understand UNDERWRITING. Of course this is what I do. Here are the teacher notes on this subject:

Unless you live in a bubble, you have to assume risk Risk assumption: The choice to accept and bear the risk of loss. Loss Control is any activity that lessen the severity of loss once it occurs, wear seat belts, don't drink and drive, eat a healthy diet, no smoking Insurance: You transfer some of your risk of loss to the insurance company. But you cannot transfer 100% of risk—your actions matter.

Teacher notes on Living with Risk FYI card

1) Risk is defined as uncertainty concerning a potential economic loss 2) The simplest way to deal with risk is to avoid the act that creates it. 3) Risk Avoidance: avoiding an act that would create a risk. 4) There is RISK in everything you have a financial interest 5) Life, Health, Home, Car, Business, Everything

Teacher notes on Risk. FYI card

HMO and PPO. The key here is no deductible. You have to see doctors in the network (or it is cheaper to do so) and there are co-payments for services.

The below describes managed healthcare. The below describes TWO of the following: HMO, PPO, IPA or Indemnity? Monthly payments made directly to organizations that provide health care Designated doctors and hospitals provide services Hold down costs by controlling amount of care provided and emphasizing prevention Charge copayments Most medical services including preventive and routine care are covered

principle of indemnity

The insurer agrees to pay no more than the actual amount of the loss

If you understand the previous card, this would be the reverse. The first $1,500 of any bill would be paid for by the insured person (the deductible). Then anything over that amount would be paid 80% by the insurance company and 20% by the insured. Lets do a problem in the next slide

The next question on the study guide is to calculate the insurers financial responsibility for payment given a set of facts and I feel like the above is what they are referring to. Trying to determine what this would mean. I think perhaps this could mean the financial responsibility of the insurance company (so the flip of what we just did)

With this method, you analyze your family's total income needs: how much you need to make your payments, buy food, expenses, etc. Subtract Your financial resources if you die such as social security payments for your survivors, savings and investments, life insurance, annuities, any other investments The difference between these two is how much you need for insurance (see page 12 of chapter 8 teacher notes if you want to see a slide)

The other method to determine how much life insurance is needed is needs analysis.

With this method, you take your salary multiplied by 5-10x So, if you earn $50,000, you would need insurance in the range of $250,000-$500,000

There are two kinds of methods to determine how much life insurance is needed. One is multiple of earnings. As a rule of thumb with this method, the range of earnings need is how many times your salary?

straight term and decreasing term. Straight term - Coverage remains the same while premiums can increase as insured ages Decreasing term - Premiums remain the same while coverage decreases

Types of term life:

Part A - Liability coverage Part B - Medical payments coverage Part C - Uninsured motorists coverage Part D - Coverage for damage to your vehicle

Types/Parts of Automobile Insurance Coverage

False. Savings are the best way to deal with financial emergencies

Using credit is the ideal way to provide for financial emergencies. true or false

1) Open checking and savings accounts 2) Get a credit card and make small purchases

What actions should you take to build credit?

Type of Structure Credit Score - affect premiums more than any other Location of Home Other factors specific to homeowner

What are factor affecting home insurance coverage?

1) Meet basic living expenses 2) Make impulse purchases 3) Purchase non-durable goods 4) Consistently paying only minimum payments

What are improper uses of credit?

auto loans, personal loans (trip to Europe as an example), other durable goods (furniture, mobile home, appliances, computer) school loans consolidation loans (lumping your debit into one loan) *note - does not include mortgage loans

What are some examples of consumer loans?

Advantages: Economical way for young families to purahase large amounts of life insurance Provides for needs that disappear over time Disadvantages Premiums become too costly as you get older Does not build cash value

What are the advantages and disadvantages of term life insurance?

Advantages Savings vehicle Borrow against cash value Premiums remain constant Cash value accumulates tax-free until redeemed Disadvantages Less death protection for young people Low return on savings Tax penalties possible on early withdrawal Outstanding loan subtracted from face value of policy upon death

What are the advantages and disadvantages of whole life insurance?

Having good credit allows you to be approved for loans at the best interest rates possible. Bad credit can lead to being denied a loan at all and if you get approved for a loan, you have to pay a higher interest rate because you are considered a bad risk. So a person with good credit might pay 2% for a car loan but a person with bad credit might have to pay 5% interest for the same car. A person with marginal credit might be 3.5% interest.

What are the advantages of good credit? What happens if you have bad or marginal credit?

A life insurance policy loan is not taxable as income, as long as it doesn't exceed the amount paid in premiums for the policy. (this is mentioned earlier in this quizlet) If you surrender your policy or your policy lapses, the loan (plus interest) is considered taxable income by the IRS, at your ordinary-income rate

What are the tax implications on a whole life insurance policy if you take out a loan or cash the whole thing in?

life health finances car home

What are types of risk

Rating territory Use of the automobile (personal or business) Drivers' personal characteristics Type of automobile Driving record

What factors affect auto premiums?

Lower interest rates and tax deductibility The interest rates on these loans are very competitive and the interest on the loan is a tax deduction

What is an advantage to taking out a home equity loan over an installment loan?

Average annual finance charge divided by average loan balance outstanding.

What is the APR (annual percentage rate) formula?

$10,000 * 8% * 2 years = $1,600 $10,000 - $1,600 = $8,400 (the amount given to borrower) Answer: $8,400

What is the amount of the loan the borrower is getting using the discount method LOAN: $10,000 at 8%, 2 years

Whole life insurance - most expensive because it accumulates cash value. Term life insurance - does not accumulate any cash value and usually terminates at a certain age

What is the most expensive type of life insurance? What is the cheapest type of life insurance? Choices: term, universal and whole

internal limits Charges commonly subject to internal limits are hospital room and board, surgical fees, mental and nervous conditions, and nursing services. If an insured chooses an expensive physician or medical facility, then he or she is responsible for paying the portion of the charges that are above a "reasonable and customary" level or beyond a specified maximum amount. So if your costs are above a reasonable level, you are going to pay the amount over and above the average.

What is the term that is written in most medical policies that controls the amounts paid for certain specified expenses—even if the claim doesn't exceed overall policy limits?

No fault auto insurance

What kind of auto insurance provides the following: Reimburses parties involved in an accident without regard to negligence Each party compensated by their own insurance company Restricts remedies and payments for pain and suffering State laws vary regarding amount of no-fault benefits and restrictions for legal actions

whole life policies because they have a cash value (accumulates to a higher amount over time)

What kind of life insurance policy can you borrow against to get funds?

I can't find a definite answer. I think it would be big ticket items like an appliance. Another item would be travel expenses and this is because you shouldn't travel with a lot of cash and if you purchase something like an excursion and you get scammed, you can dispute the charge with your credit card company. This would be true of online purchases too. They say to purchase your gas on a credit card because this is the #1 way people get your credit card number. Credit card companies protect you from theft.

What purchases is credit an acceptable means of acquiring good and services?

single-payment or installment

What two types of consumer loans are there?

consumer loans

What type of loan has formal, negotiated contracts that specify both the terms for borrowing and the repayment schedule. One time transaction; no revolving credit. A loan for a specific purpose or transaction. Used for big ticket items.

COBRA Consolidated Omnibus Budget Reconciliation Act COBRA is what I always hear it called. Not sure you need to know the long name but doesn't hurt to see it

What was the name of the law passed by Congress in 1986 where an employer must allow an employee to continue coverage for up to 18 months if employee leaves. Employee must pay up to 102% of premium.

If it costs more to borrow the money than you can earn in interest, then withdraw the money from your savings to pay cash for the purchase; if not, you should consider taking out a loan There's a worksheet in the book and mentioned in the notes where you walk through the cost of borrowing compared to the cost of paying cash but I don't see that it is a specific formula so I think it is just something to be aware of.

When should you borrow and when should you use cash?

HO-5 is for comprehensive coverage and is the most common

Which coverage is the most common for a homeowner? HO-1, HO-2, HO-3, HO-5, HO-6, HO-7 or HO-8

Indemnity Plan

Which medical plan is the below. Choices are HMO, PPO, IPA or Indemnity? Typically offer unlimited choice of doctors and hospitals Pay deductible plus a percentage of eligible costs Reimbursements based on "usual, customary and reasonable" (UCR) charges Health care services separate from insurer

Part D: Coverage for damage to your vehicle

Which type of automobile insurance coverage is... Choices: Part A - Liability coverage Part B - Medical payments coverage Part C - Uninsured motorists coverage Part D - Coverage for damage to your vehicle Collision: Pays the actual cash value of the damage minus deductibles Pays no matter who is at fault Required for financed cars to protect the investment

Part C: Uninsured Motorist Coverage

Which type of automobile insurance coverage is... Choices: Part A - Liability coverage Part B - Medical payments coverage Part C - Uninsured motorists coverage Part D - Coverage for damage to your vehicle Pays when other driver has no insurance or if hit-and-run Usually pays for bodily injuries, not property damage Additional coverage available to protect against underinsuredmotorists Must meet criteria: •Another driver at fault •Other motorist uninsured or underinsured •Damages were incurred

Part B: Medical payments coverage

Which type of automobile insurance coverage is... Choices: Part A - Liability coverage Part B - Medical payments coverage Part C - Uninsured motorists coverage Part D - Coverage for damage to your vehicle Reimbursement for medical expenses resulting from an accident Covers insured, family members, and passengers in covered autos Covers injuries sustained as a pedestrian or while riding a bicycle

Part A: Liability coverage Who and What it covers: term-95 Insured Person: The named insured Family members Any person using covered auto Any person or organization responsible for insured's actions Covered Auto Listed on declaration page Acquired during policy period Any vehicle temporary used while auto is being repaired

Which type of automobile insurance coverage is... Choices: Part A - Liability coverage Part B - Medical payments coverage Part C - Uninsured motorists coverage Part D - Coverage for damage to your vehicle Required in most states Pays bodily injury and property damages to others when you are responsible for the loss Covers costs of settling or defending claims for damages

Financial protection for dependents—people who rely on you for financial resources Protection from liability—Able to pay off mortgage Tax benefits—proceeds from life insurance not taxable Vehicle for savings, though not the best vehicle Needed if you have people who depend on you and you have expenses

Why should you buy life insurance?

You would want a simple loan. With an add-on interest loan, the total loan amount is more and so your payment is more. In addition, you can save on interest if you pay it off early like you can with a simple loan.

Would you rather have an add-on interest loan or a simple loan?

20% of net monthly income. In the problem above, Zach's debt safety ratio is too high.

You debt safety ratio should not exceed what percent?

$500,000 x 80% = $400,000 $400,000 - $360,000 = $40,000 Zach can get a home equity loan of $40,000

Zach wants to take a loan from the value of his house. What is his home equity loan amount that he is eligible for? Zach's house is valued at $500,000. The bank will allow an LTV (loan to value) percent of 80%. Zach's mortgage balance is $360,000

Term is cheap, has no cash value and terminates at a certain age or after a certain period of time. This is an affordable option for people that need to provide money for their families if they die and basically ends when you no longer have those kinds of financial burdens Whole is costly but does accumulate a cash value that you can borrow against if you need it. It does not have a term date. You own the policy until death. *But if you borrow against it, the amount you borrow plus interest is deducted from the payout unless you pay it back

Zach, out of the term and whole life insurance comparisons, these are what I consider key

single payment loan Maturities are usually 30 days to a year. Short-term in nature. No monthly payments. Just pay it off all at once at the end of the loan.

a loan made for a specified period, at the end of which payment is due in full Is this single-payment or installment?

Home equity loan

a loan secured by equity value in the borrower's home

add-on interest loan Back to our example previously with a $10,000 loan at 8% interest for 2 yrs, remember the total amount with interest was $11,600 $10,000 * 8% * 2 = $1,600. So, $1,600 + $10,000 = $11,600. This person is getting a loan amount for $11,600

a loan where the interest has been calculated at signing and added to the principal to make one single balance.

rule of 78s (sum-of-the-digits method) Book definition: This method charges more interest in the early months of the loan on the theory that the borrower has use of more money in the loan's early stages and so should pay more finance charges in the early months and progressively less later

a method of calculating interest that has extra-heavy interest charges in the early months of the loan

personal property floater

additional property insurance that covers the damage or loss of a specific item of high value

captive agent

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

liability insurance

insurance that provides protection from claims arising from injuries or damage to other people or property. Can include expenses caused from negligence (failing to act in a reasonable manner or take necessary steps to protect others from harm).

credit disability insurance

repays the outstanding loan balance if the borrower becomes disabled

deft safety ratio

the ratio of monthly consumer debt payments to the monthly take-home pay, expressed as a percentage. Lending institutions such as banks and credit card companies use this and other financial metrics to assess whether to approve a loan, mortgage or a credit card.