1 personal finance: another perspective insurance 1: basics

of 29 /29
1 Personal Finance: Another Perspective Insurance 1: Basics

Author: daniela-anderson

Post on 03-Jan-2016

213 views

Category:

Documents


0 download

Embed Size (px)

TRANSCRIPT

  • ObjectivesA. Understand what our leaders have said regarding insuranceB. Understand the importance of insuranceC. Understand the key principles of insurance

    *

    Your Personal Financial PlanSection X: InsuranceA. Life, B. Health, C. Disability, D. Auto, and E. Home Owners/Renters InsuranceDo you need it (A-E)? Do you have it? How much should you have?What type is it? Costs and coverage? Discounts/specifics?Include a copy of your CLUE report (if avail.)Include a summary sheet of health insurance coverage and TT29 (for Life insurance)Action Plan: What insurance and coverage should you have?

    *

    Understand what our Leaders have said about InsuranceInsurance is an important part of becoming financially self-reliant. Elder Marvin J. Ashton said: Appropriately involve yourself in an insurance program. It is most important to have sufficient medical, automobile, and homeowners insurance and an adequate life insurance program. Costs associated with illness, accident, and death may be so large that uninsured families can be financially burdened for many years. (Marvin J. Ashton, Guide to Family Finance, Liahona, Apr. 2000, 42.)

    *

    Insurance (continued)President N. Eldon Tanner further commented: With rising medical costs, health insurance is the only way most families can meet serious accident, illness, or maternity costs, particularly those for premature births. Life insurance provides income continuation when the provider prematurely dies. Every family should make provision for proper health and life insurance. (N. Eldon Tanner, Constancy Amid Change, Ensign, Nov. 1979, 80.)

    *

    Understand the Importance of InsuranceWhat is insurance?Insurance is a legal contract between you and an insurance firm whereby the firm agrees for a premium (fee) to pay you compensation for certain kinds of losses or events, i.e., death, sickness, compensation for accidents, loss of ability to work, legal expenses, etc. What are the major types of insurance?Life Insurance, Health Insurance, and Auto, Home, Disability, and Liability Insurance

    *

    Insurance (continued)What is the purpose of insurance?The purpose of insurance is to transfer the risk of certain types of losses or events from yourself to another institution. By transferring risk, it can help you and those you love achieve your specific goals if you die, get sick or become unable to workSpecific goals may include:To take care of your spouse and childrenTo raise children without working outside the homeTo be able to go to college and on missions

    *

    Insurance (continued)What happens without Insurance (life, health, disability, or liability insurance)?If you live:Nothing changesIf you die, get sick, or get sued without insurance:Your spouse may have to workYour children may not achieve important goalsYou may not be able to take care of your familyYou may be unable to work and lose your earning capacityYou may lose everything you have ever saved for

    *

    Insurance (continued)How do you eliminate risk?Avoid it. You can take care of yourself, avoid high risk occupations, eat well, and exercise.Reduce it. You can reduce some risks by adding fire extinguishers and burglar alarms, adding airbags, or getting regular medical checkupsAssume it. You can retain the risk through self-insurance. If the costs are not too high, you can assume some risks yourselfTransfer it. You can transfer the risk to others by purchasing insurance. You are paying premiums to transfer the risk to an insurance company.

    *

    Insurance (continued)Should you insure against all losses?No. Some losses are not as critical as others. Insure against the critical or serious lossesCan you classify your risks?Yes. I like two thoughts:Frequency of lossHow often does the loss happen?Severity of lossHow severe are the results if the loss happens?

    *

    Insurance (continued)Frequency of LossSeverity of LossHighHighLowLowAvoidReduceTransferReduceAssumeReduceAssume

    *

    Insurance (continued)What is the key to insurance?You need to balance the cost of reducing risk with the severity of the lossInsure against high severity losses that rarely occurthose that could have a major impact on the financial condition of you and your familyReduce and avoid those other risks that you canUse insurance for what insurance does bestBe careful in mixing insurance and investing

    *

    Life Insurance and Your Investment PlanCash value: with guaranteed insurability option paid up till age 65. Term: Five-year guaranteed renewable term in $50,000 and $100,000 increments; can add and drop as necessary. Investment: Includes individual and employer sponsored retirement plans

    Chart1

    Sheet1

    AgeInvestmentsTermCash ValueTotal Value

    20250250

    2510500510

    303040750790

    6035100750850

    100402007501001,050

    130453306501001,080

    170505005501001,150

    190556904501001,240

    210609002001001,200

    250651,1500.01001,250

    -100701,0501001,150

    -100759501001,050

    -10080850100950

    -10085750100850

    -10090650100750

    Sheet1

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    Investments

    Term

    Cash Value

    Total Value

    Age

    Total Dollars

    Life Insurance and Investment Plan

    Sheet2

    Sheet3

    Chart3

    Sheet1

    AgeInvestmentsTermCash ValueTotal Protection

    20250250

    2510500510

    303040750790

    6035100750850

    100402007501001,050

    130453306501001,080

    170505005501001,150

    190556904501001,240

    210609002001001,200

    250651,1500.01001,250

    -100701,0501001,150

    -100759501001,050

    -10080850100950

    -10085750100850

    -10090650100750

    Sheet1

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    0000

    Investments

    Term

    Cash Value

    Total Protection

    Age

    Total Dollars in (000s)

    Life Insurance and Investment Plan

    Sheet2

    Sheet3

    *

    Insurance (continued)Any questions on insurance?

    *

    Understand the Key Principles of InsuranceInsurance is an important part of your Personal Financial Plan. How do you build an effective insurance plan?Many take a products approach to insuranceHowever, insurance products will change over time, as new products are being developed and soldHow about a principles based approach?The principles should not change over time

    *

    Principles of Insurance (continued)How important are correct principles when teaching about a specific subject?The Prophet Joseph Smith said: I teach them correct principles and they govern themselves. (Messages of the First Presidency, comp. James R. Clark, 6 vols., Salt Lake City: Bookcraft, 1965-75, 3:54.) What are the key principles of insurance that can help us govern ourselves? If we understand those principles, we should be able to govern, i.e. manage our various insurance products wisely

    *

    Principles of Insurance (continued)What are the key principles of Insurance?1. Know yourself and your goals2. Know your budget and how much you can afford 3. Understand in detail the costs and benefits of each insurance product -- read and understand the prospectus and illustrations carefully!4. Insure only against high-cost high-severity losses5. Work only with high-quality individuals and institutions6. Review your insurance needs annually

    *

    Principles of Insurance (continued)1. Know yourself and your goals Know what you want to attain out of lifeUnderstand that insurance is a tool to help you achieve your goalsit is not a goal in itselfGoals may include salary replacement, litigation management, inheritance planning, etc.Insurance is contingent financingKnow which products can help with which goalsUnderstand each insurance product clearlyRecognize that your insurance needs will changeYour need for insurance is not constant throughout your life. Plan for the future, but live in the present

    *

    Principles of Insurance (continued)2. Know your budget and how much you can afford Understand yourself and your budget. How much can you afford to spend on insurance needs?Be cost-effective in your insurance planningIt makes no sense to begin an insurance program that you cannot continueTake into account the potential for job loss and its impact on your budgetCertain insurance products have higher premiums than others

    *

    Principles of Insurance (continued)3. Understand in detail the costs and benefits of each insurance productKnow the costs and benefits of each type of insurance product Read in detail the marketing documentsRead and understand the prospectus and illustrations carefully!Weigh the information carefully before purchase Many insurance products have high upfront expenses and are expensive to changeCompare products across companies before you purchase

    *

    Principles of Insurance (continued)4. Insure only against high-cost high-severity lossesBe cost-effective in your insurance programInsure against events that would have a major financial or economic impact on you and your familySelf insure against smaller impactsBalance your need for insurance with the cost of insurance

    *

    Principles of Insurance (continued)5. Work only with high-quality individuals and institutionsWork with those you feel comfortableIf you feel pressure in any way, find another agentDevelop a long-term relationship based on trustKnow how insurance agents are paidMinimize the potential for conflicts of interestMake sure the company is financially soundFind companies that have been around for a long time and which have the highest ratings: A.M. Best (A+, A++), Fitch (AAA), Moodys (Aaa), and Standard and Poors (AAA).

    *

    Principles of Insurance (continued)6. Review your insurance needs annuallyYour insurance needs may change over timeUse wisdom in your changesAdd or reduce coverage in the most cost-effective way possible Be especially careful of all costs in making changesMany insurance products, particularly cash-value life insurance, have high up-front costsBe an informed insurance consumer

    *

    QuestionsAny questions on the key principles of insurance?

  • Review of ObjectivesA. Do you understand what our leaders have said regarding insurance?B. Do you understand insurance?C. Do you understand the principles of insurance?

    *

    Questions to Ask Potential Insurance Agents1. Are you a full time insurance agent?Work with agents who work full-time at their business. This gives greater assurance that your agent is knowledgeable in the products you need2. How long have you been a full-time insurance agent?Work with someone who is experienced and established. While a new agent may be competent, an experienced agent will likely be competent and have experience.

    *

    Questions to Ask (continued)3. What life insurance companies do you represent?Generally, it is better to work with someone that represents at least one company with a top rating from A.M. Best for 10 consecutive years. If they work with multiple companies, they may be able to offer more competitive products 4. Are you a CLU (a Chartered Life Underwriter)?A CLU is preferred, especially if you are seeking advice or considering insurance other than term.

    *

    Questions to Ask (continued)5. Will I be allowed to keep the insurance proposal that you prepare for me?You should not consider an agent that doesnt allow you to keep the proposal. You should be able to take the proposal home and review it on your time.6. Would you be willing to inform me of the commission youll receive on any policies that you recommend?You want to make sure that the agent is working on your behalf. By knowing the agents commission on various policies, you may be able to avoid policies that are more of a benefit to the agent than to you. Beware the agency problem!

    *

    Questions to Ask (continued)7. Do you have any clients who are willing to recommend you?Your agent should either supply you with names of satisfied clients or share testimonial letters from others. You should not consider an agent without recommendations.

    The basis for these questions are from Arthur J. Keown, Personal Finance, Turning Money into Wealth Student Workbook, Prentice Hall, New Jersey, 2007, p. W47.