Transcript Personal Finance: Another Perspective
Presentation to the Society of Automotive Engineers Club
Insurance
By: Joshua Flade Internship in Personal Finance February 23, 2011
Why Do We Need Insurance?
Purpose
The purpose of insurance is to transfer the risk of certain types of losses or events from yourself to another institution.
Types
Life, Health, Auto, Home, Disability, and Liability Insurance
Goals of Insurance
To take care of your spouse and children To raise children without working outside the home To be able to go to college and on missions
What Do Church Leaders Say?
President N. Eldon Tanner once said: 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.) 3
Insurance Model Severity of Loss
High
Frequency of Loss
High
Low
Avoid Transfer Reduce Reduce Reduce
Low
Assume Assume 4
How much Life Insurance is Enough?
From the old LDS Handbook for Families it states: Insure the family’s breadwinner first, then others, if desired, as income permits. At a minimum, get enough life insurance to pay for such things as a funeral, taxes, mortgage on the home, car payments, and other debts. The next priority should be to get enough insurance that, supplemented by any government retirement benefits the surviving spouse may be entitled to, there will be sufficient to provide for the family and to make provisions for the children’s education and missions. “Handbook for Families: Preparing for Emergencies,” Ensign, Dec. 1990, 59.
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Key Principles of Buying Insurance
o 1. Know yourself and your goals o 2. Know your budget and how much you can afford o 3. Understand in detail the costs and benefits of each insurance product. Read and understand the prospectus and illustrations carefully! o 4. Insure only against high-cost high-severity losses o 5. Work only with high-quality individuals and institutions o 6. Review your insurance needs annually and make changes as necessary
Purchasing Life Insurance
Key questions when purchasing insurance: How long can I keep this policy?
Term vs. Permanent What are the renewal terms of the contract?
When will my premiums increase?
Can I convert my term policy to a permanent policy? What are the details?
How strong is the insurance company financially?
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Purchasing Life Insurance
(continued) Two methods to determine how much life insurance. a. The earnings multiple approach The goal is earnings replacement It seeks to replace the annual salary stream of a bread winner for X years, normally 5 – 15 times gross salary is recommended.
o The lower general interest rates, the higher the multiple needed 8
Purchasing Life Insurance
(continued) How is it calculated?
1. Adjust salary down 2. Choose the appropriate interest rate to match the assumed after-tax and after-inflation earnings on the policy settlement.
3. Determine the income stream replacement and annuity 4. Subtract current insurance coverage 9
Purchasing Life Insurance
(continued) b. The Needs Approach How is it calculated?
1. Adjust the salary downward 2. Add up all funding needs The total needs of the beneficiaries includes: immediate, debt elimination, transitional, dependency, spousal life income, education, and retirement funds 3. Subtract current insurance coverage and other available assets This is additional coverage needed 10
Learning Tools
To help you determine your life insurance needs, we have prepared a spreadsheet to help you in this process Learning Tool 29: Calculating Life Insurance Needs This tool uses 6 different approaches to determining how much you need for life insurance
Health Insurance Basics
What are the major types of Health Care Coverage?
The four major types of Health Care Coverage are: I. Basic health insurance II. Major medical expense insurance III. Dental and eye insurance IV. Dread disease and accident insurance 12
Auto Insurance
Why have auto insurance? There are 30 million accidents in the U.S. annually, or about 1 accident for every 5 licensed drivers. This results in over $100 billion in economic losses, 2 million injuries, and over 40,000 deaths.
1 When will it be your turn?
1 Louis Boone, David Kurtz, and Douglas Hearth, Planning Your Future, 3 rd Southwestern, United States, p.275.
ed., Thompson 13
Auto Split-Coverage Limits
What are auto split-coverage insurance limits?
100/300/50 (my recommended minimum coverage) These limits have reference to your coverage amounts: $100,000 of bodily injury liability per person $300,000 of bodily injury liability per accident $50,000 of property damage per accident These are the maximum amounts your insurance company will pay per person or per accident. Should the cost of the accident exceed the stated limits, you are personally responsible for any amounts exceeding these limits 14
Comprehensive Auto Insurance
What does comprehensive physical damage cover?
It covers collision loss regardless of who is at fault If the other driver was at fault and has liability insurance, your insurance company should be able to recover losses without collision coverage from the other driver’s insurance company Other than collision, it covers comprehensive physical damages My recommended minimum coverage is $100,000. Remember that deductibles apply.
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