Personal Finance: Insurance

• Insurance is to provide financial protection against different kinds of risks we face in life.

•Insurance Policy: Your policy is a written agreement between you ands the insurance company. It explains:• what kinds of losses the company will cover, •how much it will pay to cover these losses,• and how much you will pay for this protection.

Coverage Limit

• The maximum amount the company will pay you for your loss.

Deductible

• The deductable is the amount of loss that you must pay yourself before the company will step in and pay the rest.

Claim

• A request for payment of your losses.

• Example: if you have a car insurance policy that has a $500 deductable. If you get in a car accident that will cost $1,500 to repair. Then you will have to pay $500 before the insurance company pays $1,000

Premium • Is the amount of money you pay per month, per quarter,

or per year in order to guarantee your coverage. Insurance premiums vary widely, according to the following factors:

• The type of insurance: Health insurance is more expensive then property insurance.

• Amount of Coverage: You can often choose between different coverage limits, lower coverage limits mean lower premiums.

• Your age, marital Status, where you live, and your credit history.

Types of Insurance

• Health Insurance: This insurance pays for medical bills when you are sick or injured. Your parents policy will cover you until you are 19 or, if you are a full time student, until you are 23. The cheapest way to get health insurance is through your job, if your lucky enough to find an employer that pays health insurance benefits.

• Dental Insurance: Helps pay for dental visits and dental procedures like cleanings, dentures, or braces.

Property

• If you live in an apartment, you can get renters or owners insurance to replace your stuff in case it is stolen or destroyed by fire.

• If you buy a home you need homeowners insurance to protect your home.

Disability

• If you suffer an illness or injury that keeps you from working for an extended period, this insurance will pay you 75% of your monthly income until you recover.

Car Insurance

• Liability Coverage: Pays for any personal injuries, or property damage.

• Collision Coverage: To pay for any damage to your own car.

• Teenagers pay more for car insurance than older drivers. Males pay more than females.

Life Insurance

• This insurance provides money to the people you leave behind when you die.

• A beneficiary: the person you want to receive the money after you die.

Life Insurance Cont.

• Term life: is usually cheaper and pays a higher benefit. But you can only buy a policy for a limited term, or period of time. When that term is over, you need to buy a new policy, usually at a higher price, because term insurance premiums increase as you get older.

Life Insurance Cont.

• Whole Life: is more expensive and pays less of a death benefit than a term policy.

• However it provides coverage for your whole life and the premium never increases.

• Whole life also comes with a cash value that increases over time. Your policy entitles you to withdraw or borrow against this accumulated cash value for emergencies.

Investment

Savings

• Are money deposits placed securely in a bank or other financial institution, so that the funds will be available for later use.

• Savings earn a small amount of interest or the money banks pay for the use of your savings.

Investments

• Are money you pay into a business with the expectation, But not the guarantee, of future rewards, if the business makes a profit.

• Return: the money you get back when the company makes a profit.

• Risk: if a company that you are investing in does bad then you don’t get your money back.

Investments Cont.

• Investments carry higher risks, but potentially higher returns, than savings.

Financial Institutions for Savings

• Bank/Savings Account: a Corporation that stores deposits and makes loans in order to earn a profit. Savings accounts in banks make interest.

• Certificate of Deposit (CD): a deposit you promise to leave in the bank for a specific amount of time, usually a year or more, in exchange for a higher rate of interest.

Bonds

• Bonds: you pay money to a corporation, federal government, or city/state.

• They pay you back with a high level of interest and then pay back the entire bond in a couple of years.

• Considered safer due to the companies being evaluated ahead of time before lending.

Stocks

• Buy into a company and earn a small portion of ownership in that company.

• The share of the companies profit that you get is called dividends or Capital Gains.

• Considered more risky because if the business goes under than you are out your investment.

Diversification

• Investing your money in many different places and companies. So if one company goes under you haven't lost all your money.

• Don’t put you eggs in one basket.

Mutual Funds

• A mutual fund pools money from many investors and uses it to buy a variety of stocks and bonds.

• Mutual funds offer a compromise by including low-risk, low return stocks with some high risk, high return stocks. That way its hard for investors to loose all their money.

Credit Union • Is a non profit financial institution that is owned

and controlled by its members, usually people who work in the same company or the same occupation. Credit union deposits earn interest, and depositors are eligible to borrow money from the credit union, sometimes at lower interest rates than a bank would charge.

• They are also protected by the US government.• But not many of them and have to be a member.

Debit Card

• Takes money out of your checking account (demand deposit). Like an instant check!

Credit Card

• Credit: the ability to obtain goods and services now, based on an agreement to pay for them later.

• Credit can include: bank loans for large items like a car or a house.

• Credit Card: for smaller expenses like clothes, food, or entertainment items.

Credit Card

• Good: convenient, lets you buy it now but pay for it later.

• Bad: can increase the amount of money that you have to pay for things. Can also lead to increased debt.

Installment Plan

• When you agree to pay a fixed amount per month for a special number of months.

Credit Score

• Is a number value of how good your credit history is. The higher the number the better.

Credit history: How well you have managed your bills and credit in the past. Did you pay your bills on time? Did you pay your loans back on time?

Simple Interest

• Interest rate charged only on the original amount borrowed.

• Example: a $1,000 loan at 10% simple interest you would pay back how much money?

Answer

• $1,100• 1,000 + (.10 x 1,000)= 1,000 + 100 = $1,100

Compound Interest

• Interest rate charged on the original amount borrowed and all previous interest. So it will add up fast

• 1st year: $1,000 + (.10 X 1,000)= $1,100• 2nd Year: $1,100 + (.10 x 1,100)= $ 1,210

Fixed and Variable Interest Rate

• Fixed: Interest Rate never changes

• Variable: Interest Rate can go up at any time.

What is Credit Worthy?

• When you go to the bank for a loan or a home mortgage, the bank must decide whether you are creditworthy.

• This is based on two underlying questions:1. Are you able to pay the money back?2. Are you likely to pay the money back?

Things you need to be credit worthy

• 1. Do you have a job?

• 2. Do you have collateral?

• 3. Do you have a good credit history/Score?

Collateral

• Something the bank could take away from you if you do not repay the loan. What you put up in case you don’t pay the loan.