Personal Finance

Chapter 5: PERSONAL
FINANCIAL PROTECTION PLAN

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Personal Finance
Objectives
Compare basic financial products and services to serve your
personal financial plan and make the right choice (CLO3)

Understand the stages of financial protection, thereby

determining needs and planning for financial protection
(CLO5)

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Chapter’s content

1 Risk and Risk management 2 Personal financial

protection strategy

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The Risk-Management Types of Insurance
Process

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 1. Risk and Risk Management
Risk is uncertainty about the outcome of a situation or event. It arises out
of the possibility that the outcome will differ from what is expected. In the
area of financial losses, risk consists of uncertainty about both whether the
financial loss will occur and how large it might be.
There are two types of risk:
Speculative risk exists in situations where there is potential for gain as well as
for loss. Investments such as those made in the stock market involve speculative
risk.
Pure risk exists when there is no potential for gain, only the possibility of loss.
Fires, automobile accidents, illness, and theft are examples of events
involving pure risk. Insurance only addresses pure risk.

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Personal Finance
 1. Risk and Risk Management

Risk management is the process of identifying and evaluating situations

involving pure risk to determine and implement the appropriate means for
its management. Risk management involves making the most efficient
arrangements before a loss occurs.
Risk management usually requires the purchase of insurance, although
insurance is only one of the ways to handle risk, and it is not always the best
choice.

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Personal Finance
 Personal financial protection strategy

1 2 3

Step

Step

Step
Assess your Decrease Choose
current spending goals that
on help you
financial
essential realize
situation needs your plan

4 5
Step

Step
Set a
budget for Risk-
your
personal
Manage
financial ment
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 Personal financial protection strategy

Step 1: Assess your current financial situation

• Collect all recurring invoices within the last 6
months.
• Take note of all income in the last 6 months.
• List recurring expenses and unexpected expenses
into separate sections.
• Determine which expenses are truly necessary and
which are too extravagant.
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 Personal financial protection strategy
Step 2: Decrease spending on essential needs
• Look for new companies that have more competitive offers on
products or services you use regularly, such as credit cards, gas, cell
phone bills, and Internet services. For example, you can use Viber /
Skype / Facetime... to communicate instead of calling by mobile
phone.
• Look for free or low-cost services, such as watching TV series
with an Internet laptop.
• Use coupons during shopping occasions

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 Personal financial protection strategy
Step 3: Choose goals that help you realize your plan
The SMART rules: S – Specific, M – Measurable, A – Attainable, R –
Relevant, T - Time based
• You don't need to save enough money to realize all your plans at
once.
• If you need a significant amount of money for your plan, divide it
into small monthly or quarterly savings goals to make it easier to
achieve.
• Share your goals with family/ friends who may be able to support
you.
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Personal Finance
 Personal financial protection strategy

Step 4: Set a budget for your personal financial plan

• This budget will include all the essential needs you listed
from step 1 after minimizing other expenses. However, don't
eliminate all entertainment or shopping needs because it will
easily discourage you from your plans.
• Budgeting strategies: Traditional Budget Method, Pay
yourself first, The 50/30/20 or 80/20 Budget, Envelope
Budget or zero-based method

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Personal Finance
 Personal financial protection strategy

Step 5: Risk-Management
Risk management represents decisions about whether
and how to protect against risk. The first step in risk
management is to recognize the risks to which you are
exposed.
Then you must decide whether to protect against
those risks.

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 The Risk-Management Process

Step 1: Identify Your Risk Exposures

Step 2: Estimate Your Risk and Potential Losses
Step 3: Choose How to Handle Your Risk of Loss
Step 4: Implement Your Risk-Management
Program
Step 5: Evaluate and Adjust Your Program

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 Choose How to Handle Your Risk of Loss

Risk avoidance
Risk Reduction
Risk retention / acceptance
Loss control
Risk transfer

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 Types of Insurance

Homeowner’s
Insurance
Automobile Insurance

Health insurance
Life Insurance

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 Law of large numbers

As the number of members in a

group increases, predictions about
the group’s behavior become
increasingly accurate

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 insurance
Mechanism for transferring and reducing pure risk through
which a large number of individuals share in the financial losses
suffered by members of the group as a whole.
premium
The monthly or annual cost paid for insurance.
insurance policy
Contract between the person buying insurance (the insured) and
the insurance company (the insurer)
hazard
Any condition that increases the probability that a peril will
occur
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Personal Finance
Homeowner’s insurance
Combines liability and property insurance coverages
that homeowners and renters typically need into single
package policies
Property Coverage Homeowner’s insurance provides protection for
various types of property damage losses, including the following:
(1) damage to the dwelling;
(2) damage to other structures on the property, referred to as
appurtenant structures;
(3) damage to personal property and dwelling contents; and
(4) expenses arising out of a loss of use of the dwelling (for example, food
and lodging)
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How Much Coverage Is Needed on Your Dwelling?
The amount of reimbursement for partial losses will be
calculated using the replacement-cost-requirement
formula:
R = (L – D) x (I : (RV x 0.80 or 1.00))
where
R = Reimbursement payable
L = Amount of loss
D = Deductible, if any
I = Amount of insurance actually carried
RV = Replacement value of the dwelling
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Consider the example of Selena Torres from Henderson,
Nevada, who owns a home with a replacement value of
$200,000 with a $500 deductible. Some years ago Selena
had insured her home for $144,000 and the coverage never
increased, even though the policy required coverage of 80
percent of the replacement cost. Last month a fire in her
home caused damage amounting to $80,500.
Applying Equation, Selena’s calculations are as follows:
R = ($80,500 - $500) x [$144,000 : ($200,000 x 0.80)]
= $80,000 x ($144,000 : $160,000)
= $80,000 x 0.90 = $72,000
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Example: Personal Property Checklist: Living Room

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 The actual-cash value (ACV) formula is:

ACV = P – (CA x (P : LE))

where
P = Purchase price of the property
CA = Current age of the property in years
LE = Life expectancy of the property in years
Consider the case of Lindee Holcolm, a college instructor from Kingwood,
Texas, whose nine-year-old heating/air-conditioning unit was struck by
lightning. The unit cost $2,400 when new and had a total life expectancy of 12
years. Its actual cash value when it was struck by lightning was:
ACV = $2,400 - [9 x ($2,400 : 12)]
= $2,400 - (9 x $200)
= $600
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Automobile Insurance
Combines the liability and property insurance coverages that most
car owners and drivers need into a single-package policy.

Auto insurance insures against the legal liability that may arise
from causing death or injury to others; the expense associated with
providing medical care to you, your passengers, and other persons
outside your vehicle; and the costs associated with damage to your
automobile.

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Summary of Automobile Insurance Coverages

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 Automobile Insurance Coverages

STRENGTHS
Liability insurance covers the
❖ Uninsured and Underinsured
insured when he or she is
held responsible for losses Motorist Insurance
❖ Uninsured motorist
suffered by others
insurance
❖ Underinsured motorist
W
❖ Medical PaymentsEAKNESSES
Insurance: insurance
❖ Automobile medical
payments insurance
OPPORTUNITIES
❖ Automobile medical
❖ Physical Damage Insurance Physical
payments insurance
damage insurance or (collision and
comprehensive coverage) provides
T
protection against losses caused by
HREATS
damage
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 HOW TO COLLECT ON YOUR PROPERTY AND LIABILITY LOSSES

Step 4

Step 3 Sign a
Release
Step 2 File Your
Step 1 Document
Claim
Your Loss
Contact Your
Insurance
Agent about
Your Loss

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 Health Care Expenses
Allison Parker is a 46-year-old unmarried mother with two children, ages
16 and 17. She lives partly on alimony from her former husband and she
works part-time out of her home as a medical transcriptionist for a
hospital. Last year Allison suffered severe head injuries in a hit-and-run
accident when jogging. Her wounds have healed and Allison has regained
her ability to speak but is not yet able to walk on her own or use her hands
and arms very well. At first she required some mental health counseling.
Now she still requires a daily paid caregiver to assist with her personal
needs. It may be another six months before she can work again. Which
one of the following aspects of her injury was covered by Allison’s private
health care plan?
[Link] stay C. Mental health
[Link] care D. All of the above
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 Health insurance
Health insurance: A group of insurance benefits
provided to a living individual as a result of sickness
or injury.

Health insurance provides coverage for the financial goals

you have set for yourself

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Basic supplemental group health insurance plans

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 TYPES OF HEALTH CARE PLANS

Generic name for any

01 Health Care Plans program that pays or provides
reimbursement for health care
expenditures.

Employer-Provided will be limited to

02 what is offered
Group Health Care Plans

03
Nội dung

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 Notes

Who Is
What Types of Care A B Covered?
Are Covered?

Notes

How Much Is the C D Making

Premium? Changes in
Health Care
Plans

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 Life Insurance Planning
Michelle and Jason Bailey are in their early 30s and expecting their
first child next month. Each earns about $60,000 per year.
Currently, they have $50,000 life insurance policies on each of
their lives with the other named as the beneficiary.
They bought these policies a few years ago to pay for death-related
expenses if tragedy struck. With the baby coming, they are thinking
about buying $300,000 in life insurance coverage on each of their
lives so the proceeds could be used to replace the income lost if
one of them died. How much will Michelle and Jason each pay for
this additional protection?
A. About $25 per month B. About $50 per month
C. About $100 per month D. About $200 per month
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 Life insurance: Insurance that provides a payment to a
specified beneficiary when the insured dies.
Life insurance that is provided over a specified time
period and does not build a cash value

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 TWO TYPES OF LIFE INSURANCE

• Term life insurance is often described as

“pure protection” because it pays
benefits only if the insured person dies
within the time period (the “term”)
covered by the policy

• cash-value life insurance

Pays benefits at death and includes
a savings/investment element that
can provide a level of benefits to the
policyholder prior to the death of the
insured person
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Comparison of Premium Dollars for Cash-Value
and Term Life Insurance

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 The Fundamental Nature of Cash-Value Life Insurance

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 LIFE INSURANCE POLICY

Policy Terms and Policy Features

Provisions Unique to Unique to Cash-
Life Insurance Value Life Insurance

Settlement (or Payout) Delete “Mom” as

Options Specify How the Beneficiary on
to Pay the Death Benefit Life Insurance
Policies

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36Finance
 LIFE INSURANCE POLICY

life insurance policy

A contract between an insured (insurance policy holder) and an
insurer or assurer, where the insurer promises to pay a
designated beneficiary a sum of money (the “benefits”) upon the
death of the insured person.
owner/policyholder
Retains all rights and privileges granted by the policy, including
the right to amend the policy and the right to designate who
receives the proceeds.
insured
Individual whose life is insured
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Personal Finance
 LIFE INSURANCE POLICY

insurance dividends
Surplus earnings of the insurance company when the difference
between the total premium charged exceeds the cost to the
company of providing insurance.

participating policies
Life insurance policies that pay dividends.

death benefit
Amount that will be paid to the beneficiary when the insured
dies.
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Example: Annual Premiums for Various Types of Policies—$100,000 Policy*

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 NUMBERS ON

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 HOW TO BUY LIFE INSURANCE
Integrate Your Life
Insurance into Your
Financial Plan
Buy Life Insurance from
Signs of an Unethical Life
1 a Financially Strong
Company
Insurance Agent 6 2
Title in
here
Sales Commissions Can 5 3
Fair Prices for Term Life
Amount to
90 Percent of the
4 Insurance
Annual Premium
Buying Life Insurance Get a
Great Price Online Or Contact a
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Local Insurance Agent
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 Wisely Using Life Insurance and Investments over the Life Cycle

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Buy Term Insurance and Invest the Rest

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 TURN BAD HABITS INTO GOOD ONES
• Assume that you have life insurance
set up by your parents
=> Confirm that you are covered
and for how much
Put off thinking about life insurance because you are
young => Determine the dollar amount of insurance that
TURN you need and buy insurance to cover any shortfall
•Assume a cash-value life insurance policy is the best way to
buy life insurance
=> Explore term life insurance as the lowest cost and
most appropriate means of protection
•Explore term life insurance as the lowest cost
and most appropriate means of protection
=> Make your own assessments based on
[Link] your income and family obligations
Personal
44Finance
 SUMMARY
- Apply the risk-management process to address the
risks to your property and income
- Design a homeowner’s and automobile insurance
program to meet your needs
- Distinguish among the types of health care plans
- Understand why you might need life insurance and
distinguish among types of life insurance
- Explain the major provisions of life insurance policies
- Apply a step-by-step strategy for implementing a life
insurance plan
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THANK YOU

If you have any questions, please let us

discuss together.

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Personal Finance