Personal Finance

Chapter 5: PERSONAL
FINANCIAL
PROTECTION PLAN

w w w. f b . u e l . e d u . v n

1
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)

[Link]

2
Personal Finance
Chapter’s content

Personal financial
1 Risk and Risk management 2 protection strategy

1
The Risk-Management 4 Types of Insurance
3 Process

3
Personal Finance
 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.
[Link] 4
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.
[Link] 5
Personal Finance
 Personal financial protection strategy

Assess your Decrease Choose

current spending goals that
on help you
financial
essential realize
situation needs your plan

Set a
budget for Risk-
your
personal
Manage
financial ment
[Link] plan
Personal Finance 6
 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.
[Link] 7
Personal Finance
 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

[Link] 8
Personal Finance
 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.
[Link] 9
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

[Link] 10
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.

[Link] 11
Personal Finance
 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

[Link] 12
Personal Finance
Choose How to Handle Your Risk of Loss

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

[Link] Personal Finance

13
 Types of Insurance

Homeowner’s
Insurance
Automobile Insurance

Health insurance
Life Insurance

[Link] Personal Finance

14
 Law of large numbers

As the number of members in a

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

[Link] Personal Finance

15
 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
[Link]
peril will occur Personal Finance
16
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
17
Personal Finance
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
Personal Finance
18
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
Applying Equation, Selena’s calculations are as follows:
amounting
R = ($80,500to $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
[Link] Personal Finance
19
Example: Personal Property Checklist: Living Room

20
Personal Finance
 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)
[Link] Personal Finance
21
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.

22
Personal Finance
Summary of Automobile Insurance Coverages

23
Personal Finance
 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 Payments Insurance:
EAKNESSES insurance
 Automobile medical
payments insurance
OPPORTUNITIES
 Automobile medical
 Physical Damage Insurance Physical
payments insurance
damage insurance or (collision and
comprehensive coverage) provides

damage
T
protection against losses caused by
HREATS

[Link] Personal Finance 24

 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

[Link] Personal Finance

25
 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?
Personal Finance
26
 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

[Link] Personal Finance

27
Basic supplemental group health insurance plans

28
Personal Finance
 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

[Link] Personal Finance 29

 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

[Link] Personal Finance

30
 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
Personal Finance
31
 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

[Link] Personal Finance

32
 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
[Link] Personal Finance
33
Comparison of Premium Dollars for Cash-Value
and Term Life Insurance

34
Personal Finance
The Fundamental Nature of Cash-Value Life Insurance

[Link] Personal Finance

35
 LIFE INSURANCE POLICY

Policy Terms and Policy Features

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

Settlement (or Delete “Mom” as

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

[Link] Personal Finance

36
 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
Personal Finance
37
 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.
38
Personal Finance
Example: Annual Premiums for Various Types of Policies
—$100,000 Policy*

39
Personal Finance
 NUMBERS ON

[Link] Personal Finance

40
 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
[Link]
Local Insurance Agent
Personal Finance
41
 Wisely Using Life Insurance and Investments over the Life Cycle

[Link] Personal Finance

42
Buy Term Insurance and Invest the
Rest

43
Personal Finance
 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 Finance
44
 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
[Link] 45
THANK
YOU
If you have any questions,
please let us discuss together.

46
Personal Finance