Chapter 7 Chapter 7

Insurance & InvestmentsInsurance & Investments

7.1 Life Insurance7.1 Life Insurance

Life Insurance PremiumsLife Insurance Premiums

Life Insurance - a way of protecting your Life Insurance - a way of protecting your family from financial hardship when you family from financial hardship when you pass awaypass away

Life insurance policyLife insurance policy Insured – Person whose life is coveredInsured – Person whose life is covered Insurer – Insurance companyInsurer – Insurance company Premium - $ paid to insurance company Premium - $ paid to insurance company

for insurancefor insurance

Beneficiary – Person named in the policy Beneficiary – Person named in the policy to receive the death benefits.to receive the death benefits.

Term Life Insurance – Protection for a Term Life Insurance – Protection for a fixed period of time – 1,5,10 yearsfixed period of time – 1,5,10 years

Decreasing Term Life Insurance – Face Decreasing Term Life Insurance – Face amount of the policy decreases over timeamount of the policy decreases over time

Permanent Life Insurance – Insures you Permanent Life Insurance – Insures you for your whole lifefor your whole life

Your health condition and habits matterYour health condition and habits matter Face of PolicyFace of Policy x cost per 1,000 x cost per 1,000 1,0001,000

A.A. 1.3 from table1.3 from table

135,000 / 1,000135,000 / 1,000

135 x 1.3 = 175.5135 x 1.3 = 175.5

B. 8.92 from tableB. 8.92 from table

150,000 / 1,000 = 150,000 / 1,000 =

150 x 8.92 = 1338150 x 8.92 = 1338

Net Cost of InsuranceNet Cost of Insurance

Some companies may return part of your Some companies may return part of your premium to you as a dividendpremium to you as a dividend

Total Premiums – Dividends = Net CostTotal Premiums – Dividends = Net Cost of of

InsuranceInsurance

C. 856 – 38.56 = C. 856 – 38.56 = D. 12.81 from tableD. 12.81 from table150,000 / 1,000 150,000 / 1,000 150 x 12.81 =150 x 12.81 =1921.5 – 23.16 = 1898.40 1921.5 – 23.16 = 1898.40

Life Insurance Cash Life Insurance Cash ValuesValues

Cash value - $ you get if you cancel the Cash value - $ you get if you cancel the policypolicy

You can also borrow against your policy You can also borrow against your policy at a lower interest rate than a bankat a lower interest rate than a bank If don’t pay back the amount – beneficiaries If don’t pay back the amount – beneficiaries

receive lessreceive less

E. 300,000 / 1,000 = E. 300,000 / 1,000 =

300 x 42 = 12,600300 x 42 = 12,600

F. 150,000 / 1,000 =F. 150,000 / 1,000 =

150 x 80 = 12,000150 x 80 = 12,000

7.2 Health Insurance7.2 Health Insurance

Health insurance –Protects against Health insurance –Protects against financial loss of medical billsfinancial loss of medical bills

Can be provided through work-as a Can be provided through work-as a benefitbenefit

Hospitalization insurance Hospitalization insurance Surgical insuranceSurgical insurance Medical insuranceMedical insurance

A.A. 57 x 0.5 =57 x 0.5 =

28.5 x 12 = 28.5 x 12 =

342342

B. 36 x 0.65 = 23.4 x 12 =B. 36 x 0.65 = 23.4 x 12 =

280.80280.80

Health Insurance Benefits Health Insurance Benefits and Coinsuranceand Coinsurance

Annual Deductible AmountAnnual Deductible Amount Coinsurance or co-paymentsCoinsurance or co-payments

Total Bill – Covered Amount = Uncovered Total Bill – Covered Amount = Uncovered Amount Amount

(Covered Amount – Deductible) x Coinsurance =(Covered Amount – Deductible) x Coinsurance =

Coinsurance AmountCoinsurance Amount

Uncovered Amount + Deductible + Coinsurance =Uncovered Amount + Deductible + Coinsurance =

Amount Patient Must PayAmount Patient Must Pay

C. 2,964 – 2,583 = C. 2,964 – 2,583 =

381381

2,583 – 500 = 2,083 2,583 – 500 = 2,083

2,083 x 0.21 = 2,083 x 0.21 =

437.43 + 381 + 500 =437.43 + 381 + 500 =

1,318.431,318.43

D. 525 – 450 = D. 525 – 450 =

7575

450 x 0.10 =450 x 0.10 =

45 + 75 = 45 + 75 =

120120

7.3 Disability Insurance7.3 Disability Insurance

Disability Insurance Disability Insurance BenefitsBenefits

Pays you a portion of the income you lose if Pays you a portion of the income you lose if you cannot work due to a health condition or you cannot work due to a health condition or injuryinjury

Short-Term DisabilityShort-Term Disability Long-Term DisabilityLong-Term Disability Usually bought through workUsually bought through work Worker’s Compensation covers injury at work Worker’s Compensation covers injury at work

FOLLOW GUIDELINESFOLLOW GUIDELINES

A.A. 45,200 + 48,300 + 49,900 =45,200 + 48,300 + 49,900 =143,400 / 3=143,400 / 3=47,800 x 0.65 =47,800 x 0.65 =31,070 / 12 =31,070 / 12 =2,589.172,589.17B. Average –B. Average –38,075 x 0.45 38,075 x 0.45 17,133.75 /12 = 17,133.75 /12 = 1,427.81 – 225 = 1,427.81 – 225 = 1,202.811,202.81

Buying BondsBuying Bonds

Bonds – Written promise to repay the $ loaned Bonds – Written promise to repay the $ loaned on the due dateon the due date

Bondholders – people who own the bonds – Bondholders – people who own the bonds – may keep them until the due date or sell to may keep them until the due date or sell to other investorsother investors

Bonds usually issued with a face or par value Bonds usually issued with a face or par value of $1,000of $1,000

Face value – amount of $ issuer will pay the Face value – amount of $ issuer will pay the bondholder on due datebondholder on due date

Market value – Selling price, can be Market value – Selling price, can be different than face valuedifferent than face value If can sell for more than face value – If can sell for more than face value –

Premium – ex. 1,100Premium – ex. 1,100 If can sell less than face value – discount ex. If can sell less than face value – discount ex.

950950

Stated as a percent Stated as a percent 100% = 1,000100% = 1,000 96% = 96096% = 960 105% = 1,050105% = 1,050

A.A. 1,000 x 1.03883 = 1,000 x 1.03883 =

1,038.831,038.83

B. 500 x 0.96225=B. 500 x 0.96225=481.14481.14

500 – 481.14 =500 – 481.14 =

Total Investment in Total Investment in BondsBonds

Bonds are usually bought and sold Bonds are usually bought and sold (traded) through a broker(traded) through a broker

Offer advice on which bonds to buy and Offer advice on which bonds to buy and sellsell

Charge a commissionCharge a commission

C. 1,000 x 0.97297 = C. 1,000 x 0.97297 =

972.97 x 10 = 972.97 x 10 =

9,729.709,729.70

D. 1,000 x 1.03228 = D. 1,000 x 1.03228 =

1,032.38 x 15 = 1,032.38 x 15 =

15,484.20 15,484.20

15 x 3 = 15 x 3 =

45 + 15,484.20 = 45 + 15,484.20 =

15,529.2015,529.20

7.2 Bond Interest7.2 Bond Interest

Investors in bonds receive interest Investors in bonds receive interest payments as incomepayments as income

Bond interest is paid semiannuallyBond interest is paid semiannually 6/12 = 0.56/12 = 0.5

Interest rate based on bond’s par valueInterest rate based on bond’s par value

Par Value x Rate x Time = InterestPar Value x Rate x Time = Interest

A.A. 1,000 x 0.09 x 0.5 =1,000 x 0.09 x 0.5 =

45 x 10 =45 x 10 =

450450

B. 500 x 0.085 x 0.5 =B. 500 x 0.085 x 0.5 =

21.25 x 20 =21.25 x 20 =

425425

Bond YieldsBond Yields

Current Yield =Annual Income / Bond PriceCurrent Yield =Annual Income / Bond Price

C. 1000 x 1.01585 =C. 1000 x 1.01585 =

1,015.85 x 0.09 x 0.5 = 1,015.85 x 0.09 x 0.5 =

45.71 x 2 = 91.42 / 1015.85 = 45.71 x 2 = 91.42 / 1015.85 =

8.9%8.9%

D. 1,000 x 0.94598 =D. 1,000 x 0.94598 =

945.98 945.98

47.5 x 2 = 95/945.98 =47.5 x 2 = 95/945.98 =

10%10%