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Personal Finance:
Another Perspective
Insurance 1: Basics
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Objectives
A. Understand what our leaders have
said regarding insurance
B. Understand the importance ofinsurance
C. Understand the key principles of
insurance
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Your Personal Financial Plan
Section X: Insurance
A. Life, B. Health, C. Disability, D. Auto, and E.
Home Owners/Renters Insurance
Do you need it (answer for each section A-E)?Do you have it? How much should you have?
What type is it? Costs and coverage?
Discounts/specifics?
Include a copy of your CLUE report (if available) Include a summary sheet of health insurance
coverage and TT29 (for Life insurance)
Action Plan:
What insurance and coverage should you have?
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A. Understand what our Leaders
have said about Insurance
Insurance is an important part of becoming financially
self-reliant. Elder Marvin J. Ashton said:
Appropriately involve yourself in an insurance
program. It is most important to have sufficientmedical, automobile, and homeowners insurance
and an adequate life insurance program. Costs
associated with illness, accident, and death may be
so large that uninsured families can be financially
burdened for many years.(Marvin J. Ashton,Guide to Family Finance, Liahona, Apr. 2000,
42.)
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Insurance (continued)
President N. Eldon Tanner further commented: With rising medical costs, health insurance is the
only way most families can meet serious accident,
illness, or maternity costs, particularly those forpremature 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.)
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B. Understand the
Importance of Insurance
What is insurance? Insurance is a legal contract between you and an
insurance firm whereby the firm agrees for a
premium (fee) to pay you compensation for certainkinds of losses or events, i.e., death, sickness,
compensation for accidents, loss of ability to work,
legal expenses, etc.
What are the major types of insurance? Life, Health, Auto, Home, Disability, and Liability
Insurance
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Insurance (continued)
What is the purpose of insurance? The purpose of insurance is to transfer the risk of
certain types of losses or events from yourself toanother institution.
By transferring risk, it can help you and thoseyou love achieve your specific goals if you die,get sick or become unable to work
Specific goals may include:
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
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Insurance (continued)
What happens without Insurance (life, health,
disability, or liability insurance)?
If you live:
Nothing changes If you die, get sick, or get sued without insurance:
Your spouse may have to work
Your children may not achieve important goals
You may not be able to take care of your family
You may be unable to work and lose your
earning capacity
You may lose everything you have ever saved
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Insurance (continued)
How do you eliminate risk?
Avoid it. You can take care of yourself, avoid high
risk occupations, eat well, and exercise.
Reduce it. You can reduce some risks by addingfire extinguishers and burglar alarms, adding
airbags, or getting regular medical checkups
Assume it. You can retain the risk through self-
insurance. If the costs are not too high, you can
assume some risks yourself
Transfer it. You can transfer the risk to others by
purchasing insurance. You are paying premiums to
transfer the risk to an insurance company.
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Insurance (continued)
Should you insure against all losses?
No. Some losses are not as critical as others.
Insure against the critical or serious losses
Can you classify your risks? Yes. I like two thoughts:
Frequency of loss
How often does the loss happen?
Severity of loss
How severe are the results if the loss
happens?
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Insurance (continued)
Frequency of Loss
Severity
of Loss
High
High
Low
Low
AvoidReduce
Transfer
Reduce
Assume
Reduce
Assume
Risk Options: Avoid, Reduce, Assume, or Transfer
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Insurance (continued)
What is the key to insurance? Balance the cost of reducing risk with the
severity of the potential loss
Insure against high severity losses that rarelyoccurthose that could have a major impacton your financial situation
Reduce and avoid those other risks that youcan
Self-insure against the smaller risks Use insurance for what insurance does best!
Be careful in mixing insurance and investingproducts
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Life Insurance and Your Investment Plan
Cash value: with guaranteed insurability option paid up till age 65. Term: Five-year
guaranteed renewable term in $50,000 and $100,000 increments; can add and drop as
necessary. Investment: Includes individual and employer sponsored retirement plans
Life Insurance and Your Investment Plan
$0
$500
$1,000
$1,500
$2,000
20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Age
TotalDollarsin(000s)
Investments Term Permanent Total Protection
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Insurance (continued)
Any questions on insurance?
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C. Understand the Key
Principles of Insurance
Insurance is an important part of your Personal
Financial Plan.
How do you build an effective insurance plan?
Many take a products approach to insurance However, insurance products will change over
time, as new products are being developed and
sold
How about a principles based approach? The principles should not change over time
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Principles of Insurance(continued)
How important are correct principles when teaching
about a specific subject?
The Prophet Joseph Smith said: I teach them
correct principles and they govern themselves.
(Messages of the First Presidency, comp. James R.
Clark, 6 vols., Salt Lake City: Bookcraft, 1965-75,
3:54.)
What are the key principles of insurance that can help
us govern ourselves?
If we understand those principles, we should be
able to govern, i.e. manage our various insurance
products wisely and cost efficiently
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Principles of Insurance(continued)
What are the key principles of Insurance? 1. Know yourself and your goals
2. Know your budget and how much you can afford
3. Understand in detail the costs and benefits ofeach insurance product. Read and understand the
prospectus and illustrations carefully!
4. Insure only against high-cost high-severity losses
5. Work only with high-quality individuals andinstitutions
6. Review your insurance needs annually and make
changes as necessary
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Principles of Insurance (continued)
1. Know yourself and your goals Know what you want to attain out of life
Understand that insurance is a tool to help youachieve your goalsit is not a goal in itself
Goals may include salary replacement, litigationmanagement, inheritance planning, etc.
Insurance is contingent financing
Know which products can help with which goals
Understand each insurance product clearly Recognize that your insurance needs will change
Your need for insurance is not constant throughoutyour life.
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Principles of Insurance(continued)
2. Know your budget and how much you can afford Understand yourself and your budget.
How much can you afford to spend on insurance
needs? Be cost-effective in your insurance planning
It makes no sense to begin an insurance
program that you cannot continue
Take into account the potential for job loss and itsimpact on your budget
Certain insurance products have much higher
premiums than others
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Principles of Insurance(continued)
3. Understand in detail the costs and benefits
of each insurance product
Know the costs and benefits of each type of
insurance product. Read the documents carefully Read and understand the prospectus and
illustrations carefully!
Weigh the information carefully before purchase
Many insurance products have high upfrontexpenses and are expensive to change
Compare products across companies before you
purchase
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Principles of Insurance(continued)
4. Insure only against high-cost high-severity
losses
Be cost-effective in your insurance program
Insure against events that would have a majorfinancial or economic impact on you and your
family
Self insure against smaller impacts
Balance your need for insurance with the cost ofinsurance
In most cases, keep insurance and investment
products separate
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Principles of Insurance(continued)
5. Work only with high-quality individuals andinstitutions Work with those you feel comfortable
If you feel pressure in any way, find another agent
Develop a long-term relationship based on trust
Make sure they are licensed and know how agents arepaid
Minimize the potential for conflicts of interest
Make sure the company is financially sound
Find companies that have been around for a longtime and which have the highest ratings: A.M.Best (A+, A++), Fitch (AAA), Moodys (Aaa),
and Standard and Poors (AAA).
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Principles of Insurance(continued)
6. Review your insurance needs annually
Your insurance needs may change over time
Use wisdom in your changes
Add or reduce coverage in the most cost-effective way possible
Be especially careful ofallcosts in making
changes
Many insurance products, particularly cash-value life insurance, have high up-front costs
and are expensive to start and cancel
Be an informed insurance consumer
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Questions
Any questions on the key principles of
insurance?
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Review of Objectives
A. Do you understand what our
leaders have said regarding
insurance?B. Do you understand insurance?
C. Do you understand the principles of
insurance?
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Questions to Ask
Potential Insurance Agents
1. Are you a full time insurance agent?
Work with agents who work full-time at their
business. This gives greater assurance that your
agent is knowledgeable in the products you need
2. How long have you been a full-time
insurance agent?
Work with someone who is experienced and
established. While a new agent may be competent,an experienced agent will likely be competent and
have experience.
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Questions to Ask(continued)
3. What life insurance companies do you
represent?
Generally, it is better to work with someone that
represents at least one company with a top ratingfrom A.M. Best for 10 consecutive years. If they
work with multiple companies, they may be able to
offer more competitive products
4. Are you a CLU (a Chartered LifeUnderwriter)?
A CLU is preferred, especially if you are seeking
advice or considering insurance other than term.
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Questions to Ask(continued)
5. Will I be allowed to keep the insuranceproposal that you prepare for me? You should not consider an agent that doesnt allow
you to keep the proposal. You should be able to
take the proposal home and review it on your time.
6. Would you be willing to inform me of thecommission youll receive on any policies thatyou recommend?
You want to make sure that the agent is working onyour behalf. By knowing the agents commissionon various policies, you may be able to avoidpolicies that are more of a benefit to the agent thanto you. Beware the agency problem!
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Questions to Ask(continued)
7. Do you have any clients who are willing to
recommend you?
Your agent should either supply you with names of
satisfied clients or share testimonial letters fromothers. You should not consider an agent without
recommendations.
The basis for these questions are from Arthur J.Keown, Personal Finance, Turning Money into Wealth
Student Workbook, Prentice Hall, New Jersey, 2007, p.
W47.
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