Personal Finance
Bennie Waller
wallerbd@longwood.edu
434-395-2046
Longwood University
201 High Street
Farmville, VA 23901
Bennie D Waller, Longwood University
Insurance
Bennie D Waller, Longwood University
Life and Health Insurance
 Health insurance is a necessity
 Provides protection against catastrophic medical bills
which could significantly impact your financial security.
 Life insurance protects your family if you die
 Risk pooling – the concept that you are placed in a pool
with other to share risks
 Premiums – payments to insurance company to provide
coverage
 Actuaries –
 Beneficiary – the designated party to received proceeds
Bennie D Waller, Longwood University
Do you need life insurance?
 Life insurance may not be needed by everyone
 Single without dependents
 Married, no children working spouse – you would want life
insurance if spouse would suffer
 Life insurance is likely needed if
 You have children
 Married and with non-working spouse
Bennie D Waller, Longwood University
How much insurance is needed?
 Earning multiple approach
 Determines lump sum amount needed to replace stream of
annual income
 Multiply annual gross income by earning multiple (some
planners recommend 5-15 times earnings)
 Earning multiple is dependent on years and rate of return
 Needs Approach
 More of a customized method of determining the financial
needs of ones family to maintain their lifestyle
 Immediate needs, debt elimination, children, spouse,
and dependency needs
Bennie D Waller, Longwood University
Types of life insurance
 Term insurance – pays specific amount at death
 Best alternative for many individuals
 Lower costs
 Cash value insurance – life insurance and savings plan
 Tax advantages as cash-value is tax deferred
 Life insurance is not considered part of estate
Bennie D Waller, Longwood University
Term Insurance
 Term insurance – where “term” refers to the number of years
of coverage and pays a stated benefit if insured dies during the
coverage period. It has no “face” value, is more affordable but
costs do increase each time policy is renewed.
 Renewable term insurance – Most term insurance is
renewable up to some specified age (e.g., 70 years old)
 Decreasing term insurance – annual premiums remain
constant but coverage benefits decrease each year reflecting
the increasing probability of death as you get older.
 Based on the concept that you will require less insurance
as your wealth increases and children become self
sufficient.
Bennie D Waller, Longwood University
Term Insurance
 Group term insurance – provided usually to a group of
individuals such as a company. Typically without a medical
exam. For example, employees of Longwood University.
 Credit/mortgage insurance – a variation of group
insurance provided by lenders to cover outstanding debts
such as a mortgage.
 Convertible term life insurance – the ability to convert a
term policy into cash-value life insurance without medical
exam. Premiums may increase.
Bennie D Waller, Longwood University
Cash Value Insurance
 Insurance that provide a death benefit and savings. As long as
premiums are paid a benefit will eventually get paid.
 3 basics types of cash value insurance
 Whole life
 Universal life
 Variable life
Bennie D Waller, Longwood University
Whole Life Insurance
 Whole life – insurance that provides coverage when the
insured dies, turns 100 or some stated age.
 Premiums tend to be higher than term insurance due to the
fact that the company will eventually make a payout.
 Premiums are known in advance and many times are fixed.
 In earlier years, after fees and cost of death benefits are
deducted from premiums, goes into savings account and
represents the “cash value” which increases over time.
 As time passes, the policy premiums are not enough to
cover death benefit. The cash value is used to supplement
the premiums
 Non-forfeiture right – policyholder has right to choose the
cash value in exchange for giving up the right of death
benefits.
Bennie D Waller, Longwood University
Universal Life Insurance
 Universal life insurance – a cash value insurance that allows
policyholder to vary the premiums and level of protection.
 Policyholder can increase or decrease premium payments
which will increase/decrease cash value. Premiums are
broken down into death benefit, administrative costs and
cash value.
 If premium paid isn’t large enough to cover death benefit
and administrative expenses, the rest is subtract from cash
value. If the cash value is not sufficient to cover these costs,
the policy will lapse.
Bennie D Waller, Longwood University
Variable Life Insurance
 Variable insurance – policy that provides death benefits and
cash value which are tied to the performance of some
investment chosen by policyholder.
 Policyholder assumes the risk as the value of the policy will
vary
Bennie D Waller, Longwood University
Clauses to be familiar
 Beneficiary – individual named to receive benefits
 Grace period – late payment period which the policy will remain
in effect, typically 30 days. After which policy can be cancelled.
 Loan clause – right to borrow against cash value at specified rate
 Non-forfeiture – provides choices available if premiums are
missed and protects cash value of policy. Typical choices are
receiving the cash value or converting to term policy
 Reinstatement – requirements to reinstate lapsed policy such as
paying all past due premiums, interest and loan amounts.
 Suicide – most policies will not pay for suicide within certain
period of contract, typically 2 years.
 Incontestability – will not allow company to dispute validity of
contract after some period (2 years). It protects against policy
cancellation due to error or innocent mistatements.
Bennie D Waller, Longwood University
Riders
 Accidental death – double or triple indemnity
 Guaranteed Insurability – right to increase insurance protection
without medical exam at specified times such as birth of child
or purchase of a home.
 Cost of living (COLA) – increases coverage at same rate as
inflation
Bennie D Waller, Longwood University
Buying Life Insurance
 As with any purchase, do your homework
 Check the financial stability of the company you are
considering (S&P rating AAA is best)
 Remember insurance agents are salespeople and make their
living off of commissions.
 Interview several agents and ask many questions.
Bennie D Waller, Longwood University
Life Insurance comparisons
Bennie D Waller, Longwood University
Health Insurance
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Most health insurance policies includes some combination of
Doctor
Hospital
Surgery
 Major medical insurance – coverage for catastrophic illness
 Stop-loss provision – limits payment amount by policy
holder
 Dental and Eye care insurance – routine examinations, glasses
 Dread Disease and Accidental insurance –
Bennie D Waller, Longwood University
Choices for Health Insurance
 Private Health Care Plans
 Traditional Plans
 Provides reimbursement for some portion of medical
expenditures and provides flexibility.
 Coinsurance – percentage of each claim that company
will pay. For example, 80% participation premium on
hospital claims up to $3,000 and 100% thereafter.
Policyholder would pay 20% of first $3,000.
 Co-payment – policyholder must pay some amount of
each claim.
 Expensive and requires significant paperwork.
Bennie D Waller, Longwood University
Choices for Health Insurance
 Managed Health Care –
 Health maintenance organizations (HMO) - prepaid
insurance that permits services from participating doctors
and hospitals
 Individual practice plan – patients go to participating
offices and get treatment
 Group practice plan – patients must go to central facility
for treatment.
 Point of service plan – Plan that allows members to get
treatment from HMO and non-HMO doctors.
Bennie D Waller, Longwood University
Choices for Health Insurance
 Preferred Provider Organization (PPO) – Insurance plan under
which employer (insurer) negotiates rates for its members.
 Government sponsored Health Insurance
 Worker’s compensation - states laws that provides payments
for work-related accidents or illnesses.
Bennie D Waller, Longwood University
Choices for Health Insurance
 Government sponsored Health Insurance
 Medicare – Government provided insurance for the disabled
and those over 65.
 Part A – provides hospital insurance. You are responsible
for a portion of the costs.
 Part B - Supplemental insurance
 Part C – Advantage
 Part D – Prescription Drug coverage –
 Medigap – sold by private insuarance companies to cover
“gaps” in Medicare coverage
 Medicaid – insurance for the needy
Bennie D Waller, Longwood University
Other Insurance
 Disability insurance – provides payments to the insured if
their livelihood is interrupted by illness or accident.
 Long-term care insurance – coverage for nursing home care.
 Benefit Period—can range from 1 year to lifetime
 Waiting Period—0 days – 1 year
 Inflation Adjustment—protected from inflation
 Waiver of Premium—insurance stays in force while receiving
benefits
Bennie D Waller, Longwood University
Long-term care provisions
Bennie D Waller, Longwood University
Health Care Reform - Affordable Care
 Requires individuals to obtain health insurance or be fined
$695 (effective 2014)
 Prohibits denial of coverage due to pre-existing conditions
(effective 2014)
 Allows children to remain on parents policy to age 26
 Provides tax credits for those falling within 400% of
poverty line (effective 2014)
 Provides access to Medicaid for those with income less
than 133% of poverty.
Bennie D Waller, Longwood University
Property and Liability Insurance
 Homeowner Insurance – Six basic types of policies;
 HO 1–Basic Form: provides the narrowest coverage of all HO
policies limited to only 11 specifically named perils. Because
of its limitations, the policy is not widely available.
 HO 2–Broad Form: a “named perils” form of insurance that
limits coverage to a set of specific perils (e.g., fire,
windstorms).
 HO 3–Special Form: an “open perils” form of insurance that
covers all perils except those that are specifically excluded
(e.g., earthquakes, nuclear accidents).
Bennie D Waller, Longwood University
Property and Liability Insurance
 HO 4–Tenant Insurance: policy that provides funds to replace
furnishings and personal property in a rented dwelling. These
policies also provide liability insurance for renters up to a
specified limit.
 HO 6–Condo Insurance: policy that covers the personal
property of condo or co-op owners, plus any structural
improvements or alterations made to their unit.
 HO 8–Modified Coverage: policy designed for an older home
that limits coverage to repair costs or actual cash value, rather
than replacement cost due to the expense of replacing materials
and construction details used in older homes.
Bennie D Waller, Longwood University
Homeowner’s Policy
 Section 1: Property Coverage
 Coverage A: Dwelling and attachments such as garage
 Coverage B: Other structures – Storage shed
 Coverage C: Personal property – e.g., stolen laptop
 Coverage D: Loss of use - covers living expenses while home
is being repaired
Bennie D Waller, Longwood University
Homeowner’s Policy
 Section 2: Personal Liability Coverage
 Protects policyholder and family from financial loss if someone
is injured on their property or as a result of their actions.
 Protects against liability suits
 Also covers medical expenses of anyone hurt by policyholder,
their family, or pet
Bennie D Waller, Longwood University
Comparing Policies
Bennie D Waller, Longwood University
Comparing Policies
Bennie D Waller, Longwood University
Comparing Policies
Bennie D Waller, Longwood University
Homeowner’s Policy
 Supplemental Coverage
 Endorsement – an addendum to an insurance policy to add or
delete coverage.
 Personal articles floaters – additional coverage for personal
property items (expensive jewelry, silver, computer)
 Earthquake coverage
 Flood protection
 Replacement cost coverage –
 Personal Umbrella policy – protection against lawsuits
Bennie D Waller, Longwood University
Homeowner’s Insurance
 How much insurance do you need?
 Enough for full replacement in event of total loss
 Coinsurance – requires portion of loss to be paid by
homeowner if underinsured.
 80% rule – most companies require homeowners carry a
minimum of 80% of replacement cost.
Bennie D Waller, Longwood University
Property Insurance costs
 Cost of Insurance
 Credit score
 High deductible
 Security systems
 Smoke alarms
 Multiple policy discounts
 Pay premiums annually
 Shop around
Bennie D Waller, Longwood University
Homeowner’s Policy
Bennie D Waller, Longwood University
Automobile Insurance
 Personal Auto Policy (PAP)
 Part A: Liability – to protect against legal liability for
injury and property damage.
 Part B: Medical Expense – for medical and funeral
expenses
 Part C: Uninsured Motorist – required in many states to
provide coverage caused by an uninsured driver
 Part D: Collision/Comprehensive – for repairing your
automobile in case
Bennie D Waller, Longwood University
Automobile Policy
Bennie D Waller, Longwood University
Auto Insurance
 What drives auto insurance premiums?
 Type and use of automobile
 Driving record
 Geographical location
 Personal characteristics
 Age
 Sex
 Discounts – check with insurance company
 Credit score
Bennie D Waller, Longwood University
Getting the best rate
 Shop around. Ask questions.
 Deal with reputable companies
 Take advantage of discounts
 Consider a car that is relatively inexpensive to insure
 Improve driving record
 Raise deductibles
 Keep adequate liability insurance
Bennie D Waller, Longwood University
If you have an accident
 Move automobile to a safe place
 Get information from witnesses and keep detailed records.
 Cooperate with authorities and ask for alcohol test if you
suspect the other driver to be under the influence.
 Write down the facts as soon as possible
 Don’t admit guilt or sign anything. Get copy of police report,
review for accuracy.
 Call agent
Bennie D Waller, Longwood University
Thank You
Bennie D Waller, Longwood University