6. Insurance, Wills, and Contracts
Contracts
Legal agreements between two parties where each party has
some obligation or responsibility to the other.
Coverage
The specific protection that the insurer provides to a policy
holder.
Deductible
The amount of money that the policy holder will pay before the
insurance company will pay on an insured loss.
Estate
Everything that a person owns. It may include land, financial
accounts, jewelry, or other items.
Estate planning
Involves creating a plan for the distribution of one’s
possessions after one’s death and to provide care for any
dependents.
Exclusions
Clauses in an insurance contract that specify losses that are not
covered by the policy.
Executor
Someone who will carry out the instructions of the will.
Formal wills
Those created by attorneys and which bear the signatures of
witnesses who saw you sign the document.
Guardian
Someone who accepts the responsibility of caring for children
in the event of their parents’ deaths.
Holographic wills
Handwritten wills prepared by individuals.
Insurance
A “protection against possible financial loss”.
Insurer
Agrees to reimburse for certain types of losses in exchange for
payments on a policy.
Life insurance
Pays out a specific amount of money when an insured person
dies (although situations of suicide and fraud are excluded).
Living will
A legal document that details the type of medical care that you
wish to receive if you become incapacitated due to a physical or
mental illness or an accident.
Negligence
Typically thought of as a failure to take reasonable actions to
prevent injury or damage.
Policy
The contract between the insurer and the insured individual.
Policy holder
An individual who purchases a policy from an insurer.
Power of attorney
A legal document that gives the person of your choice legal
authority to act on your behalf.
Premium
Fee to an insurer in exchange for the insurer taking on the risk
of loss.
Riders
Supplemental insurance for items or situations that are
excluded or limited under the regular policy.
Risk
The chance that a loss, financial or physical, may occur.
Risk classification
The assessment and categorization of characteristics that
influence a person’s risk of loss.
Statutory wills
Use a preprinted form.
Will
A legal document that details what you wish to have happen to
your estate at the time of your death.
Module 6: Questions to Review
1. What are some of the common elements in an insurance policy? How do these elements
affect the policy?
2. What is a deductible? How does a deductible affect insurance?
3. What are some of the different types of insurance available? Why do people purchase
insurance policies?
4. What is estate planning? Why is it important?
5. What is a living will? Why is it important to have one?
6. What are some of the different types of wills?
7. What are the basic elements of a contract?
7. Savings and Investing
Asset allocation
When someone invests in a variety of places to reduce the
overall risk of investing.
Bonds
Have fixed maturity dates (such as 20 years), at which time the
borrower promises to repay the bondholder in full.
Bond indenture
A legal document that outlines all of the conditions of a bond.
Compounding
The process of earning interest on interest that you’ve already
earned.
Corporate bonds
Agreements by a company to pay specific amounts of money at
the maturity dates.
Direct stock plans
Purchased directly from the company, although these plans
may only be offered to employees or other stock owners.
Dividends
The periodic distribution of profits to investors.
Government bonds
Written by a municipality with the agreement to repay the
amount of the bond plus interest on a particular maturity date.
Investing
The act of using money to purchase some asset in the hopes of
generating more money.
Municipal bonds
Debt securities that are issued by state or local governments to
pay for ongoing products such as roads, schools, and airports.
Mutual funds
Work by taking investors’ money, investing that collective
money in stocks, bonds, and other investments, and managing
this portfolio for the investors.
Preferred stocks
Share characteristics with both common stocks and corporate
bonds.
Saving
The act of accumulating money.
Savings account
An account that earns interest on the money deposited, but
which cannot be directly accessed for money (such as by
writing a check).
Speculative investments
High-risk investments with the possibility of high returns in a
short period of time.
Stock
A share in the ownership of a company.
T-bills
Sold in increments of $1,000 and which have varying maturity
dates (from four to 26 weeks).
Treasury bonds
Sold in $1,000 increments and have a 30-year maturity date.
Treasury Inflation-Protected
Securities
Sold in $1,000 increments with 5-, 10- or 20-year maturity
dates.
Treasury notes
Issued in increments of $1,000 and have maturity dates
between one and 10 years.
Module 7: Questions to Review
1. What are the advantages and disadvantages of savings accounts?
2. How can saving and investing help you reach your financial goals?
3. What are the advantages and disadvantages of investments?
4. How can you reduce the risk of investing?
5. What types of investments are commonly available?
8. Consumer Credit
Bank line of credit
This is a prearranged loan amount that you can access by
writing specific checks.
Capital
The assets that you currently own, such as houses, cars,
investments, and so on.
Closed-end credit
A one-time loan that you pay back over time in payments of
equal amounts.
Collateral
An asset that you are willing to use to back up a loan.
Consumer credit
Credit for personal items (except for homes) that people want
or need, such as clothing, vehicles, and so on.
Credit
An arrangement between you and another party where you
receive goods or services now and pay later.
Credit cards
Perhaps the most used form of open-end credit. Credit cards
can be used at a vast number of locations, including most retail
stores, online sites, and most businesses.
Debit cards
Used to electronically subtract money from a savings or
checking account to pay for a purchase.
Open-end credit
Loans made on a revolving basis and the repayment period is
not set. Also known as revolving credit.
Retail cards
Similar to credit cards, but can only be used at the business
offering the retail card.
Smart cards
Have a computer chip embedded in the card that can carry a
great deal of information, such as driver’s license information,
medical history, and health care information.
Stored value cards
Also known as gift cards and prepaid cards. These cards have a
prepaid amount of money on the card that is available for use.
Module 8: Questions to Review
1. What are the advantages and disadvantages of consumer credit?
2. What are the general types of consumer credit? What are some of the sources of consumer
credit?
3. What factors influence whether credit will be extended to someone?
4. What is a credit score? How can you avoid credit problems?
5. What are the similarities and differences between smart carts, debit carts, and credit cards?
6. How does the use of credit influence businesses and the economy?
9. Managing Personal and Family Finances
Budget
A spending plan created to help manage money.
Budget variance
Any difference between a budget and what was actually spent
during the time period.
Cash flow
The “inflow and outflow of cash during a given time period”.
Cash flow statement
A record of income and expenditures for a particular period.
Current liabilities
Those that need to be paid in full within a short period of time
(less than one year).
Liabilities
Money due to others that needs to be paid immediately.
Liquid assets
Assets that can quickly and easily be converted to cash.
Long-term liabilities
Those that do not need to be paid in full for a longer period of
time (more than one year).
Net worth
The difference between your assets and your liabilities.
Personal balance sheet
An assessment of what you own and what you owe.
Personal financial statements
Snapshots of your financial situation, including your income
and spending.
Safe deposit box
A private, secure storage area at a location such as a bank.
Module 9: Questions to Review
1. Why is keeping financial records important?
2. Where should you keep different types of financial records?
3. What is a personal balance sheet?
4. What are liquid assets? What are non-liquid assets? What are some examples of each?
5. What are liabilities? Describe two different types of liabilities.
6. What is a cash flow statement?
7. What is a budget? Why are budgets important?
10. Consumer Choices
Advertising
Communication that aims to motivate or persuade people to
buy a product or service.
Card Stacking
Technique that involves advertising all of the good things about
a product while ignoring the negative aspects of the product.
Credit freezes
Prevents anyone from viewing your credit report, essentially
blocking the creation of new credit accounts in your name.
Endorsements
A celebrity or other well-known figure is included in the ad,
recommending the product.
Facts and Figures
Advertising technique with the presentation of statistics or
scientific claims about their product.
Fraud alert
Can stop an identity thief from opening any new accounts in
your name.
Glittering Generalities
Advertising technique that involves using appealing words to
sell
a product.
Identity theft
Happens when someone takes “personally identifying
information” such as a Social Security number, a driver’s
license number, or other information and uses that information
to commit fraud or other crimes.
Phishing
Happens when an identity thief calls or emails you pretending
to be someone else in order to get your personal information.
Pretexting
Involves obtaining your personal information under false
pretenses.
Rebates
Partial refund of the purchase price of an item.
Skimming
Involves special devices that steal your credit card or debit
card information when you use the card for a purchase.
Sponsors
Pay for advertising.
Weasel Words
Advertising technique that involves the use of “positive words
without actually really making any guarantee”.
Module 10: Questions to Review
1. What are some strategies that you can use to purchase goods in a financially wise way?
2. What is advertising? What is the purpose of advertising?
3. What is the advertising technique of Glittering Generalities? Describe this technique.
4. What is Card Stacking? Describe Card Stacking and its use.
5. What is identity theft? How does identity theft happen?
6. What is phishing?
7. What is pretexting? How is this used?
8. What are the effects of identity theft? How can you reduce the risk of identity theft?