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Personal Finance: Another Perspective

Insurance 1: Basics

Objectives

A. Understand what our leaders have said regarding insurance

B. Understand the importance of insurance

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 (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 avail.)

• 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 sufficient medical, automobile, and homeowner’s 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 for premature 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 certain kinds 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 Insurance, Health Insurance, and 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 to another institution.

• By transferring risk, it can help you and those you 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 for

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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 adding fire 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

LowAvoid

ReduceTransfer

Reduce

Assume

Reduce

Assume

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Insurance (continued)

• What is the key to insurance?• You need to balance the cost of reducing risk

with the severity of the loss

• Insure against high severity losses that rarely occur—those that could have a major impact on the financial condition of you and your family

• Reduce and avoid those other risks that you can

• Use insurance for what insurance does best

• Be careful in mixing insurance and investing

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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

Age

To

tal

Doll

ars

in (

00

0s)

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

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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 of each

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 and

institutions• 6. Review your insurance needs annually

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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 you achieve your goals—it is not a goal in itself

• Goals may include salary replacement, litigation management, 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 throughout your life.

• Plan for the future, but live in the present

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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 its impact on your budget

• Certain insurance products have 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 in detail the marketing documents

• Read and understand the prospectus and illustrations carefully!

• Weigh the information carefully before purchase

• Many insurance products have high upfront expenses 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 major financial or economic impact on you and your family

• Self insure against smaller impacts

• Balance your need for insurance with the cost of insurance

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Principles of Insurance (continued)

5. Work only with high-quality individuals and institutions• Work with those you feel comfortable

• If you feel pressure in any way, find another agent

• Develop a long-term relationship based on trust

• Know how insurance agents are paid

• Minimize the potential for conflicts of interest

• Make sure the company is financially sound

• Find companies that have been around for a long time and which have the highest ratings: A.M. Best (A+, A++), Fitch (AAA), Moody’s (Aaa), and Standard and Poor’s (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 of all costs in making changes

• Many insurance products, particularly cash-value life insurance, have high up-front costs

• Be an informed insurance consumer

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Questions

Any questions on the key principles of insurance?

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 rating from 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 Life Underwriter)?• 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 insurance proposal that you prepare for me?• You should not consider an agent that doesn’t 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 the commission you’ll receive on any policies that you recommend?• You want to make sure that the agent is working on

your behalf. By knowing the agent’s commission on various policies, you may be able to avoid policies that are more of a benefit to the agent than to 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 from others. 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.