8.01- C Summarize other types of investments.

Investing Through Life Insurance

*Purpose: to protect those whose financial security will be affected by your death - insurable interest– Policy face amount/value $

amount of insurance purchased – Life insurance is a valuable asset

to families and businesses• Insure breadwinner

• Insure business partner

Who pays? Who receives?

– Beneficiaries get face amount of policy• Insured chooses beneficiary & contingents

– Names can be changed by insured

– Proceeds = death benefits ($) received – Premium- cost of insurance, paid periodically

• non-payment of premium = policy lapses

– To get proceeds, must file claim with death certificate

Investing Through Insurance

• Whole Life Insurance – /+ Safe investment, but not high return+Lasts for your whole life (age 100)

• As long as you pay the premium (cost)

+Builds cash value (savings)• Policyholder can take out as loan, or• Policyholder can cancel policy to get cash value $

• Term Life Insurance– Pure insurance, no cash value builds– Only pays if named insured dies during term– Less premium than whole life

• Pete bought a State Farm 10-year term life policy for $50,000 on 5-5-2003. He named his mother, Renae to get the $ if he dies. His cost is $35 per month.

– What is the premium? $35 per month.– What is the face amount/value of the policy? $50K– When does the policy expire? Midnight 5-4-2013– Who is the named insured? Pete– Who is the beneficiary? His mom, Renae– How much money will Renae get? $50,000– What does Renae have to do to get the $? File claim– Can Pete take cash out of the policy? No cash value on

term life insurance

Investing for Retirement

• Pension– Consistent investment for employee by employer

during working years– Employer controls investment– Employer gets series of regular payments once

retired under an organized plan.

• Types of investments for retirement– 401-K, IRA, Company pension plan– Real estate, stock market, collectibles

Saving for Retirement• Individual Retirement Account (IRA)

+Tax deferred (pay income tax when $ taken out)+Deduct investment from income for tax purposes until withdrawn+ Employee control investment of funds- Cannot take out until 59 ½ years old without tax penalty

• Roth IRA -contributions are not tax deductible+ investment gains are tax free when they are withdrawn - Cannot withdraw until age 59 ½ without tax penalty

• 401K, 403B • Tax Deferred

+ Contributions are tax deductible -funds are taxed as regular income upon withdrawal

-cannot withdraw until after age 59 ½.

Annuity• Definition: Investment of sum of money

where Person gets a fixed monthly

income for life or a designated # of years/months

Example 1: Regina receives $300,000

inheritance from her grandmother. She invests in an annuity which pays her $1000 per month for life. Now, Regina will not spend it too quickly!

Example 2: Tina gets a lump sum settlement of $2 million for a lawsuit. She sets up an annuity that will pay her $250,000 per year for life.

Example 3: Andy wins the lottery of $3 million, but receives annual payments of $200,000 for life.

Real Estate Investing • Real Estate - Land and anything that is

attached to it.– Mortgage

• Legal document giving the lender a claim against the property

– Home Equity• Difference between the price

at which you could currently sell your house and the amount owed on the mortgage.

• Appreciation – general increase in value of a property

• Depreciation – general decrease in value of a property

• Banks will loan money to homeowners under a line of credit called a “home equity loan”

Real Estate-Types of Property

Undeveloped Property (Land)• Unused land intended only

for investment purposes

– Commercial Property• Land and buildings that

produce lease or rental income

– Residential-Personal homes• One of best investments

middle class can make

• Also provides a home for family to live in

Which properties would be income producing for the owners?

Real Estate Investment Trusts (REITs)

• Works like a mutual fund

• Group of investors combine funds to invest in real estate

RISKY!!!

Collectibles

• Items of personal interest to collectors.

• Rare coins, works of art, antiques, stamps, rare books, comic books, sports memorabilia, rugs, ceramics, paintings, and other items that appeal to collector and investors.

May or may not appreciate in valueAlthough a risky investment, you may still enjoy the hobby of collecting

Options and Futures Markets• Options: a contractual right to purchase an

asset at a set price on a specified date• Futures contract: agreement to purchase a

commodity at a set price and date with no option to decline.– Commodity contract purchased in anticipation

of higher market prices for the commodity in the near future

– Oil speculators ran the prices of oil up in 2008

Very Risky !!!Speculative !!!

Commodities

• Commodities-include grain, livestock, precious metals, petroleum products, currency, and financial instruments

• Ex: Oil speculators buy low and sell high, but what if prices go down?

• VERY RISKY!!!

• VERY SPECULATIVE!!

Investing With Others• Investment Clubs

– Small group of investors who organize to study stocks and to invest their money together

– Who do you trust to help you invest your money?

• Stockbroker?

• Educated friends?

• Family?

• Oprah?

• http://www.fool.com/investing/general/2004/07/09/oprah-investment-guru.aspx

Mutual FundsCreated by an investment

company that raises money from many shareholders (pools money) and invests it in a variety of stocks.

• Limit risk by diversifying investment in a portfolio, not just one stock

• Trust manager’s judgment

Speculative Investment• Speculator

– One that has an unusually high risk– Invest in commodities, play futures market– May gain a high reward/return!– May lose everything!