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10. Personal Loss Exposures and Financial PlanningPersonal Loss Exposures

Planning for the FutureInvesting to attain Financial Goals

Retirement PlanningTax Deferred Retirement Plans

AnnuitiesSocial security

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Personal Loss Exposures

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Personal Loss exposures

Premature Deatho Early death, Outstanding or unfilled financial Obligations

Poor Health and Disability

Unemployment

Weekly Cash benefits will be paid by Government programs

Retirement

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Personal Loss exposure- Unemployment PaymentConditions

Benefitso Based on employee's covered earnings during the base period

o Benefits paid up to max of 26 weeks

o Established from employers tax contribution with exception of very few state

Extended Benefitso Benefits from federal controlled programs

o States with high Rates of unemployment

o Paid additional 13 weeks

o Shared equally by state and Federal Government

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Personal Loss exposure- Unemployment PaymentConditions

Involuntary unemployedEarn Qualifying Wages during a specific base period

Actively seek work

Free from disqualifying acts

Meet a specified waiting period

Benefitso Based on employee's covered earnings during the base period

o Paid up to max of 26 weeks

o Established from employers tax contribution with exception of very few

state

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Financial Planning

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Financial Planning

Gathering financial InformationAnalyze the present financial situation

Determine specific financial goals and objectives

Design a financial plan to achieve the financial goals

Periodically review and revise the plan

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Obstacles to Financial Planning

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Obstacles to Financial Planning

Unwillingness to save and investExcessive use of High-interest credit cards and continued spending

Natural tendency to delay and postpone saving

Inadequate knowledge about financial planning

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Financial Goals

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Financial Goals

Increase in personal wealthHigher standard of Living

Protection of the family and property

Saving for RetirementPurchase of home

College education for Children

Emergency fund

Getting out of Debt

Minimizing taxes

Investment Goals

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Investing to Attain Financial GoalsInvestment ObjectivesInvestment Risks

Investment Types

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Investment objectives

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Investment ObjectivesCapital Appreciation

o No taxation until soldo Capital gains taxation

o Long term investment

Preservation of Capital

o Conservative Investor o Short term investment

o To address the rate of inflation

Current Income

Growth and Income

LiquidityMinimizing Taxes

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Investment Risks

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Investment Risks

Variability of Investment outcomes

Total Return = Dividends paid + Capital appreciation

Conservative (Risk Averse) and Speculative Investments (Aggressive Risk)

Risks

o Inflation Risko Market Risk

o Interest Rate Risk

o Financial Risk

o Business Risk

o Liquidity Risk

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Investment Types

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Investment Types

Savings accounts and Savings InstrumentsStocks

Bonds

Mutual Funds

Real Estate

Miscellaneous Investments

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Savings Accounts and Savings InstrumentsFree from interest rate and Market RiskFree from Financial Risks when insured by Deposit Corporation

Subject to Inflation RiskHigh Liquidity

Short term and Emergency fund

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Saving accounts and Instruments Types

Regular Savings Accounts

Certificates of DepositMoney Market Mutual Funds

Money Market Deposit Accounts

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Stocks

Highly Risk investment of all major typesSubject to all types of investment risk

Ownership interest in the Corporation

Stockholders share the profits and losses, and receive the dividends

Common and Preferred Stock

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Bonds and Mutual Funds

Bondso Riskier than Savings accounts but less riskier than stocks

o Fixed maturity date and periodic interest payments

o Coupon Rate

o Can be sold before Maturity date

Mutual Fundso Diversification

o Professional Management

o Record Keeping

o Marketability

o Liquidity

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Real Estate

Shelter, stability and security for familyApartments, Shopping centers, Mortgages, Farmland, REITs

Advantages

o Regular income

o Capital appreciation

Disadvantageso Maintenance, tax and insurance expenses

o Liquidity problem

o Dealing with problem tenants

o Tax issues

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Retirement Planning

Problems in comfortable retirementSuggestions for RetirementRetirement Investment Methods

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Problems in Comfortable Retirement

Increased Proportion of Retirees

Longer Period of Retirement

Insufficient Money Income

Insufficient Financial Assets

Poor Health

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Suggestions for Retirement Investment

Begin investing early

Max contributions to Tax deferred retirement plans (Ex : 401(k) plan)

Change the allocation of assets over the Life Cycle

Consider Dollar Cost Averaging

Dont ignore the effect of Inflation after Retirement

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Retirement Plans

Tax deferred Retirement PlansSocial Security

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Tax Deferred Retirement Plans

Advantages

Private Pension Plans

o Meets IRS Requirements (Qualified Plans)

o Eligibility RequirementsMinimum age and length of Service (21 and one year of service)

o Types

Defined Contribution (Money Purchase Pension) Plan- Majority are Defined Contribution plans

Defined Benefit Plan

Retirement Age

Vesting (employees ownership of pension contributions made by the employer)

Annual Limits on Contributions and Benefits

Early and Late Distributions

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IRA, Other Tax Deferred Retirement Plans

IRA Individual Retirement accountTraditional IRA (Taxable compensation during the year and less than 70.5 years of ages by the end of the taxable year)

Roth IRAIt is a Individual Retirement plan that allows 1) Investment earnings to accumulate free of

federal taxes and 2) tax-free withdrawals at age 59.5 or later; does not allow federal income-tax deduction of annual contributions

Other Tax deferred Retirement Planso Section 401(k) Plans

o Profit Sharing Plan

o Thrift Plan ( or Savings plan)

o Keogh(HR-10)o SEP (Simplified Employee Pension Plan)

o SIMPLE( Savings Incentive Match Plan for Employees)

o Section 403(b)- Tax Sheltered Annuities

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Individual Annuities

Immediate Annuity

Deferred AnnuityFlexible Premium Annuity

Fixed Annuity

Variable Annuity

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Social SecurityOASDHI

o Social Insurance Programo Compulsory Program

Base of financial Security to Population

Control of Adverse Selection

o Minimum Floor Of income

o Emphasis on Social adequacy

o Benefits loosely related to earnings

o Benefits prescribed by law

o Financially Self Supporting

o Full Funding unnecessary

o No Means Test

o Covered Occupations

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Social Security

Insured Statuso Fully Insured

40 Credits or worked for 10 years full timeo Currently Insured

At least 6 credits during last 13 calendar quarters in which death ,disability or entitlement to benefit

o Disability Insured

The worker must be disability insured to get disability benefits

31 or older must be fully insured

At least 20 credits out of the last 40 quarters

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Social Security Benefits

Retirement Benefitso Must be in fully insured status

o Benefits are based on PIA (Primary insurance Amount)

o Cost of Living Adjustment

o Early Retirement age ( 62)

o Delayed retirement Credit ( up to 70)

Survivor Benefitso Either fully or currently insured

Disability Benefits

Medicare Benefits