Appropriate uses of credit
To avoid paying cash for large outlays, to meet a financial emergency, for convenience, and for investment purposes
Improper uses of credit
Using credit card for: meeting basic living expenses, impulse purchases (especially expensive ones), and nondurable (short-lived) goods and services
the product purchased on credit should outlive the payments
Establishing credit (p.148)
1) Open checking and savings accounts
2) Use credit
3) Obtain a small loan
The 5 C's of credit
Character, Capacity, Collateral, Capital, Condition
Maximum consumer credit payment percentage (Debt safety ratio)
Debt safety ratio = (Total monthly consumer credit payments) / (Monthly take-homepay)
Recommended ratio is 10-15%, maximum is 20%
Fees on credit cards
Interest charged, annual fees (typically $25 to $40), transaction fee for each (non-ATM) cash advance; this fee usually amounts to about $5 per cash advance or 3% of the amount obtained in the transaction, whichever is more
Late-payment fees, over-the-lim
Cash advance (p. 152)
A loan that can be obtained by a bank credit cardholder at any participating bank or financial institution
Credit bureau (p. 159)
An organization that collects and sells credit information about individual borrowers
Credit limit
A limit that is set for how much you can spend with your credit card. A fee is charged if you go over the limit
Credit scoring (p. 161)
A method of evaluating an applicant's creditworthiness by assigning values to such factors as income, existing debts, and credit references
Debit card (p. 155)
A card used to make transactions for cash rather than credit; replaces the need for cash or checks by initiating charges against the checking account
Prepaid card
Payment card that is loaded with money by me or someone else
Grace period
A short period of time, usually 20 to 30 days, during which you can pay your credit card bill in full and not incur any interest charges
Home Equity credit line (p. 157)
A line of credit issued against the existing equity in a home
Minimum monthly payment (p. 163)
In open account credit, a minimum specified percentage of the new account balance that must be paid in order to remain current
Reward credit card (p. 153)
A bank credit card that combines features of a traditional bank credit card with an additional incentive, such as rebates and airline mileage
Secured cards (p. 154)
A type of credit card that's secured with some form of collateral, such as a bank CD
Bankruptcy
A form of legal recourse open to insolvent debtors, who may petition a court for protection from creditors and arrange for the orderly liquidation and distribution of their assets
Equal Credit Opportunity Act
Enacted in 1974, it makes it unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction, on the basis of race, color, religion, national origin, sex, marital status, or age.
Truth in Lending Act
A 1968 US federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculating and dsiclosed
Fair Credit Reporting Act
A US Federal Government legislation enacted to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies
Fair Credit Billing Act
A US federal law enacted in 1974 as an amendment to the Truth in Lending Act. Its purpose is to protect consumers from unfair billing practices and to provide a mechanism for addressing billing errors in "open end" credit accounts, such as credit card or
Lost or stolen cards (liability limits)
Most you're ever liable for with a lost or stolen card is $50 (per card), but if you report the loss before the card can be used, you won't be liable for any unauthorized charges
Identity Theft
Methods thieves use: dumpster diving, skimming, phishing, changing your address, old-fashioned stealing, pretexting
Methods to prevent theft: deter thefts by protecting information, detect suspicious activity by checking statements, and defend against the
Purpose of insurance
To protect you and your family from the financial consequences of losing assets or income when an accident, illness, or death occurs
Risk transfer
Making it someone else's problem
Risk avoidance
Avoiding an act that would create a risk
Risk assumption
The choice to accept and bear the risk of loss
Why buy life insurance? (p. 199)
To protect your dependents from financial loss in the event of your untimely death
Multiple of earnings method
A method of determining the amount of life insurance coverage needed by multiplying gross annual earnings by some selected number
Needs analysis method
A method of determining the amount of life insurance coverage needed by considering a person's financial obligations and available financial resources in addition to life insurnace
Term Life insurnace
Insurance that provides only death benefits, for a specified period, and does not provide for the accumulation of cash value
Universal life insurance (p. 212)
Permanent cash-value insurance that combines term insurance (death benefits) with a tax-sheltered savings/investment account that pays interest, usually at competitive money market rates
Variable life insurance
Life insurance in which the benefits are a function of the returns being generated on the investments selected by the policyholder
Whole life insurance (p. 208)
Life insurance designed to offer ongoing insurance coverage over the course of an insured's entire life
Participating policy (p. 221)
A life insurance policy that pays policy dividends reflecting the difference between the premiums that are charged and the amount of premium necessary to fund the actual mortality experience of the company
Beneficiary
A person who receives the death benefits of a life insurance policy after the insured's death
Contingent beneficiary
A person who receives the death benefits of a life insurance policy after the primary beneficiary dies before the insured's death
Cash Value (p. 208)
The accumulated refundable value of an insurance policy; results from the investment earnings on paid-in insurance premiums
Face Value
The death benefit of a life insurance policy
Credit life insurance
Life insurance sold in conjunction with installment loans
Decreasing term policy
A term insurance policy that maintains a level premium throughout all periods of coverage while the amount of protection decreases
Disability clause (p. 220)
A clause in a life insurance contract containing a waiver-of-premium benefit alone or coupled with disability income
Group term life insurance
Life insurance that provides a master policy for a group; each eligible group member receives a certificate of insurance
Guaranteed purchase option
An option in a life insurance contract giving the policyholder the right to purchase additional coverage at stipulated intervals without providing evidence of insurability
Multiple indemnity clause
A clause in a life insurance policy that typically doubles or triples the policy's face amount if the insured dies in an accident
Nonforfeiture rights
A life insurance feature giving the whole life policyholder, upon policy cancellation, the portion of those assets that were set aside to provide payment for the future death claim
Suicide Clause
Voids the contract if an insured commits suicide within a certain period, normally two years after the policy's inception
Incontestability Period
Clause in most life insurance policies that prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed.
A typical incontestability clause specifies that a contract will not be voidable after
Policy loan (p. 219)
An advance, secured by the cash value of a whole life insurance policy, made by an insurer to the policyholder
Settlement options (p. 219)
Lump sum, interest only, fixed period, fixed amount, life income
Policy reinstatement
Revives the original contractual relationship between the company and the policyholder
Change of Policy
Allows the insured to switch from one policy form to another
Renewability
A term life policy provision allowing the insured to renew the policy at the end of its term without having to show evidence of insurability
Convertibility
A term life policy provision allowing the insured to convert the policy to a comparable whole life policy
Affordable Care Act (p. 234)
Key elements of the law: individual mandate, coverage of young adults, pre-existing health conditions, health care insurance exchanges, and small-firm coverage of employees
COBRA
Consolidated Omnibus Budget Reconciliation Act - passed by Congress in 1986, an employee who leaves the insured group voluntarily or involuntarily may elect to continue coverage for up to 18 months by paying premiums to his or her former employer on time.
HMO
Health Maintenance Organization - an organization of hospitals, physicians, and other health care providers who have joined to provide comprehensive health care services to its members, who pay a monthly fee
HSA
Health Savings Account - a tax-free savings account - funded by employees, employer, or both - to spend on routine medical costs. Usually combined with a high deductible policy to pay for catastrophic care
FSA
Flexible Spending Account - a special account you put money into that you use to pay for certain out-of-pocket health care costs
Major Medical
An insurance plan designed to supplement the basic coverage of hospitalization, surgical, and physicians expenses; used to finance more catastrophic medical costs
Coinsurance
In property insurance, a provision requiring a policyholder to buy insurance in an amount equal to a specified percentage of the replacement value of their property
Deductible
The initial amount not covered by an insurance policy and thus the insured's responsibility; it's usually determined on a calendar-year basis or on a per-illness or per-accident basis
Preexisting condition clause
A clause included in most individual health insurance policies permitting permanent or temporary exclusion of coverage for any physical or mental problems
Internal limits
A feature commonly found in health insurance policies that limits the amounts that will be paid for certain specified expenses, even if the claim does not exceed overall policy limits
Second Opinions
Many plans require this on specific nonemergency procedures and, in their absence, may reduce the surgical benefits paid. Most surgical expense plans now fully reimburse the cost of second opinions
Coordination of Benefits
A provision often included in health insurance policies to prevent the insured from collecting more than 100% of covered charges; it requires that benefit payments be coordinated if the insured is eligible for benefits under more than one policy
Dental Insurance
Covers necessary dental care and some dental injuries sustained through accidents
Long Term Care insurance
The delivery of medical and personal care, other than hospital care, to persons with chronic medical conditions resulting from either illnes or frailty
Activities of Daily Living
Gatekeeper provision that requires the insured's inability to perform these activities: bathing, dressing, eating, etc.
Definitions of disability
Own occupation - if you're unable to perform the duties of your customary occupation you can receive benefits
Any occupation - if you can engage in no gainful employment at all you can receive benefits
Elimination period
Provision in a disability income policy that are similar to those for long-term-care insurance. Typical elimination periods are from 30 days to a year.
Worker's Compensation
Health insurance required by state and federal governments and paid nearly in full by employers in most states; it compensates workers for job-related illness or injury
Actual cash value
A value assigned to an insured property that is determined by subtracting the amount of physical depreciation from its replacement cost
Bodily injury liability losses
A PAP provision that protects the insured against claims made for bodily injury
Collision insurance
Automobile insurance that pays for collision damage to an insured automobile regardless of who is at fault
Medical payments coverage (automobile)
Insures a covered individual for reasonable and necessary medical expenses incurred within three years of an automobile accident in an amount not to exceed the policy limits
Comprehensive automobile insurance
Coverage that protects against loss to an insured automobile caused by any peril (with a few exceptions) other than collision
Liability coverage
Insurance that protects against the financial consequences that may arise from the insured's responsibility for property loss or injuries to others
Premium factors (automobile)
1) Rating territory
2) Amount of use the automobile receives
3) Personal characteristics of the driver
4) Type of automobile
5) Insured's driving record
Automobile premium discounts
1) Safe-driving (accident-free) discounts
2) Driver training (for youths)
3) Good-student discounts (high school & college students)
4) Multicar discount (families with 2 or more cars)
5) Antitheft devices
6) Nonsmoker and nondrinker
Optional coverage under auto policies
There are financial responsibility laws, whereby motorists must buy a specified minimum amount of automobile liability insurance or provide other proof of comparable financial responsibility
1) Compulsory auto insurance laws - require motorists to show ev
Negligence
Failing to act in a reasonable manner or to take necessary steps to protect others from harm
Personal liability umbrella policy
An insurance policy providing excess liability coverage for homeowner's and automobile insurance as well as additional coverage not provided by either policy
Principle of indemnity
An insurance principle stating that an insured may not be compensated by the insurance company in an amount exceeding the insured's economic loss
Property damage liability loses
A PAP provision that protects the insured against claims made for damage to property
Property insurance
Insurance coverage that protects real and personal property from catastrophic losses caused by a variety of perils, such as fire, theft, vandalism, and windstorms
Replacement cost
The amount necessary to repair, rebuild, or replace an asset at today's prices
Right of subrogation
The right of an insurer, who has paid an insured's claim, to request reimbursement from either the person who caused the loss or that person's insurer
Other insurance clause
States that if a person has more than one insurance policy on a property, each company is liable for only a prorated amount of the loss based on its proportion of the total insurance covering the property
Without this provision, insured persons could use
Uninsured/underinsured motorist coverage
Automobile insurance designed to meet the needs of "innocent" victims of accidents who are negligently injured by uninsured, underinsured, or hit-and-run motorists
HO policies (p. 261)
Basic Form (HO-1)
Broad Form (HO-2)
Special Form (HO-3)
Renter's Form (HO-4)
Comprehensive Form (HO-5)
Condominium Form (HO-6)
Modified Coverage Form (HO-8)
Homeowners choose from HO1-5 & HO-8
HO-4 & 6 meet the needs of renters and owners of condominiums
Medical payments coverage (homeowners)
smaller, must be someone who doesn't live at your house
skateboard at top of stairs, neighbor falls down stairs, med. pay covers those
If your child falls down stairs, health insurance covers it
Claims adjustors
An insurance specialist who works for the insurance company, they determine what the cost of a catastrophe, wreck, etc.
Personal articles floater
Extends coverage on things such as stolen jewelry so you can get more coverage