12 Insurance 1 Basics 2283

8/2/2019 12 Insurance 1 Basics 2283

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Personal Finance:

Another Perspective

Insurance 1: Basics


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Objectives

A. Understand what our leaders have

said regarding insurance

B. Understand the importance ofinsurance

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 (answer for each section 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 available) 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 sufficientmedical, automobile, and homeowners 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 forpremature 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 certainkinds 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, Health, Auto, Home, Disability, and Liability

Insurance


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What is the purpose of insurance? The purpose of insurance is to transfer the risk of

certain types of losses or events from yourself toanother institution.

By transferring risk, it can help you and thoseyou 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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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


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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 addingfire 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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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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Frequency of Loss

Severity

of Loss

High

High

Low

Low

AvoidReduce

Transfer

Reduce

Assume

Reduce

Assume

Risk Options: Avoid, Reduce, Assume, or Transfer


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What is the key to insurance? Balance the cost of reducing risk with the

severity of the potential loss

Insure against high severity losses that rarelyoccurthose that could have a major impacton your financial situation

Reduce and avoid those other risks that youcan

Self-insure against the smaller risks Use insurance for what insurance does best!

Be careful in mixing insurance and investingproducts


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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

20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Age

TotalDollarsin(000s)

Investments Term Permanent Total Protection


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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 and cost efficiently


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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 ofeach 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 andinstitutions

6. Review your insurance needs annually and make

changes as necessary


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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 youachieve your goalsit is not a goal in itself

Goals may include salary replacement, litigationmanagement, 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 throughoutyour life.


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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 itsimpact on your budget

Certain insurance products have much higher

premiums than others


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3. Understand in detail the costs and benefits

of each insurance product

Know the costs and benefits of each type of

insurance product. Read the documents carefully Read and understand the prospectus and

illustrations carefully!

Weigh the information carefully before purchase

Many insurance products have high upfrontexpenses and are expensive to change

Compare products across companies before you

purchase


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4. Insure only against high-cost high-severity

losses

Be cost-effective in your insurance program

Insure against events that would have a majorfinancial or economic impact on you and your

family

Self insure against smaller impacts

Balance your need for insurance with the cost ofinsurance

In most cases, keep insurance and investment

products separate


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5. Work only with high-quality individuals andinstitutions Work with those you feel comfortable

If you feel pressure in any way, find another agent

Develop a long-term relationship based on trust

Make sure they are licensed and know how agents arepaid

Minimize the potential for conflicts of interest

Make sure the company is financially sound

Find companies that have been around for a longtime and which have the highest ratings: A.M.Best (A+, A++), Fitch (AAA), Moodys (Aaa),

and Standard and Poors (AAA).


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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 ofallcosts in making

changes

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

and are expensive to start and cancel

Be an informed insurance consumer


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Questions

Any questions on the key principles of

insurance?


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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 ratingfrom 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 LifeUnderwriter)?

A CLU is preferred, especially if you are seeking

advice or considering insurance other than term.


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5. Will I be allowed to keep the insuranceproposal that you prepare for me? You should not consider an agent that doesnt 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 thecommission youll receive on any policies thatyou recommend?

You want to make sure that the agent is working onyour behalf. By knowing the agents commissionon various policies, you may be able to avoidpolicies that are more of a benefit to the agent thanto you. Beware the agency problem!


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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 fromothers. 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.

12 Insurance 1 Basics 2283

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