Term
What is a measure of financial soundness or claims-paying ability of insurance companies that is most widely used and readily available to consumers? |
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Definition
| The financial ratings that are given to many insurance companies by independent insurance rating services such as A.M. Best, Moody's, and Standard and Poor's. |
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Term
| Explain what is meant by the large loss principle in making insurance purchasing decisions. |
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Definition
| It is the principle of insurance buying that places primary emphasis on those risks that could potentially wipe out or substantially deplete a person's or family's net worth. It is the severity of a potential loss, not its frequency, that is the determining factor. |
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Term
| How do state guarantee funds provide protection to consumers? |
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Definition
| They reimburse insureds and claimants for certain losses suffered due to the insolvency of insurance companies in the state. |
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Term
| Identify three of the seven main changes made by the Economic Growth and Tax Relief Reconsiliation Act. |
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Definition
1. Reductions in individual income tax rates. 2. Marriage penalty relief. 3. Greatly improved education planning opportunities. 4. Substantially increased contribution and deduction limits for qualified retirement plans, IRAs, and other plans. 5. The ability of all 401(k) participants to make all or part of their elective contributions in after-tax Roth contributions if the plan allows. 6. Increases in the federal estate tax and generation skipping transfer tax applicable exclusion amounts. 7. Repeal of the step-up in income tax basis at death rule, and adoption of a modified carry-over basis at death rule |
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Term
| Some people may be deterred by what they think will be the high cost of estate planning services. How might consumers secure valuable planning services without additional cost? |
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Definition
1. Through stockbrokers, trust officers, and insurance agents and brokers who are willing to give advice in the areas of their specialties without extra cost beyond those that are built into the cost of other products or services. 2. Fees charged for some planning services may be deductible for federal income tax purposes. |
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Term
| What are four sources of protection against disability income losses? |
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Definition
1. Health insurance 2. Disability benefits under life insurance policies 3. Social security disability benefits 4. Workers' compensation disability benefits 5. Other government benefits 6. Disability benefits under private pension, profit-sharing, and nonqualified deferred-compensation plans 7. Noninsured employer salary-continuation (sick-pay) plans 8. All other income or investment yield available to the family |
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Term
| There are many facets to the service an insurer might be expected to offer its customers. Give two examples of such services, other than claims service. |
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Definition
1. Life and health insurance needs analysis 2. Estate analysis services in life insurance 3. Risk analysis in property and liability insurance 4. Insurance surveys for property and liability insurance |
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Term
| A major objective of most people is to protect their family or others from the financial consequences of their deaths. List three financial losses that may result from a person's death. |
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Definition
1. Loss of the deceased's future earning power 2. Costs and other obligations arising at death 3. Increased expenses for the family 4. Loss of business values 5. Estate shrinkage at death |
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Term
| The first step in the financial planning process is getting together useful information about the person's financial and personal situation. Other than tax and investment records, what other information should be included? |
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Definition
1. Life, health, long-term care, and property and liability insurance policies 2. Retirement and other employee benefits 3. Wills, trust, and other estate planning documents 4. Powers of attorney and related instruments |
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Term
| For planning purposes, medical costs can be divided into what three categories? |
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Definition
1. Normal or budgetable expenses 2. Larger than normal expenses 3. Catastrophic medical expenses |
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Term
| When there is a closely held business interest in the family, failure to plan for the future disposition or retention of this interest can result in what kinds of severe problems in the event of the death, disability, or retirement of one of the owners? |
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Definition
1. Higher than necessary taxation 2. High estate settlement costs 3. Disputes or harsh discord within the family 4. Life objectives not being realized |
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Term
| Two financial planning statements are the personal budget and a personal cash flow statement. Explain how each functions as a financial planning tool. |
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Definition
1. The personal budget is an advance plan for anticipated expenditures and income. It is helpful in keeping a person's or family's expenses under control and within their income. 2. A cash flow statement shows the sources and timing of a person's or family's cash receipts and of cash outlays. |
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Term
| What are four types of life events that typically warrant a periodic review of and revision to a financial plan? |
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Definition
1. Births 2. Marriages 3. Divorces 4. Deaths 5. Job Changes 6. Different economic conditions |
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Term
| An insurer should be evaluated on grounds such as price and what other three criteria? |
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Definition
1. Financial soundness 2. Services provided 3. Types of coverage and policies offered |
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Term
| Identify two financial intermediaries or institutions that serve as conduits for savings into appropriate investments |
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Definition
1. Investment companies 2. Commercial banks 3. Life insurance companies 4. Savings institutions |
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Term
A person's financial objectives might include capital accumulation. Identify three primary reasons a person would want to accumulate capital. |
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Definition
1. Emergency fund purposes 2. Family purposes 3. Educational needs 4. General investment portfolio |
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Term
| What is the basic reason for establishing a trust? |
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Definition
| To provide experienced and knowledgeable investment and property management services for the beneficiaries of the trust. |
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Term
| Some of the more sophisticated wealth management techniques tend to be used mainly by those with high incomes and large property or business interests. Give two examples of social and economic changes that have tremendously increased the need for and the complexity of financial planning. |
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Definition
1. Economic growth 2. The tax structure 3. The fact that two-income earner families are now the norm |
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Term
| What is it that makes the Economic Growth and Tax Relief Reconsiliation Act such an unusual, uncertain, and confusing piece of tax legislation? |
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Definition
1. May of its provisions are not effective until years in the future. 2. It contains a "sunset provision" that provides that all of its terms and provisions will no longer apply after December 31, 2010 |
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Term
| How may the use of a deductible or other cost-sharing device benefit an insured? |
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Definition
| Deductibles eliminate small losses and the resulting high administrative expenses of settling claims, and decrease the cost of the insurance. |
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Term
| The fundamental problem during deflation is not maintaining the purchasing power of a given income stream. What is the primary problem during deflationary periods? |
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Definition
| Maintaining, as much as possible, the person's or family's income stream and the values of assets and investments |
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Term
| Identify four sources of protection against medical care expenses other than employer-provided medical expense coverage and individual medical expense coverage. |
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Definition
1. Social Security medical benefits 2. Medical payments under liability and auto insurance policies 3. Workers' compensation medical benefits 4. Other government benefits 5. Other employer medical reimbursement benefits 6. Other assets available for the family 7. Medical savings accounts to the extent available |
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Term
| What are three pertinent questions individuals should ask in finding good insurance agents or brokers? |
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Definition
1. What experience do they possess in terms of years and extend of practice? 2. Are they noted specialists in any certain line? 3. Do they do business mostly with individual households, with business firms, or generally across the board? 4. Do they engage in survey selling, estate analysis, or perhaps financial planning generally? 5. Do they present a unified program of coverage based on careful analysis of exposures and needs? 6. Do they represent sound companies? 7. Do representatives hold professional designations in insurance or financial planning? |
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Term
| In terms of investment decision-making authority, investment advisors may operate in one of three ways. Identify two of the three ways. |
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Definition
1. On a strictly discretionary basis 2. Under an arrangement whereby the advisor basically makes investment decisions but consults with the client regarding rationale 3. Under an arrangement by which the advisor and the client consult extensively before investment decisions are made but the client reserves the right to decide |
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Term
| Estate shrinkage is an example of a financial loss that may result from a person's death. Explain what is meant by estate shrinkage. |
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Definition
| Larger estates may suffer considerable reduction in value due to federal and state death taxes. This tax burden may substantially reduce the wealth passing to the estate owner's heirs if steps are not taken to reduce the shrinkage. |
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