8 - How Much Insurance Should I Have? Flashcards
Define “emergency fund.”
The equivalent of 3 months’ income available in case of emergencies.
What is the “Readjustment Period?”
The 2 years that follow the death of the life insured. It involves adjusting to the new financial structure.
What are the 3 main types of “Final Expenses?”
- Funeral Costs
- Probate Fees
- Payments of debts (loans, CC, and mortgage)
What is the “Dependency Period?”
The period in which the surviving spouse must care for the children. It lasts until the youngest is 18, or 25 if in full-time university.
What are the 2 main types of ongoing expenses?
- Daily costs of living (food, clothing, holidays)
2. Saving for university
What are the “Survivor Life Income Needs/Future Needs?”
Spouse needs to be provided for until death (may include retirement income if limited employment opportunities).
Define “Qualitative Goals.”
They are lifestyle choices that have direct effects on expenses, risk tolerance, and investment choices. (example: vacation for one month each year in Europe).
Define “Quantitative Goals.”
The dollar figure assigned to qualitative goals. (Example: for a one month vacation in Europe each year, the family needs $22,000).
What is “Capital?”
The cash and assets that can be invested or used for financial gain (includes stocks, bonds, real property, mutual funds, etc).
What is the difference between nominal and real interest rates?
Nominal interest rate is the interest rate that will be received for investment in a GIC.
Real interest rates are adjusted for inflation (Nominal Interest Rate - Inflation = Real Interest Rate).
What is the formula for the Capitalization of Income Approach?
Annual income/interest rate = Lump Sum (the human life value)
What are the four steps to the Capital-Retention Approach?
- A (Assets) - B (Final Expenses) = C (Cash Needs)
- D (Continuing Income) - E ( Continuing Expenses) = F (Income Needs)
- F (Income Needs) / interest rate = G (Capitalized Value)
- G (Capitalized Value) +/- C (Cash Needs) = H (Insurance Needs)
Under what circumstances are Cash Needs added to or subtracted from Capitalized Value to get the Insurance Needs?
They are added to the Capitalized Value when they are negative (Final Expenses are greater than Assets).
They are subtracted from the Capitalized Value when they are positive (Assets are greater than Final Expenses).
How is disability insurance coverage determined?
Earned income x 60% (assuming a 60% benefit pmt) / 12 = Disability Income Benefit
What is the definition of “earned income” for the purposes of disability insurance?
Earned income is the income received from employment. It does not include alimony or investments etc.
