Chapter 14: Professional Financial Planning Flashcards
3 Sections or stages of financial planning for humans
Early adult years
Middle adult years
Later adult years
Early adult years
saving for families should parents die prematurely, child education or paying off mortgages
Middle Adult Years
Saving for retirement
Later Adult Year
Estate planning, wills , transfer of property and wealth
Professional Financial Planning Steps (5)
- Motivate and Educate Clients
- Collect Information
- Develop Goals
- Implement Plans
- Review & Update Plans
Motivate and Educate Clients Stage
overcome tendencies to avoid completing financial plan
3 tendencies to avoid financial planning
- lack of knowledge
- not knowing where to start
- not understanding importance
Collect Information Stage
collect info about client etc net worth, cash flow, develop cash budget and spendings, house hold income from parents, family needs
cash budget(3)
heart of financial plan
plan development from tax returns and book records
estimate future needs
adjusted cost basis (4)
net cash outflow for purchased property -> purchase price and expense -> client attitude towards risk -> risk return trade off
Develop goals stage
short, middle, long term,
consider all sources of wealth and expenditure (rank)
Saving plan
fund expenses and obtain financial goals= investment strategy
Asset Allocation Plan:
What % of assets are held in low vs high risk investments
Implement plan stage
implement first budget and plan
Review and Update plans
plans change etc jobs, kids, raises bonuses, divorce, challenges
Early Adult Years
calculating life insurance needs for family
Period Characteristics: Early
first job, marriage, children, accumulation of debt
Needs based (Life Insurance) purchase
life insurance purchased in amount equal to difference between assets required to complete financial plan and assets available
Permanent policies or cash value life insurance
life insurance policy with savings feature, premiums affordable later
Permanent needs
not function of time as exists at all ages etc burial fund, estate planning, court, attorney
Term
not a long period of time and no savings element
Temporary need
projected end, meet for portion of time
Assets available to meet needs (4)
social security, employee group life, home equity, investment savings
Tax advantage funding
produces more funds than non-tax
529 Plan
contributor owns account, owner selects investment strategies and can make changes after one year
Middle Adult Years
Retirement
Period Characteristics: Middle
children independent, mortgages repaid, families accumulating savings
what is the shift during the stage
from premature death to retirement, participate in social security, employee pension
Retirement Planning and Problem to solve steps (6)
- Estimate length of life & health status
- forecast amount and sources of pre and post retirement income
- predict amount and type of retirement expenses
- age when retiring
- gauge impact of inflation post retirement
- anticipate possibility of dependent child, parent or both
Late Adult Years
transferring wealth to lower generations etc estate planning
estate planning
transfer of wealth, logical and economic transfer of asset with owners desires
Will
legal document in which a person directs the disposal of assets at death
probate
name for legal (court supervised) process of transferring property at a person’s death
intestate
person dies without a will
trust
legal arrangement allowing person, trustee, to manage property for the benefit of another person, beneficiary
Life Insurance Trust
What attorneys call a trust funded with life insurance proceeds
what is the cash in life insurance trust used for
purchase assets from the estate at set prices
survivor life insurance and when is beneficiary paid
insure two loves under one contract, beneficiary paid after second death
3 reason for business to purchase life insurance
- benefits for employees
- protect firm through use of life insurance
- Aid in business transfer of ownership
benefits for employee
group life
Key employee life insurance and who is owner , beneficiary and insured
protect a firm from the lose of a important individual etc president or ceo, and the resulting financial problems
beneficiary and owner is business and insured is key individual
split dollar life insurance
employer and employee part of premium for insurance policy with savings feature
buy and sell agreement
used to transfer ownership when owner of business dies
2 forms of buy and sell agreement
cross purchase plan or entity plan
cross purchase plan
each partner (shareholder) can purchase life insurance on every other partner (shareholder)
Entity plan
partnership (corporation) can purchase insurance on each parter (shareholder) -> smaller number of policies
