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Personal Finance > Exam 3 > Flashcards

Exam 3 Flashcards

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1
Q

Renting is more advantageous than buying a home when you are seeking:

A

lower initial costs.

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2
Q

How does a seller’s market differ from a buyer’s market?

A

Seller’s market - demand for homes is high with few available for sale.
Buyer’s market - many homes are available for sale with relatively low demand.

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3
Q

How do changing interest rates affect the amount of mortgage a person can afford?

A

As interest rates decline, home buyers can afford to take on a larger mortgage

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4
Q

Under what conditions might an adjustable-rate mortgage be appropriate?

A

When interest rates are relatively high, and they are expected to decline.

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5
Q

What factors affect the selling price of a home?

A

location, size, condition, features, and current market demand

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6
Q

Insurance

A

Protection against possible financial loss

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7
Q

How are the most common risks classified?

A

personal risk, property risk, and liability risks

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8
Q

What is the difference between pure risk and speculative risk?

A

Pure risk-A risk in which there is only a chance of loss; also called insurable risk.
Speculative risk-A risk in which there is a chance of either loss or gain.

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9
Q

What are the methods of managing risk?

A
  1. risk avoidance
  2. risk reduction
  3. risk assumption
  4. risk shifting.
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10
Q

What main coverage is included in home insurance policies?

A

coverage for the building and other structures, additional living expenses, personal property, and personal liability

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11
Q

What type of coverage in a home insurance policy is designed to pay for legal action taken against a homeowner who may be legally responsible for another person’s losses or injuries?

A

liability

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12
Q

How does renter’s insurance differ from other home insurance policies?

A

Renter’s insurance includes coverage for personal property, additional living expenses, and personal liability. It does not cover the building or other structures.

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13
Q

Financial responsibility law

A

State legislation that requires drivers to prove their ability to cover the cost of damage or injury caused by an automobile accident

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14
Q

no-fault system

A

drivers involved in an accident collect medical expenses, lost wages, and related injury costs from their own insurance company

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15
Q

How does collision coverage differ from comprehensive physical damage coverage?

A

Collision - pays for damage to the insured’s car when it is involved in an accident
Comprehensive physical damage - covers financial loss from damage to a vehicle caused by a risk other than a collision, such as fire, theft, glass breakage, hail, or vandalism

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16
Q

A major expense associated with home ownership would be:

A

real estate taxes

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17
Q

During which phase of the home-buying process would you assess types of housing available?

A

Determine home ownership needs

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18
Q

A conventional mortgage usually has:

A

equal payments over 10, 15, 20, 25, or 30 years

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19
Q

Which of the following is an example of a closing cost?

A

Title insurance

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20
Q

While cleaning your home, a worker damages some furniture. You take action against the worker’s employer to cover the cost of the damage. This is an example of a(n)

A

vicarious liability

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21
Q

An umbrella policy is designed to cover:

A

major personal liability claims

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22
Q

Which type of coverage would pay for damage to your automobile in an accident for which you were at fault?

A

collision

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23
Q

Henry Edwards was injured in an accident caused by another driver who did not have insurance. Henry’s medical expenses would be covered by:

A

uninsured motorists protection

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24
Q

lease

A

legal document that defines the conditions of a rental agreement.

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25
Q

Condominium

A

individually owned housing unit in a building with several such units

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26
Q

Zoning laws

A

Restrictions on how the property in an area can be used

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27
Q

Mortgage

A

long-term loan on a specific piece of property such as a home or other real estate

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28
Q

Points

A

Prepaid interest charged by a lending institution for the mortgage
- each discount point is equal to 1 percent of the loan amount.

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29
Q

Amortization

A

reduction of a loan balance through payments made over a period of time

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30
Q

Adjustable-rate mortgage (ARM)

A

home loan with an interest rate that can change during the mortgage term due to changes in market interest rates; also called a flexible-rate mortgage or a variable-rate mortgage.

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31
Q

Rate cap

A

limit on the increases and decreases in the interest rate charged on an adjustable-rate mortgage

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32
Q

Payment cap

A

limit on the payment increases for an adjustable-rate mortgage

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33
Q

Buy-down

A

interest rate subsidy from a home builder or a real estate developer that reduces a home buyer’s mortgage payments during the first few years of the loan.

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34
Q

Second mortgage

A

cash advance based on the paid-up value of a home; also called a home equity loan

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35
Q

Reverse mortgage

A

loan based on the equity in a home, that provides elderly homeowners with tax-free income and is paid back with interest when the home is sold or the homeowner dies.

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36
Q

Refining

A

process of obtaining a new mortgage on a home to get a lower interest rate and payment.

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37
Q

Closing costs

A

Fees and charges paid when a real estate transaction is completed; also called settlement costs.

38
Q

Title insurance

A

Insurance that, during the mortgage term, protects the owner and lender against financial loss resulting from future defects in the title and from other unforeseen property claims not excluded by the policy.

39
Q

Deed

A

document that transfers ownership of property from one party to another

40
Q

Appraisal

A

An estimate of the current value of a property.

41
Q

Insurance company

A

risk-sharing firm that assumes financial responsibility for losses that may result from an insured risk

42
Q

Insured

A

person covered by an insurance policy

43
Q

Policyholder

A

person who owns an insurance policy

44
Q

Risk

A

Chance or uncertainty of loss; also used to mean “the insured.”

45
Q

Peril

A

chance of a possible loss

46
Q

Hazard

A

factor that increases the likelihood of loss through some peril

47
Q

Self-insurance

A

process of establishing a monetary fund to cover the cost of a loss

48
Q

Negligence

A

Failure to take ordinary or reasonable care in a situation.

49
Q

Household inventory

A

list or other documentation of personal belongings, with purchase dates and cost information.

50
Q

Medical payments coverage (homeowner)

A

Home insurance that pays the cost of minor accidental injuries on one’s property.

51
Q

Coinsurance clause

A

policy provision that requires a homeowner to pay for part of the losses if the property is not insured for the specified percentage of the replacement value.

52
Q

Bodily injury liability

A

Coverage for the risk of financial loss due to legal expenses, medical costs, lost wages, and other expenses associated with injuries caused by an automobile accident for which the insured was responsible.

53
Q

Property damage liability

A

Automobile insurance coverage that protects a person against financial loss when that person damages the property of others.

54
Q

Deductible

A

amount a policyholder must pay per loss on an insurance policy

55
Q

What is health insurance, and what is its purpose?

A

Health insurance is a form of protection with a primary purpose to alleviate the financial burdens suffered by individuals because of illness or injury.
The purpose of health insurance is to reduce the financial burden due to illness or injury.

56
Q

Coinsurance

A

provision under which both the insured and the insurer share the covered losses

57
Q

What benefits do Part A and Part B of Medicare provide?

A 
hospital  insurance  (Part  A) 
medical  insurance  (Part  B).
58
Q

What are the three main sources of disability income?

A

employers, Social Security, and workers’ compensation

59
Q

How can you determine the amount of disability income insurance you need?

A

If the sum of your disability benefits approaches your after-tax income, you can safely assume that if disability strikes, you’ll be in good shape to pay your day-to-day bills while recuperating.

60
Q

coordination of benefits (COB)

A

method of integrating the benefits payable under more than one health insurance plan

61
Q

What do life expectancy tables indicate?

A

the average number of additional years a person of a certain age and sex can expect to live

62
Q

What are the two types of life insurance companies?

A

stock life insurance companies, owned by shareholders

mutual life insurance companies, owned by policyholders.

63
Q

What are Blue Cross and Blue Shield plans? What benefits does each plan provide?

A

Blue Cross-An independent membership corporation that provides protection against the cost of hospital care.
Blue Shield-An independent membership corporation that provides protection against the cost of surgical and medical care.

64
Q

What are the two sources of government health insurance?

A

Medicare-Federal health insurance program for people 65 or older, people with certain disabilities. The program is administered by the Centers for Medicare and Medicaid Services.
Medicaid-A program of medical assistance to low-income individuals and families.

65
Q

Why is it important to know the ratings of the insurance company?

A
  • to determine the financial strength of the insurance company
  • can also play a factor in finding more reasonably priced insurance.
66
Q

Medigap, or MedSup, insurance

A

Supplements Medicare by filling the gap between Medicare payments and medical costs not covered by Medicare

67
Q

disability income insurance

A

Provides payments to replace income when an insured person is unable to work

68
Q

What makes a variable annuity different?

A

Variable annuities offer stepped-up death benefit, a guaranteed minimum income benefit, and sometimes long-term care insurance.

69
Q

Which type of health insurance includes two features (a deductible provision and a coinsurance provision) to help keep the premium within the policyholder’s means?

A

Major medical expense

70
Q

Which one of the following is true regarding group health insurance?

A

Provides coverage for you and your immediate family

71
Q

Which health insurance plan directly employs or contracts with selected physicians to provide managed health care services in exchange for a fixed, prepaid monthly premium?

A

HMO

72
Q

What are the main differences between whole life and term policies?

A

Whole life policy-An insurance plan in which the policyholder pays a specified premium each year for as long as he or she lives; also called a straight life policy, cash value life policy, or ordinary life policy.
Term insurance-Life insurance protection for a specified period of time; sometimes called temporary life insurance.

73
Q

Your annual income is $45,000. What is your life insurance need based on the easy method?

A

$45,000 × 7 years × 70% =

$220,500

74
Q

The total debts of you and your spouse include the following: mortgage, $200,000; auto loan, $16,000; credit card balance, $2,000; and personal debts of $4,000. Further, you estimate that your funeral will cost $6,000. Your spouse expects to continue to work after your death. What is your life insurance need using the DINK method?

A

$6,000 + ½ ($200,000 + $16,000 + $2,000 + $4,000) =

$117,000

75
Q

rider

A

document attached to a policy that modifies its coverage

76
Q

double indemnity

A

benefit under which the company pays twice the face value of the policy if the insured’s death results from an accident

77
Q

How frequently does the premium for a whole life policy change during the insured’s life?

A

It never changes

78
Q

Hospital expense insurance

A

Pays part or all of hospital bills for room, board, and other charges

79
Q

Stop-loss

A

provision under which an insured pays a certain amount, after which the insurance company pays 100% of the remaining covered expenses

80
Q

Long-term care insurance (LTC)

A

Pays for the cost of day-in, day-out care for long-term illness or disability

81
Q

What are the four most common settlement options?

A

Lump-Sum Payment
.Limited Installment Payment
Life Income Option
Proceeds Left with the Company.

82
Q

annuity

A

contract that provides a regular income, typically for as long as the person lives

83
Q

Exclusive provider organization (EPO)

A

network that renders medical care from affiliated health care providers.

84
Q

Point-of-service plan (POS)

A

network of selected contracted, participating providers; also called an HMO-PPO hybridor open-ended HMO

85
Q

Nonparticipating policy

A

Life insurance that does not provide policy dividends; also called a nonpar policy.

86
Q

Cash value

A

amount received after giving up a life insurance policy

87
Q

beneficiary

A

person designated to receive something, such as life insurance proceeds, from the insured

88
Q

Chartered life underwriter (CLU)

A

life insurance agent who has passed a series of college-level examinations on insurance and related subjects

89
Q

Basic health insurance coverage

A

Combination of hospital expense insurance, surgical expense insurance, and physician expense insurance

90
Q

Hospital indemnity policy

A

Pays stipulated daily, weekly, or monthly cash benefits during hospital confinement; not substitute for basic or major medical protection

91
Q

Using the “nonworking” spouse method, what should be the life insurance needs for a family whose youngest child is 8 years old?

A

(18 − 8) × $10,000 = $100,000

Personal Finance (5 decks)

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