Section 4 - R23 - Risk Management for Individuals Flashcards
Human Capital (Definition)
PV of future earnings and wages. Often the dominant asset in a household balance sheet
Finance Capital (Definition)
Funds available for investment. They may be personal (for consume, eg house, furniture, auto) or investment (stocks, bonds, accrued pension plans)
Financial Stages fo Life (List)
- Education
- Early Career
- Career Development
- Peak accumulation
- Pre Retirement
- Early Retirement
- Late Retirement
Traditional v. Economic Balance Sheet
Traditional: Asset - Liability = Net Worth
Economic: PV assets - PV current and implied liabilities = Net Wealth
Investment Assets (Definition)
Investment assets are the components of an individual’s wealth
Publicly Traded Marketable Assets (List)
Bonds, equities, REITs
Non Publicly Traded Marketable Assets (List)
Real Estate, Annuities, Cash-Value Life Insurance, Business Assets
Non Marketable Assets (List)
Employer Pension Plan (mNPV = taxa de NPV ajustada pela mortalidade), Government Pensions
Economic Net Worth (Definition)
Net Worth = Assets - Liabilities
Economic Net Worth = Extend to Future Assets, eg Human Capital and PV of Pension Benefits
Risk Management Strategy for Individuals (Framework)
- Specify the objective
- Identify risks
- Evaluate risks and select appropriate methods to manage the risks (avoid, reduce, accept, transfer)
- Monitor outcomes and risk exposures
Economic Balance Sheet Items (List)
Assets: Human Capital, Pension Value
Liabilities: Mortgage, Bequests, PV of Lifetime Consumption
Result = Economic Net Worth
Contrast Traditional Balance Sheet v. Economic
A traditional balance sheet includes assets and liabilities that are easy to quantify. An economic balance sheet provides a useful overview of one’s total wealth portfolio by supplementing traditional assets with human capital, pension wealth and additional liabilities, such as consumption and bequest goals.
Individual Risk Exposures (List)
- Earnings Risk (earnings potential of an individual)
- Premature Death Risk
- Longevity Risk (uncertainty of how long retirement will last)
- Property Risk (damaged, destroyed, stolen or lost)
- Liability Risk (legally liable for some financial cost)
- Health Risk (illness or injury)
Life Insurance (Definition and Types)
Insurance that protects a beneficiary from the loss of human capital due to someone’s death, affecting dependents from that individual’s earnings.
- Temporary (for certain period of time)
- Permanent (lifetime coverage)
Life Insurance Elements (List)
- Term
- Type (Permanent or Temporary)
- Amount of Benefits
- Identity of the insured
- Policy Owner
- Beneficiary
Insurable Interest (Concept)
An insurable interest means that the policy owner must derive some type of benefit from the continued survival of the insured that would be negatively affected should the insured pass away. Objetivo é que apenas pessoas emocionalmente ligadas à vida do segurado possam contratar seguros, de modo a previnir fraudes.
Life Insurance Determinants (List)
- Mortality Expectations (actuarial estimates based in historical data and future expectations)
- Discount Rate
- Load (Other Expenses and Profit) = sales, physical exams, issuance, monitoring etc
Net Premium and Gross Premium (Example)
150k policy for 1y with 0.15% mortality @ 5.5% discount rate
PV 1 = 0.015100k / 1.055
PV 2 = 0.99850k / 1.055
Net Premium PV Total = PV1 + PV2
Gross = Sum Loads (expenses and profit for the company)
Premiums (Characteristics)
- Premiums for level term policies are higher than annually renewable policies in the early years
Cash Value Insurance Policy (Concept)
Insurance Policy that provides the accumulation of a cash reserve based in the premiums paid. The cash value within the policy may be (1) withdrawn by the owner when policy matures or when he terminates the policy or (2) can be borrowed as a loan while keeping the policy in force.
Premium Types in Policy Reserves
- Renewable
- Renewed each 10y
- Fixed for the whole life
Comparison of Life Insurance Costs (Concept)
Cost per year of 1,000 coverage
- Net Payment Cost Index: PV Future Premiums / PV Future Death Benefits.
LOW = Good
HIGH = Bad
- Surrender Cost Index: Custo de Resgate. Custo de Resgate Futuro / PV Premiums Futuros. Cost associated with surrendering, or terminating, a life insurance policy early.
LOW = Good
HIGH = Bad
Policy Reserves (Definition)
Amount of money that an insurer (Itaú Seguros) sets aside in liabilities to cover its future obligations to policyholders
Calculation Methods for Life Insurance Needs (List)
- Human Life Value Methods: Replace the estimated net contribution to family finances that the insurance would generate. Salário do morto pra família beneficiária.
- Needs Analysis Method: Soma dos custos dos beneficiários.
Disability Income Insurance Types (Definition)
- Inability to perform one’s regular occupation (inapto a ser analista de crédito de IFs). Residual disability.
- Inability to perform any regular occupation for which he is suitable (inapto a ser bancário). Partial disability.
- Inability to perform any occupation (tetra)
Disability Income Insurance Characteristics
- Benefit Period
- Elimination Period (carência)
- Rehabilitation Clause (paga a fisio)
- Waiver of Premium (Não precisa mais pagar prêmio - em caso de sinistro)
- Option to Purchase Additional Insurance Rider (allows the insured to increase coverage without further proof of insurability)
- Non-cancelable and Guaranteed Renewable Policy
- Inflation adjustments
Property Insurance (Definition)
Insurance against one’s property risk (including the risk of being damaged, destroyed, stolen or injuried). It may apply for homeowners or renters. It may include the risk of a housefire, automobile collision, stolen items and furniture or jewelry. It may be based in replacement cost.
Deductible in an Insurance Policy (Concept)
Deductible é a franquia. Amount to be paid by the beneficiary in the case of an insurance claim before it receives additional financial coverage from its policy claim.
Permanent Life Insurance (Types)
a. Whole Life: entire life, ongoing fixed premiums, generate cash value, non-cancelable, participating or not (value may grow)
b. Universal: flexible, premium may be high or low, insurance stays in force as long as premiums are paid or cash value > policy expenses
Riders (Definition and Examples)
Riders are additional provisions or clauses that can be added to a basic life insurance policy to modify its terms or provide additional coverage for specific circumstances.
Examples:
1. Accelerated Death Benefit (if diagnosed as terminal)
2. Guaranteed Insurability (right to purchase more coverage a t predefined intervals)
3. Waiver of Premiums: if policy holder becomes disabled.
Property Insurance (Types)
a. Homeowner Policy: Risks associated with personal property
- Replacement cost or cash value
- Deductibles (higher = lower premium)
b. Auto Insurance: Collision v. Comprehensive (geralzão pra danos). Deductibles. Often mandatory.
Health Insurance Characteristics
- Risk Pool: premium collected for a group of individuals in order to diversificate the risk of filing claims.
- Coverage Limitations: policies specifically define the covered and uncovered medical procedures and diseases. They also may be comprehensive.
- Preexisting Conditions: they may have exclusions for pre-existing conditions.
Health Insurance Items (List and Definitions)
- Deductibles: Minimum amount policy that holder pays (franquia)
- Coinsurance: Percentage that insurance company pays above the deductible.
- Copayment: Fixed payment that holder must pay for obtaining particular services
- Maximum Out-Of-Pocket
- Maximum Yearly Benefit
- Pre-Existing Condition
Liability Insurance (Definition)
- Personal Umbrella Liability Insurance Policy
Annuities (Definition)
Financial product that provides a series of regular payments to an individual over a defined period of time, typically until the end of their life. They are used as a retirement income vehicle, but can also be used for other purposes such as funding education expenses or providing a guaranteed stream of income.
Annuity Parties (List)
- Insurer
- Annuitant
- Contract owner (typically the annuitant)
- Beneficiary
Annuity Classifications (List)
- Immediate (Pay now, Receive now) or Deferred (Income Stream Begins at a Later Date)
- Fixed or Variable (like Mutual Fund but structured as an insurance, may include death benefit)
Note: Payout for both is similar. Immediate Fixed is the most common.
Add: Advanced Life Deferred Annuities (Pure Longevity Insurance - ALDA).P
Health Insurance Types (List)
- Indemnity Plan: Essential is covered + % of the “Reasonable + Customary” Fees
- Preferred Provider Organization (PPO): network of physicians that charge lower prices within the plan. Dr. Consulta.
- Health Maintenance Organization (HMO): office visits at little or no cost to encourage individuals to seek help for small medical problems before they become serious.
- Comprehensice Major Medical Insurance: cobre quase tudo.
Annuities: Advantages and Disadvantages
- Volatility of the Benefit Amount (fixed, variable)
- Flexibility (immediate, variable)
- Lock / Depends on future market expectations (fixed v. variable)
- Fees (variable > fixed)
- Inflation concerns (if fixed with no adjustments)
- Provide tax benefits (tax deferred growth, for example)
Annuity Payout Methods (List)
- Life Annuity: pay during life, cease at death
- Period-certain annuity: pay during specified number of periods
- Life annuity with period certain: period is determined in time (from / to)
- Life annuity with refund: PMTs are “amount paid (-) less fees”
- Joint life annuity: Two or more individuals (husband + wife, for example)
Mortality Credit (Concept)
Some individuals pass away earlier in life. As a result, their premiums paid help subsidizing elderly insured people in the pool.
High Mortality Credit: Others funding me if I am old. Increase during life.
Strategies to mitigate risk (List)
- Risk Avoidance (don’t do certain things)
- Loss Prevention (security cameras)
- Risk/Loss Reduction (Sprinkler system for fire)
or
4. Risk Retention (do not insure)
5. Risk Transfer (insurance)
Retirement Income Efficient Frontier
- High Annuity Allocation (Low Wealth + Low Probability of Having Sufficient Money)
- Low Annuity Allocation (opposite)
Factors affecting demand of annuities (List)
- Longer than expected life expectancy
- Greater preference for lifetime income
- Less concern for leaving money to heirs
- More conservative investing preferences
- Lower guaranteed income from other sources.
É basicamente uma Renda Fixa que gera cupons e a pessoa é independente e aproveita a renda ao invés de gastar com seguro para os outros.
