Finance Chapter 8: Home and Automobile Decisions

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Questions and Answers

What is a key advantage of cash-value life insurance?

Immediate cash payout upon death

No restrictions on beneficiary designations

Lower premiums compared to term insurance

Tax advantages associated with its growth (correct)

Which clause allows an insured individual to reinstate their policy after a lapse?

Loan clause

Incontestability clause

Change of policy clause

Policy reinstatement clause (correct)

Which type of settlement involves payments made in regular installments over a specified period?

Installment payment settlement (correct)

Lump sum settlement

Interest only settlement

Life annuity settlement

What is NOT included in the list of standard contract clauses of life insurance?

Policy borrowing clause Signup and view all the answers

Which rider provides coverage if the policyholder becomes disabled?

Waiver of premium for disability rider Signup and view all the answers

What type of insurance plan combines features of traditional fee-for-service and HMOs?

Preferred Provider Organization (PPO) Signup and view all the answers

What is a common misconception about term insurance compared to cash-value life insurance?

Cash-value insurance is more affordable than term insurance. Signup and view all the answers

Which of the following is NOT a requirement of the Affordable Care Act?

Coverage for routine vision care Signup and view all the answers

In an open-end lease, who assumes the risk for the residual value of the leased asset?

The lessee Signup and view all the answers

Which of the following is a feature of term insurance?

It pays only if the insured dies during the coverage period. Signup and view all the answers

What financial strategy can help borrowers avoid predatory loans?

Knowledge and awareness Signup and view all the answers

What is one downside associated with specialty mortgages?

High prepayment penalties Signup and view all the answers

What type of insurance combines life coverage with a savings plan?

Whole Life Insurance Signup and view all the answers

Which of the following types of loans should borrowers be cautious of?

Abusive loans Signup and view all the answers

Which of the following describes a key aspect of an open-end lease compared to a closed-end lease?

Flexibility in mileage and wear-and-tear Signup and view all the answers

What distinguishes cash-value insurance from term insurance?

It accumulates cash value over time. Signup and view all the answers

What is one of the key steps in achieving financial goals?

Identifying costs and setting a time frame Signup and view all the answers

Which of the following is NOT a recommended strategy for managing your portfolio?

Stay unaware of market changes Signup and view all the answers

Which of the following describes a reverse mortgage?

A loan available to homeowners aged 62 and older with home equity Signup and view all the answers

What is a crucial step in preparing for a financial life event such as divorce?

Create a budget and track expenses Signup and view all the answers

What aspect of debt management helps maintain a strong credit score?

Repaying borrowed amounts punctually Signup and view all the answers

Which of the following is a key factor to consider when managing personal finances?

Spending less than you earn and budgeting wisely Signup and view all the answers

What is a recommended approach to saving for your financial goals?

Make savings automatic and avoid procrastination Signup and view all the answers

Which statement best describes the importance of understanding good vs. bad debt?

Good debt can help build wealth while bad debt can drain resources Signup and view all the answers

What is a primary benefit of disability insurance?

Offers payments during income interruptions Signup and view all the answers

What is a key characteristic of HO-3 (All risk form) insurance?

It covers all direct physical losses to the home Signup and view all the answers

What is NOT considered a source of disability insurance?

Medicare coverage for seniors Signup and view all the answers

Which statement accurately reflects Medicaid?

It offers medical insurance for needy families and the aged or disabled Signup and view all the answers

What should you consider when selecting long-term care insurance?

Policies from high-quality companies with an A11 or A1 rating Signup and view all the answers

What does a personal liability coverage protect against?

Injury to others and their medical expenses Signup and view all the answers

What distinguishes HO-4 (Renter's Form) insurance?

Specifically for renters and their personal belongings Signup and view all the answers

Which of the following perils is covered by HO-2 (Broad Form) but not HO-1 (Basic Form)?

Falling objects Signup and view all the answers

Study Notes

Chapter 8 (The Home and Automobile Decision)

Before purchasing a house or car, research affordability, including down payments and monthly payments.
Dealers often hold back a small percentage of the sale price.
Buying with cash is the cheapest option.
Shorter loan terms result in higher monthly payments.
Closed-end leases, also known as walk-away leases, don't obligate the lessee to purchase the asset at the end of the lease term.
The lessee can return the asset without further financial obligations.
Fixed monthly payments, a pre-determined residual value, and mileage limits are specified in the lease.
In an open-end lease, the lessee assumes the residual value risk.
If the asset's market value at the end of the lease term is less than the expected residual value, the lessee is responsible for the difference.
Open-end leases offer more flexibility concerning mileage and wear and tear compared to closed-end leases.
Open-end leases are common in commercial leasing, especially where usage might be unpredictable.
Leasing might be preferable if a closed-end lease is available.
Purchasing new cars every 2-4 years is a financial choice with a driving obligation of 15,000 miles.
The warranty is the first line of car protection.
Lemon laws protect consumers from defective vehicles.

Loan Origination Fees

An upfront fee charged by lenders to process new loan applications.

Appraisal Fees

A charge for professional property evaluation, typically for real estate.

Title Search Fees

A charge to examine public records verifying property ownership.

Recurring Costs

Ongoing expenses needed to maintain operations (business, household, etc.).

PITI (Principal, Interest, Taxes, and Insurance)

Common mortgage loan component.

Conventional Loans

Mortgages directly from banks or savings and loans (S&Ls)

Government-Backed Loans

Loans backed by government agencies.

FHA Loans

Mortgages insured by the Federal Housing Administration.

VA Loans

Mortgages guaranteed by the Department of Veterans Affairs, available to eligible veterans and spouses.

Fixed-Rate Mortgage

A mortgage with a fixed monthly payment that doesn't change throughout the loan term.

Assumable Loan

A loan that can be transferred to a new buyer.

Prepayment Privileges

Allows early cash payments to be applied to principal.

Adjustable-Rate Mortgage (ARM)

Mortgage with interest rates that adjust according to an index, such as 6 or 12-month U.S. Treasuries .

Margin

The amount added to an index rate for an ARM.

Adjustment Interval

How often the interest rate of an ARM adjusts.

ARM Innovation

Convertible to a fixed-rate loan, options for reducing costs and combination options.

Specialty Mortgage Options

Shared Appreciation Mortgage and Interest-only Mortgage.

Prepayment Penalties

Fees charged if a loan is paid off early or refinanced.

Bait and Switch Costs

Loan terms at closing differ from those agreed upon earlier.

Life and Health Insurance (Chapter 9)

Health insurance protects against medical expenses.
Life insurance protects families in case of death.
High costs limit coverage and increase out-of-pocket medical expenses.
Patient Protection and Affordable Care Act aims to provide health insurance.
Life insurance is considered when surviving spouse and children need financial support after death.
High costs necessitate evaluation of coverage options.
Life insurance value exceeds estate tax free transfer threshold (consider tax implications).
Use multiple evaluation approaches to calculate life insurance needs, accounting for lost income and return rate.

Cash-Value Insurance

Combines life insurance with savings.
Offers both death benefits and savings potential.
Permanent types of cash-value insurance

Whole Life Insurance

Pays a death benefit when the insured dies, turns 100, or reaches a specified age.
Assets accumulate via cash-value accounts.

Nonforfeiture Rights

Policyholder can convert the policy to a lower death benefit in exchange for cash value.

Universal Life Insurance

Flexible premiums and varying benefits

Term Insurance vs Cash-Value Life Insurance

Comparison of available insurance types.

Chapter 10, Property and Liability Insurance

Homeowner's insurance protects against property damage (fire, theft).
Separated policies were once needed for each peril, now packaged policies combine coverages
HO-1, HO-2, HO-3, HO-4, HO-6, HO-8 are different homeowner policy types.

HO-1, HO-2, HO-3, HO-4, HO-6, HO-8

Different types of homeowner's insurance with varying coverage.

Property Coverages Details

Dwelling / Structure replacement cost, Other structures (sheds/ garages)
Personal Property (items within the house), Loss of use (temporary living expenses)
Personal Liability Insurance (injury to others or damage to property)
Medical Payments (coverage for injuries to others)

Comparing Costs (Chapter 7)

Traditional Net Cost (TNC) and Interest-Adjusted Net Cost (IANC) methods for calculating costs.

Patient Protection and Affordable Care Act (ACA)

Legislation ensuring most Americans have health insurance.

Affordable Care Act

Affordable Care Act (ACA) reformed the insurance industry, increasing access.

Increasing Access to Affordable Care

Children can remain on their parents' insurance plans until 26.
Significant changes to ensure appropriate coverage from insurance companies.
Basic health insurance commonly combines hospital/surgical/ and physician expense coverage, and major medical expenses insurance.

Private Health Care Plan

Company-offered healthcare plan.

Health Maintenance Organizations (HMOs)

Health care management options.

Group Versus Individual Health Insurance

Distinctions between group and individual healthcare plans.

Government Sponsored Health Care Plans

State and federal programs like Medicare and Medicaid.

Medicare Parts A, B, C, D

Different parts of federal healthcare program.

Controlling Health-care Costs

Strategies for reducing costs.

Flexible Spending Accounts

Pre-tax dollars for eligible healthcare expenses.
Health Savings Accounts, Health Reimbursement Accounts, and High Deductible Plans are presented as methods for cost controls.

Choosing an Insurance Plan

Different plans with varying financial obligations.

Disability Insurance

Ensures income replacement in case of disability.

Chapter 17, Financial Life Events

Financial life events—planning for retirement, illness, death, divorce.

Debt Management

Debt management strategies for successful financial planning.

Reverse Mortgages

Loan type available to homeowners aged 62 or older.

Preparing for Divorce

Important steps to take for financial preparation.

Life Events Summary

Summarizes different stages of life and financial management.

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Description

Explore the key concepts of financial decisions regarding purchasing homes and automobiles. This chapter covers affordability, leasing options, and the impact of loan terms on monthly payments. Understand the differences between closed-end and open-end leases and how they affect financial obligations.