Finance 310-03 Exam 2 Study Guide PDF

# Finance 310-03 Exam 2 Study Guide ## Terms and Definitions - **Liability** - A policy coverage that protects you if you're legally liable for bodily injury and property damage caused by your automobile. It includes payment for any judgment awarded, court costs, and legal defense fees. Legally en...

# Finance 310-03 Exam 2 Study Guide ## Terms and Definitions - **Liability** - A policy coverage that protects you if you're legally liable for bodily injury and property damage caused by your automobile. It includes payment for any judgment awarded, court costs, and legal defense fees. Legally enforceable obligation. - **Elements of Negligence** - - **Duty** demonstrates the expectation to use reasonable care regarding others, i.e., “a duty of care.” - If one driver gets behind the wheel while intoxicated and puts others at risk, they've breached their duty of care. This “breach” is the term that describes the wrongful conduct/unlawful act. - **Causation** is broken down into legal and factual causation. Causation is a very detailed, nuanced concept that could be meticulously explained in hundreds of ways. A simple summary of causation is the relationship between someone's breach of care and the damage that occurred. - **Damages** include the cost of your medical care, your lost wages and diminished future earnings, your pain and suffering, and damages to your property. - **Title** - A Title Search is an investigation of the public land records to determine the legal ownership rights to property or a home. - **Adjustable-Rate Loans** - Loans in which the interest rate does not stay fixed but varies based on the market interest rate. ## Key Terms - **Res Ipsa Loquitor** - the principle that the occurrence of an accident implies negligence. - **Condominium Insurance** - [HO6 (Condominium Form) - Provides personal property and liability insurance for co-op or condominium owners.]? - **COBRA (Consolidated Omnibus Budget Reconciliation Act)** - If you work for a company with 20 employees or more, you will be given the opportunity to continue your health insurance coverage for 18 months to 3 years after you leave the company, depending on why you left. - **Home Warranty**- Covers repairs or replacements of major systems like HVAC, plumbing, and electrical, plus key home appliances such as your fridge, washer and dryer, protecting from unexpected breakdowns - **Mortgage Insurance PMI** - a type of insurance you may be required to buy if you take out a conventional loan with a down payment of less than 20% of the purchase of a home, PMI protects the lender, not you, if you stop making payments on your loan - **Home Equity** - A loan that uses a borrower's build-up equity in his or her home as collateral against the loan. ## Chapter 6 ### Credit Score - The numerical evaluation or “scoring” of credit applicants based on their credit history. - **Factors related to credit scores**: - **Your payment history (35% of your score)**: do not skip payments. Try always to pay at least the minimum due. - **The Amount You Owe (30% of your score)**: How much do you owe on your credit cards, your mortgage, your car loans, and any other outstanding debt? The lower the debt-to-credit ratio, the better. - **Length of Credit History (15% of your score)**: the longer your credit accounts have been open and the longer you have had accounts with the same creditors, the higher your credit score will be. - **Types of Credit Used (10% of your score)**: The wider the variety of credit that you have, the better. - **New Credit (10%)**: If you have RECENTLY made a lot of credit applications, you will lose points on your FICO score. ### Three Methods of Getting Out of Debt - - **Math Method**: Pay off debt with the highest interest rate first while paying a minimum payment on the rest. (Highest savings but takes longer) - **Momentum Method**: Pay off the lowest balance debt first then the next lowest, etc., while paying the minimum on the rest. (Most Satisfying). - **Shotgun Method**: Pay more than the minimum payment on most or all of your debt accounts (least effective) ## Chapter 7 ### Risks of Adjustable-Rate Loans - Tied to the market interest rate, so if the market rate interest goes up, so does the amount of interest you pay ### Notable Interest Rates: - **Federal Fund Rate**- Rates that charge each other when they borrow between them. It's usually 3% lower than the prime rate. Can influence short-term consumer loans and credit card interest rates - **Prime Rate**- The interest rate that banks charge to their most creditworthy, or “prime”, customers ### 4 Requirements of All Legal Contracts - 1. Agreements must be made for a legal purpose 2. Parties must have the legal capacity to contract 3. There must be a valid offer and acceptance 4. Promises must be supported by the exchange of consideration ### Common Loan Clauses - **Insurance Agreement Clause**: A loan requirement that a borrower purchase credit life insurance that will pay off the loan in the event of the borrower's death - **Acceleration Clause**: A loan requirement stating that the loan is due immediately if the borrower misses one payment. - **Deficiency Payments Clauses**: A loan requirement stating that if you default on a secured loan, but also, if the sale of that asset doesn't cover what is owed, you can be billed for the difference. - **Recourse Clause**: A clause in a loan contract defining what actions a lender can take to claim money from a borrower in the case of default. - **Early Payoff Clause** (Agreed upon upfront) ## Chapter 8 ### Costs of Property Repossession - Occurs when your lender seizes this asset you defaulted on what you owe. ### Considerations for a New, Used, or Leased Vehicle - - **New**- Know what the dealer has paid from www.edmunds.com, negotiate from the dealer's cost up, not sticker price down, know if the manufacturer is offering rebates from www.cardsdirect.com, get several quotes and make sure you know if the prices quoted are the prices before or after rebates are deducted from www.consumerreports.com, compare financing from different sources before you sign your contract, beware of adding expensive extras you probably don't need (ex. Service contracts, rustproofing, etc.), inspect and test-drive the vehicle you plan to buy, don't take possession of the car until the whole deal is finalized, take your time, don't feel pressured to buy, might get the best deal when about to leave, end of the month is best time to buy - **Used**- check consumer reports from www.consumerreports.com, negotiate, shop during daylight hours to thoroughly inspect the car and test drive, get the car inspected by an independent mechanic, ask questions about previous ownership and mechanical history of the car, never sign anything you don't understand, negotiate changes and write them in the contract - **Leased**- closed-end lease, you are financially stable, you must have a new car every 2-4 years, you do not drive 15,000 miles annually, you take good care of your car, you are not bothered by the thought of monthly payments that never end, you use your vehicle for business travel, you do not modify your car, the manufacturer of the vehicle you are interested in is offering very low-priced leasing options ## Chapter 9 ### Prepare to describe Term, Whole, and Universal Life Insurance - - **Term** - protection for a specified period, the lower initial premium that increases with age, fixed death benefit, no cash value - **Whole ** - permanent protection, fixed premium, fixed death benefit, fixed cash value that grows on a tax-deferred basis - **Universal** - permanent protection, flexible premium, death benefits are flexible, cash value depends on level of payments made and investment results of the insurance company ## HSAS & FSAs - **HSA** - Pay for health care expenses tax-free (Can build up over years). - **FSA** - allows pre-tax dollars to be used for qualified healthcare and childcare expenses (use or loan). ## Parties to a Life Insurance Policy - - **Owner** - Person or Company who has an insurable interest buys policy, can also be the beneficiary or names some other beneficiary(ies) - **Insured** - Person who's life is insured - **Beneficiary** - receives death benefits, not taxed - **Conditional Beneficiary** - Good idea. Otherwise, the proceeds pass to the estate of the owner if the beneficiary predeceases before the insured. ## Chapter 10 ### Auto Insurance Policy Coverage Type - - **Part A - Liability Coverage**: provides coverage against lawsuits that might arise from negligent ownership or operation of an automobile. - **Part B - Medical Expenses Coverage**: Your medical expenses coverage includes all reasonable medical and funeral expenses incurred by the policyholder and family members in addition to other persons injured while occupying a covered automobile. - **Part C - Uninsured Motorist's Protection Coverage**: Uninsured motorist's protection coverage provides benefits for injuries caused by an uninsured motorist, a negligent driver whose insurance company is insolvent, or a hit-and-run driver. - **Part D - Damage to Your Automobile Coverage**: Protection against damage to or theft of your automobile is provided in Part D coverage. This coverage includes both collision loss and other than collision loss, generally called comprehensive physical damage coverage. ### Explain the use of an Umbrella Policy - This policy supplements the liability coverage you have through your home and auto insurance and provides an extra layer of protection. These policies kick in after the liability insurance in your homeowner's and auto policies runs out and provide coverage for claims that are not covered under your homeowner's insurance. ### Elements of Negligence - - **Duty** demonstrates the expectation to use reasonable care regarding others, i.e., “a duty of care.” - If one driver gets behind the wheel while intoxicated and puts others at risk, they've breached their duty of care. This “breach” is the term that describes the wrongful conduct/unlawful act. - **Causation** is broken down into legal and factual causation. Causation is a very detailed, nuanced concept that could be meticulously explained in hundreds of ways. A simple summary of causation is the relationship between someone's breach of care and the damage that occurred. - **Damages** include the cost of your medical care, your lost wages and diminished future earnings, your pain and suffering, and damages to your property. ### Prepare to Identify HO 1, 2,3,4,6 & 8 Policies - - **Coverages:** - A. Dwelling, B. Other Structures, C. Unscheduled Personal Property, D. Loss of use, E. Personal liability, F. Medical payments to others. ### HO1 (Basic Form) - Provides such a very narrow coverage that it isn’t available in most states. It covers fire/lightning, vandalism, riot, volcanic eruption, smoke, explosion, glass breakage, vehicles, windstorms, theft, or aircraft. Dwelling is a minimum of $15,000. Other Structures is 10% of the insurance on the house. Personal Property is 50% of house insurance. Loss of use is 10% of house insurance. Personal liability is $100,000. Medical payments to others are $1k per person. ### HO2 (Broad Form): - A named perils form of insurance. That is, it covers a set of named perils, such as fire, lightning, windstorms, and so on. If a peril isn’t specifically named in this policy, it isn’t covered. Typically costs 5% to 10% more than HO-1 coverage. ### HO3 (All-Risk Form): - Covers all direct physical losses to your home. It offers open perils protection, meaning it covers all perils except those specifically excluded. Excluded perils might include flood, earthquake, war and nuclear accident. Typically costs 10% to 15% more than HO1 policy. ### HO4 (Renter's Form): - Aimed at renters or tenants and covers personal belongings but does not include liability insurance. ### HO6 (Condominium Form): - Provides personal property and liability insurance for co-op or condominium owners. ### HO8 (Older Homes Form): - Designed for older homes, insuring them for repair costs or actual cash value rather than replacement cost. ### Res Ipsa Loquitur - - The principle that the occurrence of an accident implies negligence. ### Peril - - natural (fire, flood, hail), human (one person, small group), economic (large scale)