Professional Documents
Culture Documents
MODULE
Personal Finance
(eFM-PF / eHRM-PF)
IN
NAME: _____________________________________________
PROGRAM / YEAR LEVEL: ____________________________
INSTRUCTOR: _JOHN ALBERT A. ALZATE ______________
SEMESTER: __________________
SCHOOL YEAR: _______________
Compiled by:
JOHN ALBERT A. ALZATE
Faculty
BSBA Program
Module 2
MANAGING BASIC ASSETS
Life is full of uncertainty. This saying is the absolute truth that’s why people tend to protect
themselves, as much as possible, from the uncertainties such as saving and acquiring insurance
coverage. One of the three ways to use monetary assets is to make investments. Investments are the
best places to put money you will not need for 5, 10, or even 20 years in the future. The magic of the
world of investments is that over longer periods of time, it is quite possible to watch your money triple
or quadruple over the original amount invested. However, it does not end on acquiring these
investments but it is also equally important to know more the details and learn how to manage such
investments since your financial success will depend in part in how well your management is. With
this, the second module for this course aims to give you more in depth knowledge about managing
your cash and savings as well as your acquisition of insurance coverage for different purposes.
II. Discussion
Monetary asset management is the task of maximizing interest earnings and minimizing fees on all of
your funds kept readily available for day-to-day living expenses, emergencies, and savings and investment
opportunities. Successful monetary asset management allows you to earn interest while maintaining
reasonable liquidity and safety. Liquidity refers to the speed and ease with which an asset can be converted
to cash. Safety means that your funds are free from financial risk. In personal financial planning, efficient cash
management ensures adequate funds for both household use and an effective savings program.
The financial services industry comprises companies that provide checking savings, and money
market accounts and possibly credit, insurance, investment, and financial planning services. These companies
include depository institutions such as banks and credit unions, stock brokerage firms, mutual funds, financial
services companies, and insurance companies.
Depository institutions are financial institutions that are legally allowed to offer checking and savings
accounts to individuals and businesses as well as provide loans. They all can offer some form of government
account insurance on deposited funds and are government regulated. Examples of depository institutions are
commercial banks, savings banks, and credit unions. Although each is a distinct type of institution, people
often call them all simple banks.
Nondepository institutions are financial institutions that offer banking services, but don’t accept
deposits like traditional banks. Today you can hold a credit card issued by a stock brokerage firm or have an
account with a mutual fund that allows you to write a limited number of checks.
Commercial banks are a type of bank that accepts deposits in checking and savings accounts and
provides transactional services such as accepting deposits, making business loans, and offering basic
investment products. They are under federal and state regulations. They offer numerous consumer services,
Source: http://www.pdic.gov.ph/files/Deposit
%20InsuranceBrochure_Final.pdf
Mutual funds are investment companies that raise money by selling shares to the public and then
invest that money in a diversified portfolio of investments. Most have created cash management accounts to
provide a convenient and safe place to keep money while awaiting alternative investment opportunities.
Stock brokerage firms are licensed financial institutions that specialize in selling and buying stocks,
bonds, and other investments and providing advice to investors. They can earn commissions based on the buy
and sell orders that they process. Stock brokerage firms typically offer cash or mutual fund accounts into which
Checking accounts
A checking account is a deposit account held at a financial institution that performs transactions that
allow for withdrawals and deposits by the account depositor. Checks may be written against amounts on
deposit. Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash
machines and electronic debits, among other methods. A checking account is sometimes called a transaction
account.
Whenever you deposit money into, withdraw funds from, or make any payment out of a checking
account, you should record the transaction. To do so record the date, amount, and purpose of transaction in
the check register provided with your paper checks or in an electronic recordkeeping software program and
calculate your account balance.
Checking account may or may not pay interest. Demand-deposit accounts are checking accounts that
typically pay no interest. An interest-bearing checking account is any account upon which you can write check
that pays interest.
An overdraft, or bounced check, occurs any time once writes a check or uses a debit card when there
are insufficient funds in the account. If funds to cover the usage are not available, the bank will charge ₱1,000
fee or more. The merchant to whom a bad check was written will also charge a similar fee.
Savings Accounts
Savings accounts or sometimes called a statement savings accounts are deposit accounts held at a
bank or other financial institution that provides principal security and a modest interest rate. Funds on deposit
in a savings account are considered time deposits (rather than demand deposits). These require that account
holders give 30 to 60 days-notice for withdrawals, although this restriction is almost never enforced. Although
savings account deposits are extremely safe, the interest rate paid is only slightly higher than on a checking
account.
A money market deposit account (MMDA) is a deposit account that requires a fairly large initial deposit
to open, and it requires a minimum balance to be maintained, checks must be written for a minimum amount,
and it only allows a limited number of checking transactions per month. Thus they pay slightly higher interest
rates.
The actual peso amount of interest you will earn depends on four variables:
Certificates of Deposit
Some time deposits, such as a certificate of deposit, are classified as a fixed-time deposit. As such,
they have a specific time period that the savings must be left on deposit. Otherwise a penalty is assessed for
early withdrawal. A certificate of deposit (CD) is an interest-earning savings instrument purchased for a fixed
period of time, such as 6 months or 1, 2, or even 5 years. The interest rate in force when the CD is purchased
typically remains fixed for the entire term of the deposit. Depositors collect their principal and interest when the
CD matures. Certificates of deposit are insured similarly to checking and savings accounts.
Variable rate (or adjustable-rate) certificates of deposit pay an interest rate that is adjusted (up or down)
periodically. Typically, savers may pay a fee to be allowed to “lock in,” or fix, the rate at any point before their
CDs mature.
CD might appear to be a low-risk place to hold funds. There is a risk, however, if interest rates in
general go up while your money is in the CD. The risk that is that you have the opportunity cost of not being
able to move your money to an account that is paying the newer higher interest rate. The uncertainty about
changing rates is referred to as interest rate risk, which is the risk that an investment’s value will change due to
a change in the absolute level of interest rates.
● Inflation rate. The BSP’s policy direction to achieve its mandate of maintaining price stability
has a marked influence on the interest rate level. When there is too much liquidity in the
system, there is more pressure for inflation to rise. To curb inflationary pressures arising from
excess liquidity in the system, the BSP will have to increase its key policy rates, i.e.,
overnight borrowing rate or reverse repurchase rate (RRP) and overnight lending rate or
repurchase rate (RP). By increasing its key policy rates, the BSP is sending a signal to the
market that the general level of interest rates will be on an uptrend. In mirroring the
movement of the BSP’s policy rates, the benchmark 91‐day Treasury bill rate also sets the
direction for other rates, specifically, bank lending rates.
● Fiscal policy stance. The fiscal policy stance may also influence the direction of interest
rates. A government that incurs a fiscal deficit needs to finance its existing budgetary
requirements by borrowing from the domestic market or from abroad. The higher is the fiscal
deficit, the stronger the demand to borrow to finance the gap. This exerts upward pressure on
domestic interest rates, particularly if the government borrows from a relatively less liquid
domestic market.
● Intermediation cost. Financial institutions incur costs in extending their services. Interest
rates will tend to be high when intermediation cost is high. Included in the intermediation
costs are administrative costs and the BSP’s reserve requirements.
Other factors that could influence the interest rates include the maturity period of the financial
instrument and the perception of risks associated with the instrument. Those with longer‐term maturity
and with higher probability of incurring loss carry higher interest rates. The lack of intermediation could
also affect interest rate movement. For instance, with their larger holdings of non‐performing assets
(NPAs), banks are more cautious in their lending activities. This would tend to induce an increase in
interest rates.
Interest can be earned in one of two ways. First, some short-term investments are sold on a
discount basis. This means the security is sold for a price that’s lower than its redemption value;
difference between the purchase price and redemption value is the amount of interest earned on the
investment. Treasury bills, for instance, are issued on a discount basis. Another way to earn interest on
short-term investments is by direct payment, which occurs when interest is applied to a regular savings
account. That is, the amount of interest earned is added to the amount invested, so at maturity, you get
your money back plus whatever you earned in interest. Although this is relatively simple process,
determining the actual rate of return can be complicated.
The first complication is in the method used to determine the amount and rate of compound
interest earned annually. Assume that you invest ₱1,000 in a savings account advertised as paying
In our example, because ₱50 was earned during the year on an investment of ₱1,000, the
effective rate is ₱50/₱1,000 or 5% which is the same as the nominal rate of interest.
But suppose you can invest your funds elsewhere at a 5% rate, compounded semiannually.
Because interest is applied to your account at midyear, you’ll earn interest on interest for the last 6
months of the year, thereby increasing the total interest earned for the year. The actual dollar earnings
are determined as follows:
Interest is generated on a larger investment in the second half of the year because the amount
of money on deposit has increased by the amount of money on deposit has increased by the amount of
interest earned in the first half (₱25). Although the nominal rate on this account is still 5%, the effective
rate is 5.06% (₱50.63/₱1,000). As you may have guessed, the more frequently interest is
compounded, the greater the effective rate for any given nominal rate.
Compound interest is the same as the future value concept. You can use the procedures you
have learned from the previous module to find out how much an investment or deposit will grow over
time at a compounded rate of interest. For example, using the future value formula and the future value
factor, you can find out how much ₱1,000 will be worth in 4 years if it’s deposited into a savings
account that pays 5% interest compounded annually:
1. ATM cards. Most checking accounts come with a free debit card. These allow you to make
purchases and withdraw money from automatic teller machines (ATMs), which allow you to
check your balance, withdraw and deposit money, and transfer money between your accounts.
ATM cards are used to make the transactions along with a personal identification number (PIN).
Or you can use your smartphone.
2. Debit cards. A debit card (also known as bank card or check card) is a plastic payment card
that provides the cardholder electronic access to his/her bank account(s) at a financial
institution. The cards deduct money directly from a consumer’s checking account to pay for a
purchase. When you buy something, the cost is electronically deducted (debited) from your
bank account and deposited into the seller’s account. Debit cards also allow you to withdraw
money from your checking account through an ATM or through the cash-back function that
many merchants offer at a point of sale. Debit cards eliminate the need to carry cash or physical
checks to make purchases. In addition, debits cards offer the convenience of credit cards and
they have many of the same consumer protections when issued by major payment processors
like Visa or MasterCard. Debit cards are also called bank cards, ATM cards, cash cards, and
check cards. Debit cards usually have daily purchase limits, meaning it may not be possible to
make an especially large purchase with a debit card.
3. Prepaid cards. Prepaid cards are easy to use and reloadable, and they may be used almost
anywhere to buy online, make bill payments, get cash at ATMs, get direct deposits, and make
everyday purchases. No credit check or bank account is needed as they are only as valuable as
the money put on the card. With prepaid debit cards the money is on deposit with the card
issuer’s computers. These have protections from the Financial Consumer Protection
Department of BSP much like debit cards. Visa and MasterCard dominate.
4. Stored-value cards. A stored-value card is a payment card with a monetary value stored on
the card itself, not in an external account maintained by a financial institution. Debit cards are
usually issued in the name of individual account holders, while stored-value cards are usually
anonymous. An example of a stored-value card is a gift card. Gift card often have activation fee,
expiration date (no shorter than five years), and inactivity fee if there are no transactions within
a year. Cards that can only be used at one retailer are worthless if they go bankrupt.
5. Credit cards. A credit card is a plastic card with imprinted numbers and a magnetic strip,
issued by a bank or business authorizing the holder to use it as a payment instead of a cash to
buy goods or services on credit. The issuer of the card will later collect payment for any
purchases. If payment is made after the grace period, interest will be charged in the account
usually one month after a purchase is made. Borrowing limits are pre-set according to
individual’s credit rating. A credit card is different from a debit card because money is not tied to
or immediately removed from a bank account.
6. Electronic Benefit Transfer (EBT) cards. An electronic system that allows a country’s welfare
department to issue benefits via magnetically encoded payment debit cards. They are used to
access food stamps and cash benefits that can be obtained at EBT participating merchants,
ATM machines, and Point of Sale (POS) terminals. Example: 4Ps cash assistance distribution
Other Bank Services
1. Safe-deposit box – is a rented drawer in a bank’s vault. The rental fee for the boxes vary depending on
their size. When you rent a box, you receive one key to it, and the bank keeps another key. The box
that can be opened only when both keys are used. This arrangement protects items in the box from
theft and serves as an excellent storage place for jewelry, contracts, stock certificates, titles, and other
important documents. Keeping valuables in a safe-deposit box may also reduce your homeowner’s
insurance by eliminating the “riders” that are often needed to cover such items.
Although AMAs are an attractive alternative to a traditional bank account, they do have some
drawbacks. For example, compared with banks, there are fewer “branch” locations. However, AMAs are
typically affiliated with ATM networks, making it easy to withdraw funds. Yet ATM transactions are more costly;
checks can take longer to clear; and some bank services may not be offered. Moreover, AMAs are not covered
by deposit insurance, although these deposits are protected by Securities Investors Protection Fund, Inc.
(SIPF) of the PSE and the firm’s private insurance.
1. Joint tenancy with right of survivorship (also called simply joint tenancy) is the most common form of
joint ownership, especially for husbands and wives. In this case, each person owns the whole of the
asset and can dispose of it without the approval of the other(s). with accounts at financial institutions,
the financial institution will honor checks or withdrawal slips possessing any of the owners’ signatures.
An advantage of a joint account is that in case of death of one of the owners, the property continues to
be owned by the surviving account holder(s).
2. Tenancy in common is a form of joint ownership in which two or more parties own the asset, but each
retains control over a separate piece of the property rights. In most states, the ownership shares are
presumed to be equal unless otherwise specified. When one owner dies, his or her share in the asset is
distributed to his or her heirs according to the terms of a will (or if no will exists, according to the laws of
the country) instead of going to the other co-owners.
Tenancy by the entirety is a type of shared ownership of property recognized in most countries, available only
to married couples. Much like in a joint tenancy, spouses who own property as tenants by the entirety each
own an undivided interest in the property, each has full rights to occupy and use it and has a right of
survivorship. Tenants by the entirety also cannot transfer their interest in the property without the consent of
the other spouse.
Exercise 1.1
Test I. Identification. Identify the following concept by writing your answer on the space provided.
1. _________________ are assets whose values do not fluctuate in dollar terms and that carry an
obligation to deliver a certain amount of currency units. In short, they are static.
2. _________________ refers to a facility in which something is deposited for storage or safeguarding or
an institution that accepts currency deposits from customers such as a bank or a savings association.
3. _________________ are investment companies that raise money by selling shares to the public and
then invest that money in a diversified portfolio of investments.
4. _________________ is the amount a lender charges for the use of assets expressed as a percentage
of the principal.
5. _________________ is an interest-bearing account at a bank or credit union.
6. _________________ is a deposit account held at a financial institution that allows withdrawals and
deposits. Also called demand accounts or transactional accounts.
7. _________________ is a set length of time after the due date during which payment may be made
without penalty.
8. _________________ refers to money that exists in banking computer systems that may be used to
facilitate electronic transactions.
9. _________________ is the real return on a savings account or any interest-paying investment when
the effects of compounding over time are taken into account.
10. _________________ is the Philippine’s central monetary authority.
State the pros and cons of saving in the bank and keeping your money in your house. Write your
answers in the table below.
Exercise 1.2
Direction: Based on your understanding of the PDIC-covered deposit, compute the following items.
Exercise 1.3
Direction: Answer the following problems and show your solutions.
1. Ready Flashlights, Inc. deposited ₱300,000 that would yield an interest income of ₱5,500. What is the
effective interest rate of the deposit?
2. Calculate the simple interest and compound interest of the ₱15,000 deposit with an interest rate of 9%
for three years. What is the amount difference between simple and compound interest?
3. What would be the future value of ₱175,000 invested now if it earns an annual interest at 10% for
seven years?
Future Value Factors:
Future Value of 1 for 7 periods at Future Value of an Ordinary
10% Annuity of 1 for 7 periods at 10%
1.94872 9.48717
II. Discussion
The Concept of Risk
In insurance terms, risk is the chance of economic loss. Whenever you and your family have a financial
interest in something – your life, health, home, car, or business – there’s a risk of financial loss. To protect
against such losses, you must employ strategies such as risk avoidance, risk retention, loss prevention and
control, risk transfer, risk reduction, and risk assumption.
Risk Avoidance
The simplest way to deal with risk is to avoid the act that creates it. For example, people who
are afraid they might lose everything as a result of an automobile accident could avoid driving.
Similarly, avid skydivers or bungee jumpers might want to choose another recreational activity. But risk
avoidance has its costs. People who avoid driving experience considerable inconvenience, and the
retired skydiver may suffer from stress-related health risks. Risk avoidance is attractive when the cost
of avoidance is less than the cost of handling it some other way.
Risk Retention
You either to retain or accept risk. For example, you can use a deductible clause in an
insurance policy to retain an initial portion of the risk. In this way, you pay the first dollars of a loss
before the insurance company will reimburse for a loss.
Loss Prevention is any activity that reduces the chance that a loss will occur (such as driving
within the speed limit to lessen the chance of being in a car accident). Loss control, in contrast, is any
activity that lessens the severity of loss once it occurs (such as wearing a safety belt or buying a car
with air bags). Loss prevention and control should be important parts of all risk management programs.
Risk Transfer
Risk Reduction
Reduce risk to an acceptable level. Insurance is used by policyholders when they arrange for all
or a portion of their risk to be covered by an insurance company, thereby reducing their personal level
of risk.
Risk Assumption
Risk assumption involves bearing the risk of loss. Risk assumption is an effective way to handle
small exposures to loss when insurance is too expensive. For example, the risk of having your PFIN
text stolen probably doesn’t justify buying insurance. It’s also a reasonable approach for dealing with
very large uninsurable risks such as nuclear holocaust. Unfortunately, people assume risks, unaware of
exposures to loss or thinking that their insurance policy offers adequate protection when it doesn’t.
Risk management is the process of identifying and evaluating situations involving pure risk to determine
and implement the appropriate means for its management. Risk management involves making the most
efficient arrangements before a loss occurs. Risk management usually requires the purchase of insurance,
although insurance is only one of the ways to handle risk, and it is not always the best choice.
Step 1: Identify your Step 2: Estimate Step 3: Choose How Step 4: Implement Step 5: Evaluate and
risk exposures Your Risk and to Handle Your Risk Your Management Adjust Your
Potential Losses Loss Plan Program
Sources of risk are
called exposures and Next you estimate The risk of loss may The next step is to This involves
these include the loss frequency and be handled in implement the risk- periodic review of
items you own and severity. Frequency multiple ways as handling methods your risk
the activities in of loss is the likely discussed in the you have chosen. management efforts.
which you engage number of times previous page. Each People often wonder The risks people face
that expose you to that a loss might strategy may be what types of in their lives change
potential financial occur over a period appropriate for insurance to buy and continually.
loss. of time. Severity of certain how much coverage Therefore, no risk
loss describes the circumstances, and they should have. management plan
potential magnitude the mix that you You should use the should be put in
of a loss. choose will depend maximum possible place and then
on the source of the loss as a guide for ignored for long
risk, the size of the peso amount of periods of time.
potential loss, your coverage to
personal feelings purchase.
about risk, and the
financial resources
you have available
to pay for the losses.
Insurance
An insurance policy is a contract between you (the insured) and an insurance company (the insurer)
under which the insurance company agrees to reimburse you for any losses you suffer according to specified
terms. From your perspective, you are transferring your risk of loss to the insurance company. You pay a
relatively small certain amount (the insurance premium) in exchange for a promise from the insurance
company that it till reimburse you if you suffer a covered loss.
Why are insurance companies willing to accept risk? They combine the loss experiences of large
numbers of people and use statistical information, called actuarial data, to estimate the risk – frequency and
magnitude – of loss for the given population. They set and collect premiums, which they invest and use to pay
out losses and expenses. If they pay out less than the sum of the premiums and the earnings on them, they
make a profit.
HEALTH INSURANCE
The next best thing to good health is a good health insurance plan. In recent years, the price of medical
treatment has risen dramatically. The cost of a major illness can easily total tens or hundreds or even millions
of pesos in expense due to hospital, medical care, and loss of income. Health insurance helps you pay both
routine and major medical care costs.
Health insurance coverage can be obtained from (1) private sources and (2) government-sponsored
programs. In 2018, total health expenditures (THE) grew by 8.3% amounting to ₱ 799.1 billion from ₱ 737.8
billion in 2017. It contributed 4.6% to the Gross Domestic Product or GDP of the country. The household
Private companies sell a variety of health insurance plans to both groups and individuals. Group health
insurance is a contract written between a group (such as an employer, union, credit union, or other
organization) and the health care provided: a private insurance company (such as Sun Life of Canada-
Philippines, Pru Life Insurance Corp. of UK, Philippine AXA Life Insurance, Corp. etc.) or a managed care
organization. Most private health insurance plans fall into one of two categories: traditional indemnity (fee-for-
service) plans and managed care plans, which include health maintenance organizations (HMOs), preferred
provider organizations (PPOs), and similar plans. Both categories of plans cover, in somewhat different ways,
the medical care costs arising from illness or accidents. The table below compares the differences among the
three most common types of health plans.
Choices of
Out-of-Pocket Annual
Type Service Premium Cost
Costs Deductible
Providers
Low if high- Usually 20% of
deductible plan; medical
Indemnity Yes Yes
high if low- expenses plus
deductible plan deductible
Health
Maintenance
No Low Low co-pay No
Organization
(HMO)
Low if using
Preferred network
Provider Higher than providers, higher
Some No
Organization HMO if provider is
(PPO) outside the
network
Table 1. How the Most Common Types of Health Plans Compare
In addition to health insurance coverage provided by private sources, government agencies (such as
Philippine Health Insurance Corporation) provide health care coverage to eligible individuals. The Philippine
government has enacted the Universal Health Care Act or Republic Act No. 11223 that automatically enrolls all
Filipino citizens in the National Health Insurance Program and prescribes complementary reforms in the health
system.
To evaluate different insurance plan options you should compare and contrast what they cover and how
each plan’s policy provisions may affect you and your family. By doing so, you can decide which health plan
offers the best protection at the most reasonable cost.
1. Hospitalization insurance policy – reimburse you for the cost of your hospital stay. Hospitalization
policies usually pay for a portion of: (1) hospital’s daily semiprivate room rate, which typically includes
meals, nursing care, and other routine services and (2) the cost of ancillary services such as laboratory
tests, imaging, and medications you receive while hospitalized. Many hospitalization plans also cover
some outpatient and out-of-hospital services once you’re discharged, such as in-home rehabilitation,
diagnostic treatment, and preadmission testing. Some hospitalization plans merely pay a flat daily
amount for each days of hospitalization and a maximum peso amount on ancillary services that they
will reimburse.
2. Surgical Expense insurance – covers the cost of surgery in or out of hospital. Usually, surgical expense
coverage is provided as part of hospitalization insurance policy or as a rider to such a policy. Most
● Accident policies that pay a specified sum to an insured injured in a certain type of accident.
● Sickness policies, sometimes called dread disaster policies, that pay a specified sum for a named
disease, such as cancer.
● Hospital income policies that guarantee a specific daily, weekly, or monthly amount as long as the
insured is hospitalized.
Remember that sound insurance planning seldom dictates the purchase of such policies. The cost of
purchasing these insurance options typically outweighs the limited coverage they provide. Accident and
sickness policies, for example, usually cover only one type of accident or illness, and hospital income policies
generally exclude illnesses that could result in extended hospitalization and health conditions existing at the
time of purchase.
The problem with buying policies that cover only a certain type of accident, illness, or financial need is
that major gaps in coverage will often occur. Financial loss can be just as great regardless of whether the
insured falls down a flight of stairs or contracts cancer, lung disease, or heart disease. Most limited-peril
policies should be used only to supplement a comprehensive insurance program if the coverage is not
overlapping.
Social Security System in the Philippines offer disability benefits but there are some conditions that
should be met before one can avail those benefits. Like for example, only the totally and permanently disabled
members are entitled to the lifetime monthly pension however this pension ceases the moment the pensioner
recovers from such disability, resumes employment, or fails to report for annual physical examination when
notified by SSS.
The need for disability income coverage is great. Although most workers receive some disability
insurance benefits from their employer, in many cases, the group plan falls short and pays only about 60% of
salary for a limited period. The first step in considering disability income insurance is to determine the peso
amount your family would need (typically monthly) if an earner becomes disabled. Then you can buy the
coverage you need or supplement existing coverage if necessary.
The scope and cost of your disability income coverage depend on its contractual provisions. Although
disability income insurance policies can be complex, certain features are important: (1) definition of disability,
(2) benefit amount and duration, (3) probationary period, (4) waiting period, (5) renewability, and (6) other
provisions.
Definition of disability
Disability policies vary in the standards you must meet to receive benefits. Some pay benefits if
you’re unable to perform the duties of your customary occupation – the own occupation definition –
whereas others pay only if you can engage in no gainful employment at all – the any occupation
definition. Under the “Own occupation” definition, a professor who lost his voice – yet could still be paid
to write or do research – would receive full benefits because he couldn’t lecture, a primary function of
his occupation. With a residual benefit option, you would be paid partial benefits if you can only work
part-time or at a lower salary. The “Any occupation” definition is considerably less expensive because it
gives the insurer more leeway in determining whether the insured should receive benefits.
Most individual disability income policies pay a flat monthly benefit, which is stated in the policy,
whereas group plans pay a fixed percentage of gross income. In either case, insurers normally won’t
agree to amounts of more than 60% to 70% of the insured’s gross income. Insurers won’t issue policies
for the full amount of gross income because this would give some people an incentive to fake a
disability (for example, “bad back”) and collect more in insurance benefits than they normally would
receive as take-home pay.
Monthly benefits can be paid for a few months or a lifetime. If you’re ensured a substantial
pension, Social Security System, or other benefits at retirement, then a policy that pays benefits until
age 65 is adequate. Most people, however, will need to continue their occupations for many more years
and should consider a policy offering lifetime benefits. Many policies offer benefits for periods as short
as 2 or 5 years. Although these policies may be better than nothing, they don’t protect against the major
financial losses associated with long-term disabilities.
Probationary Period
Both group and individual disability income policies are likely to include a probationary period,
usually 7 to 30 days, which is a time delay from the date the policy is issued until benefit privileges are
available. Any disability stemming from an illness, injury, or disease that occurs during the probationary
period is not covered – even if it continues beyond this period. This feature keeps costs down.
The waiting, or elimination, period provisions in a disability income policy are similar to those
discussed for long-term care insurance. Typical waiting periods range from 30 days to 1 year. If you
have an adequate emergency fund to provide family income during the early months of disability, you
can choose a longer waiting period and substantially reduce your premiums.
Renewability
Other Provisions
The purchasing power of income from a long-term, disability policy that pays, say ₱10,000 per
month could severely be affected by inflation. In fact, a 3% inflation rate would reduce the purchasing
power of this ₱10,000 benefit to less than ₱7,500 in 10 years. To counteract such a reduction, many
insurers offer a cost-of-living adjustment (COLA). With a COLA provision, the monthly benefit is
adjusted upward each year, often in line with the CPI, although these annual adjustments are often
capped at a given rate (say, 8%). Although some financial advisors suggest buying COLA riders, others
feel the 10% to 25% additional premium is too much to pay given for it.
Although COLA provision applies only once the insured is disabled, the guaranteed insurability
option (GIO) can allow you to purchase additional disability income insurance in line with inflation
increases while you are still healthy. Under the GIO, the price of this additional insurance is fixed at the
contract’s inception, and you don’t have to prove insurability.
A waiver of premium is standard in disability income policies. If you’re disabled for a minimum
period, normally 60 or 90 days, then the insurer will waive any future premiums that come due while
you remain disabled. In essence, the waiver of premium gives you additional disability income
insurance in the amount of your regular premium payment.
Remember that disability income insurance is just one part of your overall personal financial
plan. You’ll need to find your own balance between cost and coverage.
HOME INSURANCE
The homeowner’s policy offers property protection, accompanying structures, and personal property of
homeowners and their families. Coverage for certain types of loss also applies to lawns, trees, plants, and
shrubs. However, the policy excludes structures on the premises used for business purposes (except
incidentally), animals (pets or otherwise), and motorized vehicles not used in maintaining the premises (such
as autos, motorcycles, golf carts, or snowmobiles). Business inventory (for example, good held by an insured
who is a traveling salesperson, or other goods held for sale) is not covered. Although the policy doesn’t cover
business inventory, it does not cover business property (such as books, computers, copiers, office furniture,
and supplies), while it is on the insured premises.
Several influences have an impact on premiums for home and property insurance.
● Type of structure. The construction materials used, the style, or age of your home affect the cost of
insuring it. For example, a home built from brick costs less to insure than a similar home of wood, yet
Homeowner’s policies define the types of losses they cover and the person and locations covered.
Homeowner’s insurance contracts offer compensation for each type of loss. There are three
types of property-related losses when misfortune occurs:
A homeowner’s policy covers the persons named in the policy and members of their families
who are residents of the household. A person, such as a college student, can be a resident of the
household even while temporarily living away from home. The college student’s parents’ homeowner’s
policy may cover their belongings at school – including such items as stereo equipment, TVs, personal
computers, and microwave ovens, but there could be limits and exceptions to the coverage. The
standard homeowner’s contract also extends limited coverage to guests of the insured.
Locations Covered
Most homeowner’s policies offer coverage worldwide. For example, an insured’s personal
property is fully covered when lent to the next-door neighbor or kept in a hotel room in Malaysia. The
only exception is property left at a second home where coverage is reduced unless the loss occurs
while the insured is residing here.
Limitations on Payment
Other factors that influence the amount an insurance company will pay for a loss include replacement
cost provisions, policy limits, and deductibles.
Replacement Cost
The amount necessary to repair, rebuild, or replace an asset at today’s prices is the
replacement cost. When replacement cost coverage is in effect, a homeowner’s reimbursement for
damage to a house or accompanying structures is based on the cost of repairing or replacing those
structures, without taking any deductions for depreciation.
However, for homeowners to be eligible for reimbursement on a full replacement cost basis,
they must keep their homes insured for at least 80% of the amount it would cost to build them today,
not including the value of the land. Because inflation could cause coverage to fall below the 80%
requirement, at a small cost, homeowners can purchase an inflation protection rider that automatically
adjusts the amount of coverage based on prevailing inflation rates. Without the rider, maximum
compensation for losses would thus be based on a specified percentage of loss.
Deductibles
Each of the preceding limits on recovery constrains the maximum amount an insurance
company must pay under the policy. Deductibles, which limit what a company must pay for small
Homeowner’s Premiums
As you might expect, the size of insurance premiums varies widely depending on the insurance
provider (company) and the location of the property (neighborhood/city/state). It pays to shop around! When
you’re shopping, be sure to clearly state the type of insurance you’re looking for and to obtain and compare the
cost, net of any discounts, offered by a number of agents or insurance companies. Remember, each type of
property damage coverage can be subject to a deductible that would cost more.
Most people need to modify the basic package of coverage by adding an inflation rider and increasing
the coverage on their homes to 100% of the replacement cost. Changing the contents protection from actual
cash value to replacement cost and scheduling some items of expensive personal property may be desirable.
Most insurance professionals also advise homeowners to increase their liability and medical payments limits.
Each of these changes results in an additional premium charge.
And to reduce your total premium, you can increase the amount of your deductibles. Because it’s better
to budget for small losses than to insure against them, larger deductibles are a popular strategy. You may also
qualify for discounts for deadbolt locks, monitored security systems, and other safety features such as smoke
alarms and sprinkler systems. Indeed, there are a number of steps you can take to keep your homeowner’s
insurance affordable.
AUTOMOBILE INSURANCE
Automobiles also involve risk because damage to them or negligence in their use result in significant
loss. Fortunately, insurance can protect individuals against a big part of these costs. Automobile insurance
includes several types of coverage packaged together. Here we begin by describing the major features of a
private passenger automobile policy.
The personal automobile policy (PAP) is a comprehensive automobile insurance policy designed to be
easily understood by the “typical” insurance purchaser. Made up of six parts, the policy’s first four parts identify
the coverage provided.
Most countries require you to buy at least a minimum amount of liability insurance. Under the
typical PAP, the insurer agrees to:
1. Pay damages for bodily injury and/or property damage for which you are legally responsible as
a result of an automobile accident.
2. Settle or defend any claim or suit asking for such damages.
The provision for legal defense is important and could save thousands of dollars, even if you’re
not at fault in an automobile accident. Note, the policy doesn’t cover defense of criminal charges
against the insured due to an accident (such as drunk driver who’s involved in an accident). Part A also
provides for certain supplemental payments (not restricted by the applicable policy limits) for expenses
Persons insured. Two basic definitions in the PAP determine who is covered under Part A:
insured person and covered auto. Essentially, an insured person includes you (the name insured) and
any family member, any person using a covered auto, and any person or organization that may be held
responsible for your actions. The named insured is the person named in the declarations page of the
policy. The spouse of the person named is considered a named insured if he or she resides in the
same household. Family members are persons related by blood, marriage, or adoption and residing in
the same household. An unmarried college student living away from home usually is considered a
family member. Covered autos are the vehicles shown in the declarations page of your PAP, autos
acquired during the policy period, any trailer owned, and any auto or trailer used as a temporary
substitute while your auto or trailer is being repaired or serviced. An automobile that you lease for an
extended time can be included as a covered automobile.
The named insured and family members have part A liability coverage regardless of the
automobile they are driving. However, for persons other than the named insured and family members to
have liability coverage, they must be driving a covered auto.
Medical payments coverage insured a covered individual for reasonable and necessary medical
expenses incurred within 3 years of an automobile accident in an amount not to exceed the policy
limits. It provides for reimbursement even if other sources of recovery, such as health or accident
insurance, also make payments. What’s more, in most cases, the insurer reimburses the insured for
medical payments even if the insured proves that another person was negligent in the accident and
receives compensation from that party’s liability insurer.
A person need not be occupying an automobile when the accidental injury occurs to be eligible
for benefits. Injuries sustained as a pedestrian, or on bicycle in a traffic accident, are also covered.
(motorcycle accidents are not normally covered.)
Persons insured. Coverage under an automobile medical payments insurance policy applies to
the named insured and to family members who are injured while occupying an automobile (whether
owns buy the named insured or not) or when struck by an automobile or trailer of any type. Part B also
applies to any other person occupying a covered automobile.
Uninsured motorists coverage is available to meet the needs of “innocent” victims of accidents
who are negligently injured by uninsured, underinsured, or hit-and-run motorists. Nearly all countries
require uninsured motorists insurance to be included in each liability insurance policy issued, but the
coverage can be rejected in most of these countries. Rejecting uninsured motorists coverage is not a
good idea. Under uninsured motorists coverage, an insured is legally entitles to collect an amount equal
to the sum that could have been collected from the negligent motorist’s liability insurance, had such
coverage been available, up to a maximum amount equal to the policy’s stated uninsured motorists
limit.
Three points must be proven to receive payment through uninsured motorists insurance: (1)
another motorist must be at fault, (2) the motorist has no available insurance or is underinsured, and (3)
damages were incurred. With uninsured motorists coverage, you can generally collect only for losses
arising from bodily injury.
Persons insured. Uninsured motorists protection covers the named insured, family members,
and any other person occupying a covered auto.
This part of the PAP provides coverage for damage to your auto. The two basic types of
coverage are collision and comprehensive (or “other than collision”).
Collision insurance is an automobile insurance that pays for collision damage to an insured
automobile regardless of who is at fault. The amount of insurance payable is the actual cash value of
the loss in excess of your deductible. Remember that actual cash value is defined as replacement cost
less depreciation. So, if a car is demolished, the insured is paid an amount equal to the car’s
depreciated value minus any deductible.
Protects against loss to an insured automobile caused by any peril (with a few exceptions) other than
collision. The maximum compensation provided under this coverage is the actual cash value of the automobile.
Coverage includes, but not limited to, damage caused by fire, theft, glass breakage, falling objects, malicious
mischief, vandalism, riot, and earthquake. The automobile insurance policy normally does not cover theft of
personal property left in the insured vehicle, but rather it may be covered by the off-premises coverage of the
homeowner’s policy if the auto was locked when the theft occurred.
No-Fault Automobile Insurance is a system under which each insured party is compensated by his or
her own company, regardless of which party caused the accident. In return, legal remedies and payments for
pain and suffering are restricted. Under the concept of pure no-fault insurance, the driver passengers, and
injured pedestrians are reimbursed by the insurer of the car for economic losses stemming from bodily injury.
The insurer doesn’t have to cover claims for losses to other motorists who are covered by their own policies.
The cost of car insurance depends on many things, including your age, where you live, the car you
drive, your driving record, the coverage you have, and the amount of your deductible. Consequently, car
insurance premiums – even for the same coverage – vary all over the map.
Factors that influence how auto insurance premiums are set include (1) rating territory, (2)
amount of use the automobile receives, (3) personal characteristics of the driver, (4) type of automobile,
and (5) insured’s driving record.
● Rating Territory. Rates are higher in geographic areas where accident rates, number of
claims filed, and average cost of claims paid are higher. Rates reflect auto repair costs,
hospital and medical expenses, jury awards, and theft and vandalism in the area. Even
someone with a perfect driving record will be charged the going rate for the area where the
automobile is garaged. Some jurisdictions prohibit the use of rating territories, age, and sex
factors because they believe these factors unfairly discriminate against the urban, the
young, and the male.
● Use of the automobile. Rates are also lower if the insured automobile isn’t usually driven to
work or is driven less than 3 miles one way. Premiums rise slightly if you drive more than 3
but fewer than 15 miles to work and increase if your commute exceeds 15 miles away.
● Driver’s personal characteristics. The insured’s age, sex, and marital status can also
affect automobile insurance premiums. Insurance companies base the premium differentials
on the number of accidents involving certain age groups.
LIFE INSURANCE
As most people discover, life is full of unexpected events than can have far-reaching consequences.
Your car is sideswiped on the highway and damaged beyond repair. A family member falls ill and can no
longer work. A fire or other disaster destroys your home. Your spouse dies suddenly. Although most people
don’t like to think about possibilities like this, protecting yourself and your family against unforeseen events is
part of sound financial planning. Insurance plays a central role in providing that protection. Life insurance helps
replace lost income if premature death occurs, providing funds so that your loved ones can keep their home,
maintain an acceptable lifestyle, pay for education, and meet other special needs. Health insurance covers
medical costs when you get sick or become disabled. Property insurance, for example, reimburses you if your
car or home are destroyed or damaged.
All of these types of insurance are intended to protect you and your dependents from the financial
consequences of losing assets or income when an accident, illness, or death occurs. By anticipating potential
risks to which your assets and income could be exposed and by weaving insurance protection into your
financial plan, you lend a degree of certainty to your financial future.
Life insurance planning is an important part of every successful financial plan. Its primary purpose is to
protect your dependents from financial loss in the event of your untimely death. Life insurance protects the
assets you’ve accumulated during your life and provides funds to help your family reach important financial
goals, even after you die.
People don’t like to talk about death or the things associated with it, so they often delay
addressing their life insurance needs. Life insurance is intangible and its benefits typically occur after
you die. The key benefits of life insurance include the following:
● Financial protection for dependents. The most important benefit of life insurance is
providing financial protection for your dependents after your death.
● Protection from creditors. A life insurance policy can be structured so that death benefits are
paid directly to a named beneficiary, so that creditors cannot claim, the cash benefits from your
life insurance policy.
● Tax benefits. Life insurance proceeds paid to your heirs, as a rule, are not subject to income
taxes, and under certain circumstances can pass to named beneficiaries free of any estate
taxes.
● Vehicle for savings. Some types of life insurance policies can serve as a savings vehicle,
particularly for those who are looking for safety principal.
The three major types of policies account for 90% to 95% of life insurance sales: term life, whole life,
and universal life.
1. Term Life Insurance – provides a specified amount of insurance protection for a set period, is the
simplest type of insurance policy. If you die while the policy is in force, your beneficiaries will receive
the full amount specified in your policy. Term insurance can be bought for many different time
increments, such as 5 years, 10 years, even 30 years. Premiums can be typically annually,
semiannually, or quarterly.
Types of Term Insurance
a. Straight term – is written for a set number of years during which the amount of coverage
remains unchanged. The annual premium on a straight term policy can increase each year on
an annual renewable term policy or remain level throughout the policy period on a level
premium term policy.
b. Decreasing term – the amount of protection decreases over its life. Decreasing term is used
when the amount of needed coverage declines over time. This policy maintains a level premium
throughout all periods of coverage while the amount of protection decreases.
2. Whole Life Insurance – provides permanent insurance coverage during an individual’s entire life. In
addition to death protection, whole life insurance has a savings feature, called cash value, that results
from the investment earnings on paid-in insurance premiums. Thus, whole life provides not only
insurance coverage but also a modest return on your investment. The savings rates on whole life
policies are normally fixed and guaranteed to be more than a certain rate.
If a policy holder cancels his contract prior to death, then that portion of the assets set aside to
provide payment for the death claim is available to him. This right to a cash value is termed the
policyholder’s non-forfeiture right. By terminating their insurance contracts, policyholders forfeit their
rights to death benefits.
a. Continuous Premium – commonly called straight life, under this policy, individuals pay a level
premium each year until they either fie or exercise a non-forfeiture right. The earlier in life the
coverage is purchased, the lower the annual premium. Whole life should seldom be purchased
by anyone simply because the annual premium will be lower now than if it’s purchased later. Of
the various whole life policies available, continuous premium/straight life offers the greatest
amount of permanent death protection and the least amount of savings per premium peso.
b. Limited Payment – covers your entire life but the premium payment is based on a specified
period – for example, 20 or 30 years during which you pay a level premium. For stipulated age
3. Universal Life Insurance – is permanent cash-value insurance that combines term insurance, which
provides death benefits, with a tax-sheltered savings/investment account that pays interest, usually at a
competitive money market tests. The death protection (or pure insurance) portion and the savings
portion are identified separately in its premium. This is referred to as unbundling.
With universal life, part of your premium pays administrative fees, and the remainder is put into the
cash-value (savings) portion of the policy, where it earns a certain rate of return. This rate of earnings
varies with market yields but is guaranteed to be more than some stipulated minimum rate. Universal
life policies enjoy the same favorable tax treatment as do other forms of whole life insurance: death
benefits are tax free and, prior to the insured’s death, amounts credited to the cash value (including
investment earnings) accumulate on a tax-deferred basis. The insurance company sends the insured
an annual statement summarizing the monthly credits of interest and deductions of expenses.
References:
Bangko Sentral ng Pilipinas. (2020). Interest Rates [PDF file]. Manila: Department of Economic
Research/Department of Economic Statistics. Retrieved from
http://www.bsp.gov.ph/downloads/Publications/FAQs/intrates.pdf
Gitman, L. J., Joehnk, M. D., & Billingsley, R. (2012). Personal finance. Cengage Learning Asia Pte Ltd.
Philippine Deposit Insurance Corporation. (n.d.) Understanding Deposit Insurance [PDF file]. Makati City:
Author. Retrieved from http://www.pdic.gov.ph/files/Deposit%20InsuranceBrochure_Final.pdf
Philippine Statistics Authority. (2019, October 17). Total health expenditures grew by 8.3 percent in 2018.
Retrieved from https://psa.gov.ph/pnha-press-release/node/144466
Pineda, A. (2020, September 8). How to get a life insurance: top 10 life insurance companies in the philippines.
Retrieved from https://grit.ph/life-insurance/#:~:text=In%202018%2C%20the%20percentage%20of,to
%20have%20life%20insurance%20coverage.
What is the Philippine Deposit Insurance Corporation (PDIC)? (n.d.). Retrieved from
http://www.pdic.gov.ph/faqs-1
World Health Organization. (2019, March 14). UHC act in the philippines: a new dawn for health care.
Retrieved from https://www.who.int/philippines/news/feature-stories/detail/uhc-act-in-the-philippines-a-
new-dawn-for-health-care
Exercise 2.1
Test I. Identification. Identify the following concept by writing your answer on the space provided.
1. _________________ is an amount paid periodically to the insurer by the insured for covering his risk.
2. _________________ is a written document that details the organization’s risk management process.
3. _________________ is the risk that a borrower will be unable to pay the contractual interest or
principal on its debt obligations.
4. _________________ is a person who is eligible to be covered by you under these plans
5. _________________ is the chance or probability that a person will be harmed or experience an
adverse health effect if exposed to a hazard.
6. _________________ is a specific amount you must spend each year (or per occurrence) before your
insurance policy starts to pay some or all of the costs.
7. _________________ is the risk that an investment's value will change due to a change in the absolute
level of interest rates, the spread between two rates, in the shape of the yield curve, or in any other
interest rate relationship.
8. _________________ is the time before an insurance policy can effectively cover a risk.
9. _________________ is the process of making and carrying out decisions that will minimize the adverse
effects of risk on an organization or an individual.
10. _________________ is a contract, represented by a policy, in which an individual or entity receives
financial protection or reimbursement against losses from an insurance company.
11. _________________ is the maximum amount an insurer will pay under a policy for a covered loss.
12. _________________ is the amount of risk or liability that is covered for an individual or entity by way of
insurance services.
13. _________________ is a fee associated with certain types of life insurance, such as variable and
universal life insurance.
14. _________________ a professional who compiles and analyzes statistics and uses them to calculate
insurance risks and premiums.
15. _________________ is a risk associated with an investor’s ability to transact their investment for cash.
B. Give examples of types of insurance other than what is mentioned in this lesson.
1. ________________________________________________
2. ________________________________________________
3. ________________________________________________
4. ________________________________________________
Exercise 2.2
Directions: Interview you parents about the insurance that they own (whether they acquired in from the
government or from private insurance providers). Write on the space provided below on how insurance helped
them in times of need.
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