Professional Documents
Culture Documents
Chapter 9
LO 1: Life insurance, its purpose and principle
Life insurance: a contract (policy), stating that a company promises to pay a lump sum to beneficiary at the time
of insured's death or sometime while they are still alive, for exchange of a regular premium payment. Purpose: to
protect a financial dependent in case policyholder dies. Money used for: 1. charitable bequests. 2. retirement
income. 3. education/income for children/survivors. 4. set up estate plan. 5. pay off mortgage/debts. 6. estate &
death payments. Principle: mortality table --> odds of dying --> base premium on that; factors include: age, sex,
other risk factors.
LO 2: Life insurance needs
Need? Do I have financial dependents (children, spouse)? Objectives: how much to leave financial dependents if I
die? How much retirement income? How much can I pay for insurance program. Income Replacement Method =
(current income * 7) * 0.7. “Family Need” Mehtod: detailed assessment of insurance need based on each family.
LO 3: Two types of life insurance policies & various types of life insurance
Term Life Insurance: protection for specific period of time (ex. 10 – 20 yrs); stop premium payment = no
coverage. Some options: 1. renewability option: renew insurance plan without a physical. 2. Conversion
option: change from term --> whole-life plan, no physical, higher premium. 3. decreasing term insurance:
premium stays level, but coverage amount decreases with age.
Permanent Life Insurance: covers life-long needs, comes in various types. 1. Whole Life Policy: pay flat
premium as long as you live, amount depends on age when policy start; death benefits, accumulates cash value;
borrow against cash value/draw it out at retirement; look carefully at rate of return of my money. Different options:
Limited payment: pay premium for a period of time and be insured for life; Participating: life insurance that
provides policy dividends; changes over time according to different factors. Non-participating policy: life
insurance that does NOT provide policy dividends; flat premium rate throughout. 2. Universal Life Policy:
combination of term insurance & investment elements; good for tax-exemption purpose when RRSP sufficient;
variable premium amount; interest, garanteed over a specific amount, on cash value; set/market interest rate;
death benefits. 3. Variable Life Policy: life insurance + other investment instruments in the same portfolio; return
depends on performance of investments.
Other Types: 1. Group life insurance: term-insurances provided by employer; cost split between
employer/employee. 2. Edowment life insurance: pays lump sum after maturity or early death. Credit life
insurance: insurances lives of a group of borrower; pays off debt if the borrowers die; protects lender.
LO 4: Important provisions in life insurance contracts – things to understand
1. beneficiary properly named. 2. grace period for late payment. 3. reinstatement of mature policy that has
not been cashed. 4. Non-forfeiture clause: if policy forfeited, accumulated cash value still usable. 5.
incontestability clause: after a period of time, insurance company cannot dispute/contest against validity of
policy claim. 6. suicide clause: in first two years, suiside = fash value. 7. automatic premium loan: uses policy
cash value to pay overdue premium. 8. misstatement of age. 9. policy loan provision: borrow against policy
cash value. 10. rider: modifications of the policy ( waiver of premium disablity benefit, accidental death benefit –
double benefit, guaranteed insuranbility option, critical illness, joint, last to die.
LO 5: Buying Life Insurance
− consider present/future income, savings, other insurances, government benefits
− determine whom to buy from (private/public, company rating, agent/direct insurer/broker?)
− compare policy costs (affected by: company operation cost, investment return, policyholder mortality rate,
policy features, competitions amongst companies)
− use interest-adjustd index: considers time value of money; lower the index the lower the cost
− Method of payment: lump-sum, limited instalment (equal payments for specific number of years after
death), life income option (payment to beneficiary for life), proceeds left with the company (pays
beneficiary interests)
LO 6: Health Insurance
− basic medical procesures provincially insured
− additional coverage required: semi-private/private hospital rooms, prescription drugs, vision, dental care
− types of supplemental health insurance:
− Group: 60% are this type; employer sponsored, covers employee & immediate faily, seldom requires
medical examinations
− Individual: covers one person/family; can be tailored to particular needs
LO 7: Need for disability income insurance
− disability income insurance: provides payments to replace income when insured is disabled
− protects your ability to earn an income
− disability: inability to perform one's regular work or any job
− components of diability income insurance: 1. waiting/elimination period (shorter the wait, higher the
premium). 2. duration of benefits. 3. amount of benefits. 4. accident/sickness coverage (get both). 5.
guaranteed renewability (in case one's health gets bad, can still get renewal)
− Sources of disability income: 1. employer. 2. Private. 3. Public (employment insurance, pension plans,
worker's compensations, short/long term welfare)
− My need for disability insurance: 1. determine public/private benefits. 2. 70-80% of after-tax income. 3.
waiting/benefit periods
Critical Illness Insurance: paid for being diagnosed with serious illnesses (Cancer, heart diseases, storke, etc.);
pays for treatments while alive; tax-free lump sum w/in 30 days after diagnosis; pay off other debts/take time off
work; waiver of premium; premium refund upon death
LO 8: the value of supplement health/disability insurance
− long term care insurance: provides day in/out care for long-term illness/disabilities
Chapter 10 (www.moneysense.ca)
LO 1: Why establish an investment program?
− financial goals: should be specific, measurable, & tailored to particular financial needs
− financial checkup: 1. save & balance budget. 2. adequate insurance protection. 3. an emergency fund for quick
access (3 – 6 months of living expenses). 4. access to other cash sources for emergenies.
− To get the start-up fund: 1. pay bills, save some, spend some. 2. elective savings program. 3. employer-
sponored retirement programs. 4. extra savings for one to two months a year. 4. use gifts, inheritances, and
windfalls.
LO 2: How safety, risk, income, growth, & liquidity affect investment decisions
Safety & Risk: potential return should be proportional to risk investors assume
− Safety: minimal risk of loss; risk tolerance: amount of psychological pain tolerable from investments
Safety investments: 1. savings accounts. 2. Canada savings bonds. 3. canadian T-Bills. 4. Guaranteed
Investment Certificate (GICs). Other investments with higher returns but riskier: 1. Government and corporate
bond. 2. Utility stocks. 3. Preferred and select common stocks. 4. mutual funds. 5. real estate/rental property.
− Speculative risk: high risk investment in hope of high profit in short time
Risk Factor components: 1. business risk. 2. inflation risk. 3. economic interest rate risk. 4. market
value risk. 5. global investment risk.
− either invest for income or for value growth. Income: stocks pay dividend. Value growth: companies retain
earning for reinvestments; no immediate income, but investments grow.
− liquidity: ability to buy/sell an investment quickly without substantially affecting investment's value
LO 3: Major types of investment alternatives
1. Stock: provides corporations with equity capital (business capital obtained from owners & shareholders). Two
things to consider when buying stocks: 1. buy/sell with other shareholders; corporations do NOT need to buy
back the shares. 2. corporations have freedom over whether to pay dividend or not.
2. Corporate & government bonds: written pledge by corporate/government to repay a specific sum of money;
a loan to corporate/government. Periodic interests to bondholders; principal repaid at maturity; bondholders can
keep bond until maturity or sell to others.
3. Mutual funds: an investment where people pool money together to
buy stocks, bonds, other securties selected by professional managers
of an investment company; buy shares in the fund; diversified
investment = reduced risk; from conservative to speculative; match
my needs with fund's objective
4. segregated funds: buy insurance, and the fund is invested in
underlying mutual funds
5. real estate: page 292-293.
Factors affecting investment choices
− diversification: spread assets among different types of
investmetents to lessen risk
− goals & how to attain them; evaluate BOTH risks & returns
Chapter 11
LO 1: Common Stocks
Index: statistical measure of changes in a portfolio of stocks, which represents a portion of the overall market. Ex.
S&P/TSX Composite Index (Canadian-based), Dow Jones Industrial Average (30 sig. Stocks in NY Stock
Exchange), NYSE Composite Index (all stocks in NYSE), NASDAP Composite Index (NASDAQ stock market),
Standard & Poor's 500 stock index (World).
Why companies issue Common stocks? 1. raise money for company expension (Equity: difference between
market value and claimed value); don't need to pay back. 2. Dividend optional – depends on company. Stock split
Why consumers buy common stocks? 1. right to vote at shareholder's meeting, in person or proxy (legal form that
list issues of discussion and transfer of voting rights to others). 2. pre-emptive right (the right of current holder to
purchase new stocks from the cooperation before it is issued). 3. divident income; be aware of ex-divident (2 days
before record date).
LO 2: Preferred Stocks (preference on dividend and asset distributes over common stock holders)
Advantages over common stocks: 1. order of dividend paying: preferred --> common. (Dividend amount either a
stated amount or a par value [assigned value on the stock certificate]) 2. first claim on asset. 3. callable
(exchanged for specific amount of money; ex. Buy preferred stock with 6% dividend --> interest rate decrease -->
callables allow replacement with stocks of 4.5% interest rates.) Special features: 1. cumulative dividend
(unpaid/omited dividend accumulate and repaid before common share holders are paid). 2. participation feature
(rare; share dividend beyong the stated value with common holders). 3. conversion (change for common).
Unlike bonds, common/preferred stocks do NOT need to be repaid by corporations.
LO 3: Stock Evaluation & Investment --> know this section well. 8 types
Blue chip stock: safe investment (look for leadership, history of stable earning, consistently paying dividends).
Income stock: pays high-than-average dividend (ex. Utility stock). Growth stock: potential to earn above-
average profits (look for expanding product line of quality merchandise, effective research/development
department). Penny Stocks: sell for < 1$ by new companies, drastic fluctuation in price, high risk. Cyclical stock:
follows business cycle of economic advances & declines. Defensive stock: remains stable during economic
declines (ex. Kellogg, utility stocks). Large Cap Stocks: stocks of corporations with large capitalization ( >$150
millions). Small cap stocks: stocks of corporations with small capitalization ( <$150 millions).
note: capitalization: total amount of securities – stocks & bonds – issued by corporation; market capital = # of
common shares * market price per share.
Bull Market: investors optimistic about nation's economy & buy stocks (increased demand --> incrased price).
Bear Market: investors pessimistic about economy & sell stocks (decreased demand --> decreased price).
Numeric Measures to Consider When Evaluating a Stock
Annual Shareholder Return = (Annual divident + Appreciation in values) / (Initial Stock Investment)
Annual Dividend Yield = (Annual dividend) / (Initial Stock Investment)
Capital Gains Yield = (Appreciation in value) / (Initial stock investment)
Earning per Share = (After-tax earning of corporation) / (Number of outstanding shares of common stock);
Outstanding share: shares sold out
Price-Earning Ratio = (Price per share) / (Earnings per share over past 12 months)
Annual average compound return = [(1 +R1)(1+R2)...(1+Rn)]^(1/n) - 1
LO 4: How stocks are bought and sold
Types of stock transactions
market order: buy/sell a stock at current market values. Limit order: buy/sell a stock at a specific price or price
range. Stop order: request to sell a stock at the next available opportunity after its market price reaches a
specific amount. Discretionary order: allow account executive to decide when and at what price to place a
transaction.
LO 5: Trading Techniques – Long terms & short terms
Long-term techniques: 1. diversification: combining many assets in a portfolio to reduce risk. 2. buy and hold:
portolio value incrases through dividend payment, appreciation in stock value, and dividend reinvestment. 3.
Dollar cost averaging: purchasing equal dollar-amount of the same stocks at equal intervals --> may raise or
lower average price of stock holdings. 4. direct investment: allows for direct purchase of stocks from corporations
without going through an account executive/brokerage firm. 5. dividend reinvestment plan (DRIP): reinvest
dividends into purchasing more stocks.
− generally suggested diversifaction distribution: 5% cash, 35% bonds (10 – 20 holdings), 60% stocks (10 – 20
holdings)
Short-term techniques – these techniques are RISKY
1. Buying on margin: borrow to invest. 2. Selling short: borrow and sell stocks at a price today, and buy to
return the stocks at a lower price later. 3. trading in options: the right to buy (call) or sell (put) stocks at a
predetermined price during a specific time frame.
Chapter 8 Questions
− Jewellery lost – limit covered(1000) Silverware lost – limit covered (2500)
− Actual Cash Value = Replacement value – Depreciated (i.e. Depreciated = original/life x age of furniture)
− Replacement cost = original x 1.__ (i.e. __ = % increased)