AMORES, ROLIE ANN

HRDM-22
REVIEWER
Chapter 1
DEFINITION OF TERMS
Personal Finance - study of individual and household financial decision and activities. learning how to get what you want and have to protect what you've got.
Personal Financial Planning - developing and implementing an integrated and
comprehensive plan to meet your financial goals.
BENEFITS OF PERSONAL FINANCIAL PLANNING
1. Better Decision.
2. Be able to pay less in taxes and interest.
3. Improve financial well-being
. 4. Prepare for financial activities.
5. Save for retirement.
FACTORS AFFECTING FINANCIAL THINKING AND DECISION MAKING Individual Factors
1. Family structure - marital status and presence of dependent.
2. Health - presence of health limitation
3. Career Choice - Income potential and characteristics.
4. Age - needs, desires and priorities in different life stages.
5. Values and Attitudes - fundamental belief about what is important.
Systemic Factors
1. Economic Cycle - patterns of up and downs in the level of economic activities. >
Expansion - increased eco. activities > Recession - decreased eco. Activities > Depression extreme recession
2. Currency Value - pertain to the currency's purchasing power. > Inflation - the change in
general price of goods.
3. Interest Rates - return on invested money
4. Potential unrest and global issues
BASIC PERSONAL FINANCE CONCEPT
Income and Expenses
Income - earned or received in a given period of time.

Two ways of earning income:

1. Selling labor - working for others or for self.
2. Selling Capital - investing cash or other assets.
Expenses - cost for items or resources that are used.
1. Budget Surplus ( Income > Exp. ) - consume more - save - invest
2. Budget Deficit ( Income < Exp. ) - increase income - reduce expenses - borrow money
Assets - any item that have economic value.
Purpose of Asset:
1. To create wealth ( and increase it )
2. To create income
3. To reduce expenses Gain - asset is worth more
Loss - asset is worth less Debt and Equity
Debt - money that is owed and due Cost of Debt - enables one to invest without first
owning capital at a cost
. Equity - value of an ownership interest in property.
Cost of Equity - inherent risk on its future value. Risk and Diversification
Risk - uncertainly of a return and potential for loss.
Diversification - allocating capital in the way to reduction decrease.

Chapter 2
ELEMENTS OF COMPREHENSIVE FINANCIAL PLAN
1. Foundation - acquire necessary tools and skills.
2. Securing basic needs - short term expenses.
3. Wealth Building - savings and investments
4. Wealth Protection - protecting all the wealth you build.
STEPS IN FINANCIAL PLANNING
1. Establish your Financial Goals.
2. Analyze your current financial position.
3. Identify and Evaluate alternative strategies for achieving your goals.
4. Select and Implement a plan for achieving your goals.
5. Regularly re-evaluate and revise your plan.

Step 1 Time Horizons of Goals

1. Short term - less than 3 years
2. Medium term - 3 yrs - 10 yrs
3. Long term - 10 yrs onwards SMART Model of Goal Setting Specific Measurable Attainable
Realistic Time bound
Step 2 Financial Statements
1. Income Statement
2. Cash flow Statement
Cash inflow - income or receipts
Cash outflow - expenses Components of Cash flow
Operating CF's - reflects earnings and spendings. Financing CF's - resolving from financial
assets and investments.
Investment CF's - result from buying and selling assets.
3. Balance Sheet
Step 3
3 tools in Evaluating Alternatives
1. Marginal Reasoning
2. Cost-benefit Analysis
3. Sensitivity Analysis
Step 4 Budget - plan used to decide the amount of money that can be spent.
Steps in Creating Comprehensive Budget
1. Gather and use your financial history.
2. Individual and Systematic Factors.
3. Be Conservative.
Chapter 3: Savings

Savings- amount of money that you have saved especially in the bank over a period
of time.
Savings account- deposit account held at a bank
Interest Rates- the proportion of a loan that is charged as interest.

Types of Financial Institution

Commercial Bank- also known as full-service banks offer a full range of financial
products & services.
Savings & Loan Assoc.- they specialized in accepting savings deposits & making
mortgage & other loans.
Savings Bank-purpose is accepting savings deposit & paying interest on those
deposit.
Credit Union- created and operated by their members &profit are shared amongst the
owner.
Online Banking- electronic payment system that enables customer to conduct a
range of financial transaction.

Four Major Banks of the Phils.

1.
2.
3.
4.

BDO (0.25%)
BPI (0.75%)
Landbank of the Phils.
Metrobank (0.25%)

Chapter 4
Investment
What is an 'Investment'
An investment is an asset or item that is purchased with the hope that it will generate
income or appreciate in the future. In an economic sense, an investment is the purchase of
goods that are not consumed today but are used in the future to create wealth. In finance,
an investment is a monetary asset purchased with the idea that the asset will provide
income in the future or appreciate and be sold at a higher price.
Importance of Investing
Money plays an important role in society and creating wealth for your future. Some people
have plenty of money, but the majority of people do not have enough of it. Making smart
investment decisions early in life can pay off big time. Regardless of your current age, it is
never too late to begin investing money to be able to fund your lifestyle and plan for
financial hardships. There is no way to determine today what will happen tomorrow.
Accidents or impairments may eliminate your ability to earn money by traditional means.
The Difference Between Saving Money and Investing Money You have likely heard the
saying "a penny saved is a penny earned." These words relate to saving money. Saving
money allows you to store it away and use for a later purpose. Many parents save money to
pay for educational expenses for their children or save for a vacation. You can save for new
automobiles, seasonal sports tickets or to make improvements or repairs in your home.
Saving for any of these reasons can help you achieve your desired outcome. The difference
is that you will be saving money to spend it. Your saved money will not be growing your
wealth.
Investing the money that you save allows your money to grow to a larger sum. Investing
your money into treasury or municipal bonds, certificates of deposit and savings accounts

builds wealth slowly over the course of time. Quarterly or annual interest is added to your
original sum to grow your money.
Higher Returns for Investing Money There is more than just one way to earn high
returns with your invested money. Property investments have proven to be successful for the
richest men and women around the world. The risks are lower compared with stocks and
mutual funds that go up and down daily. Property values grow at an annual rate and owning
properties in multiple areas is a fast way to earn higher returns for investing your money in
real estate.
Average returns for real estate depend on the type of properties that you own. Rental
properties produce a monthly income stream from collected rent. Vacation homes can be
rented daily or weekly and generate higher returns throughout a 12-month period. Being a
smart investor and educating yourself about all available investing opportunities allows you
to pick and choose the returns that your money can generate.

Concept of Compounding
Compound interest is interest calculated on the initial principal and also on the accumulated
interest of previous periods of a deposit or loan. Compound interest can be thought of as
interest on interest, and will make a deposit or loan grow at a faster rate than simple
interest, which is interest calculated only on the principal amount. The rate at which
compound interest accrues depends on the frequency of compounding; the higher the
number of compounding periods, the greater the compound interest. Thus, the amount of
compound interest accrued on $100 compounded at 10% annually will be lower than that on
$100 compounded at 5% semi-annually over the same time period. Compound interest is
also known as compounding
Albert Einstein called compound interest "the greatest mathematical discovery of all time".
We think this is true partly because, unlike the trigonometry or calculus you studied back in
high school, compounding can be applied to everyday life.
The wonder of compounding (sometimes called "compound interest") transforms your
working money into a state-of-the-art, highly powerful income-generating tool. Compounding
is the process of generating earnings on an asset's reinvested earnings. To work, it requires
two things: the re-investment of earnings and time. The more time you give your
investments, the more you are able to accelerate the income potential of your original
investment, which takes the pressure off of you.

Tailoring Investment with needs

Identify your goals
While your appetite for risk is an important consideration, there are other contributing
factors. Ask yourself what your investment aims are. Do you want to invest for the long or
short term? Do you need a specific amount of annual growth to reach your investment goal?
Do you have dependants or other financial responsibilities? There is now more emphasis on
risk analysis but this doesn't guarantee that your fund won't underperform, or take on too

much risk. Allocating different investments to different goals such as school fees, property
improvements and your pension can help achieve your long-term aims.

Cheap is not always cheerful

There is more focus today on fund charges even Martin Wheatley, the new head of the
Financial Conduct Authority, has criticised them. But some charges are necessary. There will
be a charge for the platform, a charge for the advice if you are taking it and a charge for the
investment funds.
Related Articles

Early success for Nutmeg's 'off the peg' portfolios

A fund that knows how much risk you can take

British investors stung by 1.2bn fraud

What challenges lie ahead for investors?

Different diversifiers
A balanced portfolio should hold shares, bonds and cash. Once you have a solid core
portfolio, more adventurous investors can add riskier holdings to diversify.
"In a world of high correlation, macroeconomic risk and low yields, investors are being forced
to try to find new sources of income and return," said Tom Becket of Psigma. "Finding such
ideas is very hard at this time, but for those willing to think outside the box there are some
tantalising investments on offer."
The professionals use a range of left-of-field investments to achieve diversification, such as
student housing, infrastructure, private equity, commodities and currencies.

Keep it all in one place

From next year, investors will be able to move fund holdings between platforms. Currently,
you have to sell a holding on one platform, sit in cash potentially losing gains and then
repurchase the same fund on the new platform.
Moving your funds all into one place, without having to sell and buy, will help you keep
better tabs on your portfolio.

"The way to hold assets these days is to use a platform, or fund supermarket, as they are
sometimes called, which will allow you to review your investments easily, make necessary
changes and collate the information together for tax purposes," said Ms Gee.

Consider all assets

Many investors consider their investment portfolio as simply their shares and composite
funds. But it is important to remember that your cash accounts and any property you own
count as assets too.
If you already own one or more properties, be wary of buying a fund with property exposure.
Similarly, if you hold a lot of money in cash, look for a liquid fund that is fully invested as you
don't want to be doubly hit by low interest rates.

Review your holdings regularly

"Risk-rated funds are not a one-stop-shop for life," said Darius McDermott of Chelsea
Financial Services. "Your risk tolerance and investment goals change over time so you need
to review as you would other investments we always say look at your portfolio at least
once a year, if not twice."
A good financial adviser will prompt you to review your portfolio regularly, and ensure it still
matches your risk profile. If you have bought a risk-rated fund directly from the provider, set
yourself reminders in your diary to review your own holdings.
Although you may not need to buy or sell funds as often as twice a year, there are certain
life stages that advisers flag as moments to consider tweaking your portfolio. Property
purchase, becoming a parent or grandparent and changing your job all warrant a portfolio
review

The word "investment" has become muddled with overuse. Referring to a stock or a bond as
an investment is still in regular use, but now people make "investments" in their education,
their cars and even their flat screen TVs. In this article, we will look at the three basic types
of investment as well as some of the things that are definitely not investments - no matter
what the commercial says.
The Three Types of Investment
Investment, as the dictionary defines it, is something that is purchased with money that is
expected to produce income or profit. Investments can be broken into three basic groups:
ownership, lending and cash equivalents.

Ownership Investments
Ownership investments are what comes to mind for most people when the word
"investment" is batted around. Ownership investments are the most volatile and profitable
class of investment. The following are examples of ownership investments:
Stocks
Stocks are literally certificates that say you own a portion of a company. More broadly
speaking, all traded securities, from futures to currency swaps, are ownership investments,
even though all you may own is a contract. When you buy one of these investments, you
have a right to a portion of a company's value or a right to carry out a certain action (as in a
futures contract).
Your expectation of profit is realized (or not) by how the market values the asset you own
the rights to. If you own shares in Sony and Sony posts a record profit, other investors are
going to want Sony shares too. Their demand for shares drives up the price, increasing your
profit if you choose to sell the shares.
Business
The money put into starting and running a business is an investment. Entrepreneurship is
one of the hardest investments to make because it requires more than just money.
Consequently, it is also an ownership investment with extremely large potential returns. By
creating a product or service and selling it to people who want it, entrepreneurs can make
huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's richest men,
is a prime example.
Chapter 5
Creadits and Loans
Definition of Credit- Credit is a contractual agreement in which a borrower receives
something of value now and agrees to repay the lender at some date in the future, generally
with interest. The term also refers to the borrowing capacity of an individual or company.
Definition of Loan- The extension of money from one party to another with the agreement
that the money will be repaid. Nearly all loans (except for some informal ones) are made at
interest, meaning borrowers pay a certain percentage of the principal amount to the lender
as compensation for borrowing. Most loans also have a maturity date, by which time the
borrower must have repaid the loan.
Difference Between Credits and Loan- Personal loans and credit cards are both types of
credit provided by financial institutions. They can be for similar amounts, but personal loans
are for a finite amount of time, whereas credit cards are a revolving line of credit. Personal
loans are usually available for terms of between one and seven years and you receive the
entire loan amount at the beginning of the term. You then make ongoing payments to repay
the loan in full.
Credit cards do not come with terms. You are offered a credit limit and required to make
ongoing repayments to keep your account in good standing. You can continually draw up to
and including that limit and spend however much you choose on your card. You need to
repay a percentage of whatever you spend each month.

Structurally, credit cards and personal loans are similar. They are both forms of credit and
they both require a monthly repayment. What differs are the features and fees. Credit cards
offer interest-free days, balance transfers and rewards but personal loans are more suitable
for debt consolidation and have a maximum loan term so the debt is always repaid. While
annual fees are popular with credit cards, personal loans favour application and monthly
services fees.

5Cs of CreditCharacter
When lenders evaluate character, they look at stability for example, how long youve lived
at your current address, how long youve been in your current job, and whether you have a
good record of paying your bills on time and in full. If you want a loan for your business, the
lender may consider your experience and track record in your business and industry to
evaluate how trustworthy you are to repay.
Capacity refers to considering your other debts and expenses when determining your
ability to repay the loan. Creditors evaluate your debt-to-income ratio, that is, how much you
owe compared to how much you earn. The lower your ratio, the more confident creditors will
be in your capacity to repay the money you borrow
Capital refers to your net worth the value of your assets minus your liabilities. In simple
terms, how much you own (for example, car, real estate, cash, and investments) minus how
much you owe.
Collateral refers to any asset of a borrower (for example, a home) that a lender has a right
to take ownership of and use to pay the debt if the borrower is unable to make the loan
payments as agreed.Some lenders may require a guarantee in addition to collateral. A
guarantee means that another person signs a document promising to repay the loan if you
cant.
Conditions lenders consider a number of outside circumstances that may affect the
borrowers financial situation and ability to repay, for example whats happening in the local
economy. If the borrower is a business, the lender may evaluate the financial health of the
borrowers industry, their local market, and competition.

Where and how can we obtain creadit?

A bank may offer you an unsecured loan if the borrowed amount is small and your credit is
good, or a loan secured by personal property such as your home or car. If you join a credit
union, a lower interest rate may be available. Finance companies, on the other hand,
usually charge much higher rates for loans (especially auto and home equity) to people with
a risky credit rating.
If you are applying for a credit card from a bank, credit union or other company to make
purchases or receive a cash advance, compare the terms of different offers and read all of
the fine print. If approved, you will be given a credit limit on the amount you are permitted
to charge. In addition to interest charges if you do not pay the balance in full and on time
each month, there may be over-limit charges, cash advance fees, substantial late fees, and
increases in your interest rate. Interest charges can build up quickly if you are borrowing
more than you can expect to repay.

Other types of credit include charge accounts or installment plans where you buy items on
time, with interest; and rent-to-own stores where you make payments on furniture or
household items for an extended time, with the option to buy at what will be a very inflated
price. On either type of plan, the item may be repossessed for nonpayment. You could lose
everything youve put into it, and on installment purchases the company can also come
after you for the balance owed, minus any amount they were able to recover by reselling the
merchandise.
Caution is especially advised if you are thinking of doing business with a "payday lender",
money shop or storefront lender, pawnshop or title pawn company, debt consolidator,
illegal loan shark charging a very high interest rate, or unscrupulous home equity lender
offering a loan you cant possibly repay. Besides the high fees, in some cases you could end
up losing your home, your car or your personal property.
Real estate is "property consisting of land and the buildings on it, along with its natural
resources such as crops, minerals, or water; immovable property of this nature; an interest
vested in this (also) an item of real property; (more generally) buildings or housing in
general
1. Vacant Land
Farm and ranch specialists have long been quite successful in this business. Generally the
property size and price is quite large, with corresponding commissions. Be sure you
understand the specific buying requirements and motivations of your prospect.
In rapidly growing areas, specializing in building lots for properties can be lucrative for an
agent. Just know that, as long as the spread continues, the area you have to cover will get
farther out from the city and possibly your office.

2. Residential Properties
The residential type of property is by far the most popular with both new and experienced
agents. That's no surprise, since the year 2000 US Census shows more than 105 million
occupied housing units.
Real estate agents then further specialize in types of homes, including condominiums,
separate homes, duplexes, high value homes, vacations homes, etc. There's plenty to go
around.

3. Commercial Properties
Commercial property can be empty land zoned for commercial use, or an existing business
building or buildings.

Commercial property valuation requires a more complex method, taking into account the
income potential of the property, historical revenue, cash flow with owner perks removed
and much more. Unless someone has extensive business valuation experience, it's better to
enter this specialization carefully after time in the business in land or residential property
markets.

The choices are many in this area. You can be a commercial property specialist, selling
business structures. Or you can specialize in single family residential homes, farms and
ranches or even just condominiums.

When you're looking at the underlying real estate, one of the most important criteria (aside
from, location!) is the type of property. When considering a purchase, you need to ask
yourself whether the underlying properties are, for example, residential homes, shopping
malls, warehouses, office towers or a combination of any of these. Each type of real estate
has a different set of drivers influencing its performance. You can't simply assume one type
of property will perform well in a market where a different type is performing well. Likewise,
you can't assume one type of property will continue to be a good investment simply because
it has performed well in the past

Chapter 7
Insurance

Definition of Insurance

Insurance is a contract (policy) in which an individual or entity receives financial

protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.

Importance of Insurance

 Human beings, his family and properties are always exposed to different kinds of
risks. Risk involve the losses. Insurance is a tool which reduces the cost of loss or
effect of loss caused by variety of risk. It accumulates funds to meet individual
losses. It is not device to prevent unwanted event of happening or cause of loss but
protects them against that loss by compensating which as lost. The role and
importance of insurance are discussed as follows:
1. Insurance provides security
Insurance provides safety and security against the loss on a particular event. Life insurance
provides security against death and old age sufferings. Fire insurance protects against loss
due to fire while Marine insurance provides protection and safety against loss of ship and
cargo. For personal accident and sickness insurance financial protection is given when the
individual is unable to earn. In other insurance too, this security is provided against the loss
at a given contingency.
2. Insurance reduces business risk or losses
In Business, commerce and industry, huge properties are employed. Because of slight
negligence, the property may be turned in to ashes. A person may not be sure of his life,
health and cannot continue the business up to the longer period to support his dependents.
By the help of insurance, he can be sure of his earning, because the insurance company will
pay a fixed amount at the time of death, damage by fire, theft, accident and other perils.

3. Insurance provides peace of mind

Insurance removes the tensions, fears, anxiety, frustrate or weaken of the human mind
associated with the future uncertainty. By providing financial position and promise to
compensate losses arise out from various risk, it provides peace of mind and stimulates
more and better work performance of an individual.
4. Life insurance encourages saving
The insured has an obligation to pay premium regularly and cannot be withdrawn easily
before the expiry of the term of policy. Life insurance encourages the habit of regular and
systematic saving through premium and after a certain period, it would be a part of
necessary saving of the insured person.
5. Insurance accelerates the economic growth of the country

To develop the economic growth of the country, insurance provides strong hand and mind,
with protection against loss of property and capital to produce more wealth. It provides
protection against different kinds of loss caused by risk. It accumulates the capital from the
insured and utilizes for the development of country. Thus, the insurance meets all the
requirements for the economic growth of a country.
6. Insurance provides credit facilities
The insured person can get loan by pledging insurance policy and the interest will not
exceed the cash value of policy charged by insurer. In case of death of insured person, the
policy can be utilized for setting of the loan with interest. Business person can take loan on
the basis of insurance documents from the bank also.
7. Insurance helps to reduce inflation
Inflation created from over supply of money and on less production entities. Insurance can
help to reduce the inflationary pressure in two ways. Firstly, it collects money as an amount
of premium which controls over supply of money and secondly, it provides sufficient funds
for increase production entities. Thus, it reduces the impact of inflation.
8. Insurance makes security and welfare of employees
The security and welfare of employees is the responsibility of employer. These security and
welfare are easily met by life insurance, accident and sickness benefit and pension which are
generally provided by group insurance. The premium for group insurance is normally paid by
the employer. Insurance is the simple method for employer to fulfill their responsibility. Due
to these benefits, employee will devote their maximum capacities to complete their job.
9. Other Importances of Insurance
a) Insurance helps to promote foreign trade providing protection again trade risk.
b) Insurance increases business efficiency eliminating the loss of damage, destruction, or
disappearance of property of goods.
c) Insurance protects the social wealth providing protection against social evil.
d) Development of insurance business helps to solve the evil of unemployment,
generating employment opportunity in the country.

e) The insured gets tax benefit in life insurance.

Risk and Diversification: Different Types of Risk

Let's take a look at the two basic types of risk:

Systematic Risk - Systematic risk influences a large number of assets. A significant

political event, for example, could affect several of the assets in your portfolio. It is
virtually impossible to protect yourself against this type of risk.

Unsystematic Risk - Unsystematic risk is sometimes referred to as "specific risk".

This kind of risk affects a very small number of assets. An example is news that
affects a specific stock such as a sudden strike by employees. Diversification is the
only way to protect yourself from unsystematic risk. (We will discuss diversification
later in this tutorial).
Now that we've determined the fundamental types of risk, let's look at more specific
types of risk, particularly when we talk about stocks and bonds.

Credit or Default Risk - Credit risk is the risk that a company or individual will be
unable to pay the contractual interest or principal on its debt obligations. This type of
risk is of particular concern to investors who hold bonds in their
portfolios. Government bonds, especially those issued by the federal government,
have the least amount of default risk and the lowest returns, while corporate
bonds tend to have the highest amount of default risk but also higher interest rates.
Bonds with a lower chance of default are considered to be investment grade, while
bonds with higher chances are considered to be junk bonds. Bond rating services,
such as Moody's, allows investors to determine which bonds are investment-grade,
and which bonds are junk. (To read more, see Junk Bonds: Everything You Need To
Know, What Is A Corporate Credit Rating and Corporate Bonds: An Introduction To
Credit Risk.)

Country Risk - Country risk refers to the risk that a country won't be able to honor
its financial commitments. When a country defaults on its obligations, this can harm
the performance of all other financial instruments in that country as well as other
countries it has relations with. Country risk applies to stocks, bonds, mutual funds,
options and futures that are issued within a particular country. This type of risk is
most often seen in emerging markets or countries that have a severe deficit. (For
related reading, see What Is An Emerging Market Economy?)

Foreign-Exchange Risk - When investing in foreign countries you must consider the
fact that currency exchange rates can change the price of the asset as well. Foreignexchange risk applies to all financial instruments that are in a currency other than
your domestic currency. As an example, if you are a resident of America and invest in
some Canadian stock in Canadian dollars, even if the share value appreciates, you
may lose money if the Canadian dollar depreciates in relation to the American dollar.

Interest Rate Risk - Interest rate risk is the risk that an investment's value will

change as a result of a change in interest rates. This risk affects the value of bonds
more directly than stocks. (To learn more, read How Interest Rates Affect The Stock
Market.)

Political Risk - Political risk represents the financial risk that a country's government
will suddenly change its policies. This is a major reason why developing countries
lack foreign investment.

Market Risk - This is the most familiar of all risks. Also referred to as volatility,
market risk is the the day-to-day fluctuations in a stock's price. Market risk applies
mainly to stocks and options. As a whole, stocks tend to perform well during a bull
market and poorly during a bear market - volatility is not so much a cause but an
effect of certain market forces. Volatility is a measure of risk because it refers to the
behavior, or "temperament", of your investment rather than the reason for this
behavior. Because market movement is the reason why people can make money from
stocks, volatility is essential for returns, and the more unstable the investment the
more chance there is that it will experience a dramatic change in either direction.

As you can see, there are several types of risk that a smart investor should consider and pay
careful attention to.

Insurance Policy and Terminologies

Glossary Of Life Insurance Terms

Agent - An insurance company representative licensed by the state who solicits and
negotiates contracts of insurance, and provides service to the policyholder for the insurer.
An agent can be independent agent who represents at least two insurance companies or a
direct writer who represents and sells policies for one company only.
Annuity - A contract that provides a periodic income at regular intervals, usually for life.
Annuity Certain - A contract that provides an income for a specified number of years,
regardless of life or death.
Application - A statement of information made by a person applying for life insurance. It
helps the life insurance company assess the acceptability of risk. Statement made in the
application are used to decide on an applicant's underwriting classification and premium
rates.
Beneficiary - The person named in the policy to receive the insurance proceeds at the
death of the insured. Anyone can be named as a beneficiary.
Bonus Rate Annuity - An extra percent of interest credited to an annuity during the first
year that it is in force. The extra amount is above the interest rate to be credited beginning
the second year and the remaining years that the annuity is in force. The extra rate is paid
in the first year in an effort to attract new policyholders.
Cash Surrender Value - The amount available in cash upon voluntary termination of a
policy by its owner before it becomes payable by death or maturity. The amount is the cash
value stated in the policy minus a surrender charge and any outstanding loans and any
interest thereon.
Direct Response - Insurance sold directly to the insured by an insurance company through
its own employees by mail or over the counter.

Disclosure Statement - A comparison form required by New York Department of Financial

Services Regulations to be given to every applicant considering replacing one life insurance
policy with another.
Dividend - A return of part of the premium on participating insurance to reflect the
difference between the premium charged and the combination of actual mortality, expense
and investment experience. Dividends are not considered to be taxable distributions
because they are interpreted as a refund of a portion of the premium paid.
Evidence of Insurability - A statement or proof of your health, finances or job, which helps
the insurer decide if you are an acceptable risk for life insurance.
Expense - Your policy's share of the company's operating costs-fees for medical
examinations and inspection reports, underwriting, printing costs, commissions, advertising,
agency expenses, premium taxes, salaries, rent, etc. Such costs are important in
determining dividends and premium rates.
Face Amount - The amount stated on the face of the policy that will be paid in case of
death or at the maturity of the policy. It does not include additional amounts payable under
accidental death or other special provisions, or acquired through the application of policy
dividends.
Free Look Provision - A certain amount of time provided (usually between 10-30 days) to
an insured in order to examine the insurance policy and if not satisfied, to return it to the
company for a full refund.
Insurable Interest - For persons related by blood, a substantial interest established
through love and affection, and for all other persons, a lawful and substantial economic
interest in having the life of the insured continue. An insurable interest is required when
purchasing life insurance on another person.
Lapse Rate - The rate at which life insurance policies terminate because of failure to pay
the premiums. When policies are lapsed before enough premium payments are made to
cover early policy expenses, the company must make up this loss from remaining
policyholders. Therefore, the lapse rate will affect the cost of the policy.
Life Expectancy - The probability of an individual living to a certain age according to a
particular mortality table. This is the beginning point in calculating the pure cost of life
insurance and annuities and is reflected in the basic premium.
Misstatement of Age - The falsification of the applicant's birth date on the application for
insurance. When discovered, the coverage will be adjusted to reflect the correct age
according to the premium paid in.
Mortality - The incidence of death at each attained age; frequency of death.
Non-Forfeiture - One of the choices available if the policy owner discontinues premium
payments on a policy with a cash value. Options available are to take the cash value in cash
or to use it to purchase extended term insurance or reduced paid-up insurance.
Non-Participating - A life insurance policy in which the company does not distribute to
policyowners any part of its surplus.
Participating Policy - A life insurance policy under which the company agrees to distribute
to policyowners the part of its surplus that its Board of Directors determines is not needed at
the end of the business year. The distribution serves to reduce the premium the
policyowners had paid.

Policy - The printed legal document stating the terms of insurance contract that is issued to
the policyowner by the company.
Policy Proceeds - The amount actually paid on a life insurance policy at death or when the
policyowner receives payment at surrender or maturity.
Policy owner - The person who owns a life insurance policy. This is usually the insured
person, but it may also be a relative of the insured, a partnership or a corporation.
Premium - The payment, or one of the periodic payments, a policyowner agrees to make for
an insurance policy. Depending on the terms of the policy, the premium may be paid in one
payment or a series of regular payments, e.g., annually, semi-annually, quarterly or monthly.
The premium charged reflects the expectation of loss, expenses and profit contingencies.
Rating - The basis for an additional charge to the standard premium because the person
insured is classified as a greater than normal risk usually resulting from impaired health or a
hazardous occupation.
Reduced Paid-up Insurance - A form of insurance available as a non-forfeiture option. It
provides for continuation of the original insurance plan, but for a reduced amount, without
further premiums.
Reinstatement - Restoring a lapsed policy to its original premium paying status, upon
payment by the policy owner, with interest, of all unpaid premiums and policy loans, and
presentation of satisfactory evidence of insurability by the insured.
Rider - An endorsement to an insurance policy that modifies clauses and provisions of the
policy, including or excluding coverage.
Risk Classification - The process by which a company decides how its premium rates for
life insurance should differ according to the risk characteristics of individuals insured (e.g.,
age, occupation, sex, state of health) and then applies the resulting rules to individual
applications.
Settlement Options - The several ways, other than immediate payment in cash, in which a
policyholder or beneficiary may choose to have policy benefits paid. These options typically
include the following:

Interest Option - death benefit left on deposit at interest with the insurance company
with earnings paid to the beneficiary annually.

Fixed Amount Option - death benefit paid in a series of fixed amount installments
until the proceeds and interest earned terminate.

Fixed Period Option - death benefit left on deposit with the insurance company with
the death benefit plus interest paid out in equal payments for the period of time
selected.

Life Income Option - death benefit plus interest paid through a life annuity. Income
continues under a straight life income option for as long as the beneficiary lives or
whether or not the beneficiary lives, under a life income with period certain option.

Standard Risk - The classification of a person applying for a life insurance policy who fits
the physical, occupational and other standards on which the normal premium rates are
based.
Substandard Risk - The classification of a person applying for a life insurance policy who
does not meet the requirements set for the standard risk. An additional premium is charged

on substandard risks to provide for the probability that such a person will have a shorter life
span than a standard risk.
Supplementary Contract - An agreement between a life insurance company and a
policyowner or beneficiary in which the company retains at least part of the cash sum
payable under an insurance policy and makes payment in accordance with the settlement
option chosen.
Underwriter - The person who reviews the application for insurance and decides if the
applicant is acceptable and at what premium rate.
Underwriting - The process by which a life insurance company determines whether it can
accept an application for life insurance, and if so, on what basis so that the proper premium
is charged.

TYPES OF INSURANCE THAT EVERYONE NEEDS

There are however, four insurances that most financial experts recommend
that all of us have: life, health, auto and long-term disability. Each one of
these covers a specific aspect of your life, and each one is very important to
your financial future.

Life Insurance

The greatest factor in having life insurance is providing for those you leave behind.
This is extremely important if you have a family that is dependent on your salary to
pay the bills. Industry experts suggest a life insurance policy should cover "ten times
your yearly income." This sum would provide enough money to cover existing
expenses, funeral expenses and give your family a financial cushion. That cushion
will help them re-group after your death.

Health Insurance

The soaring cost of medical care is reason enough to make health insurance a
necessity. Even a simple visit to the family doctor can result in a hefty bill. More
serious injuries, that result in a hospital stay, can generate a bill that tops the price of
a one-week stay at a luxury resort. Injuries that require surgery can quickly rack up
five-figure costs. Although the ever-increasing cost of health insurance is a financial
burden, for just about everyone, the potential cost of not having coverage is much
higher.

Long-Term Disability Insurance

The prospect of long-term disability is so frightening that some people simply choose
to ignore it. While we all hope that, "nothing will happen to me," relying on hope to

protect your future earning power is simply not a good idea. Instead, choose
a disability policy that provides enough coverage to enable you to continue your
current lifestyle, even if you can no longer continue working.

Automobile Insurance

Some level of automobile insurance is required by law in most places. Even if you are
not required to have it, and you are driving an old clunker that has been paid off for
years, automobile insurance is something you shouldn't skip. If you are involved in an
accident, and someone is injured or their property is damaged, you could be subject
to a lawsuit that could possibly cost you everything you own. Accidents happen
quickly and the results are often tragic. Having no automobile insurance or
purchasing only the minimum required coverage saves you only a tiny amount of
money, and puts everything else that you own at risk.

Chapter 8
Taxes
Taxes are generally an involuntary fee levied on individuals or corporations that is
enforced by a government entity, whether local, regional or national in order to finance
government activities. In economics, taxes fall on whom ever pays the burden of the tax,
whether this is the entity being taxed, like a business, or the end consumers of the
business's goods.

Different Kinds of Tax

Capital Gains Tax- is a tax imposed on the gains presumed to have been realized
by the seller from the sale, exchange, or other disposition of capital assets located in
the Philippines, including pacto de retro sales and other forms of conditional sale.
Documentary Stamp Tax is a tax on documents, instruments, loan agreements
and papers evidencing the acceptance, assignment, sale or transfer of an obligation,
rights, or property incident thereto. Examples of documentary stamp tax are those
that are charged on bank promissory notes, deed of sale, and deed of assignment on
transfer of shares of corporate stock ownership.
Donors Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer
of property between two or more persons who are living at the time of the transfer.
Donors tax is based on a graduated schedule of tax rate.
Estate Tax is a tax on the right of the deceased person to transmit his/her estate
to his/her lawful heirs and beneficiaries at the time of death and on certain transfers

which are made by law as equivalent to testamentary disposition. Estate tax is also
based on a graduated schedule of tax rate.
Income Tax- is a tax on all yearly profits arising from property, profession, trades or
offices or as a tax on a persons income, emoluments, profits and the like. Selfemployed individuals and corporate taxpayers pay quarterly income taxes from 1st
quarter to 3rd quarter. And instead of filing quarterly income tax on the fourth
quarter, they file and pay their annual income tax return for the taxable year.
Individual income tax is based on graduated schedule of tax rate, while corporate
income tax in based on a fixed rate prescribe by the tax law or special law.
Percentage Tax- is a business tax imposed on persons or entities who sell or lease
goods, properties or services in the course of trade or business whose gross annual
sales or receipts do not exceed the amount required to register as VAT-registered
taxpayers. Percentage taxes are usually based on a fixed rate. They are usually paid
monthly by businesses or professionals. However, some special industries and
transactions pay percentage tax on a quarterly basis.
Value Added Tax- is a business tax imposed and collected from the seller in the
course of trade or business on every sale of properties (real or personal) lease of
goods or properties (real or personal) or vendors of services. It is an indirect tax,
thus, it can be passed on to the buyer, causing this to increase the prices of most
goods and services bought and paid by consumers. VAT returns are usually filed and
paid monthly and quarterly.
Excise Tax-is a tax imposed on goods manufactured or produced in the Philippines
for domestic sale or consumption or any other disposition. It is also imposed on
things that are imported.
Withholding Tax on Compensation- is the tax withheld from individuals receiving
purely compensation income. This tax is what employers withheld in their employees
compensation income and remit to the government through the BIR or authorized
accrediting agent.
Expanded Withholding Tax- is the tax withheld from individuals receiving purely
compensation income. This tax is what employers withheld in their employees
compensation income and remit to the government through the BIR or authorized
accrediting agent.
Final Withholding Tax is a kind of withholding tax which is prescribed only for
certain payors and is not creditable against the income tax due of the payee for the
taxable year. Income Tax withheld constitutes the full and final payment of the
Income Tax due from the payee on the said income. An example of final withholding
tax is the tax withheld by banks on the interest income earned on bank deposits.
Withholding Tax on Government Money Payments is the withholding tax
withheld by government offices and instrumentalities, including government-owned
or -controlled corporations and local government units, before making any payments
to private individuals, corporations, partnerships and/or associations.

Major categories of taxes

Federal and State Income Tax- The federal and certain state governments collect
taxes on many types of income, including earned (wages, salary, bonuses, pensions,
commissions) and unearned (interest, dividends, capital gains and royalties).
According to the Internal Revenue Service (IRS), income taxes can be levied on both

businesses and individuals. Income taxes are considered progressive, as the higher
your income, the higher percentage of income taxes you will be required to pay.
Estate Tax-Estate taxes are levied on the gifting of property from a deceased
individual to his/her decedents. Low value estates are typically exempt from this tax,
and taxes paid on any transfer of property during life can be deducted when
calculating estate taxes. When determining the amount of estate tax owed, the fair
market values of possessions, property, securities, trust and business interests are
used to determine the Gross Estate. Certain deductions for debt and mortgages may
be subtracted to arrive at the Taxable Estate.
Sales Tax- State and local governments often impose sales taxes on tangible
property exchanged within a given jurisdiction. Merchants must collect a combined
tax for both the state and local area in which they sell or have a nexus. Many
products such as food, pharmaceuticals and textiles are exempt from sales tax in
some states. With the rise in internet commerce, the structure and implementation of
sales tax has come into question, as many online merchants sell goods across state
lines without collecting sales taxat all.

Who are required to file annual income?

You are a Filipino citizen living in the Philippines, receiving income from sources within or
outside the Philippines, and if

You are employed by two or more employers, any time during the taxable year.
You are self-employed, either through conduct of trade or professional practice.
You are deriving mixed income. This means you have been an employee and a selfemployed individual during the taxable year.
You derive other non-business, non-professional related income in addition to
compensation income not otherwise subject to a final tax.
You are married, employed by a single employer, and your income has been correctly
withheldthe tax due is equal to the tax withheldbut your spouse is not entitled to
substituted filing.
You are a marginal income earner.
Your income tax during the past calendar year was not withheld correctlyif the tax
due is not equal to the tax withheld.