Slide 1. Financial Planning

Transcription

1 Slide 1 Financial Planning Creating a financial plan can sound like an intimidating task. But a financial plan is simply a roadmap to get you to a financial goal. It may help to think of it this way: if you were going on a trip, you would need to determine your starting point and the best way to get to your destination. In the same way, a financial plan can help you determine where you are financially and how to get to where you want to be in the future. This module will give you the tools to start your financial plan. We ll explore some popular financial goals, such as saving for college and retirement. And since no one knows what the future will hold, we ll talk about potential problems to plan for along the way. Let s start planning.

2 Slide 2 Where Are You Now? You ll want to begin your plan by determining your current financial position or net worth. Your net worth is a snapshot of your financial well-being and provides you with a picture of where you currently stand. It s relatively easy to determine your net worth; most of your time will be spent collecting all of the information. You can use financial planning software, a spreadsheet, or even a blank piece of paper.

3 Slide 3 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide The first step in determining your net worth is establishing what your assets are. Assets are things that you own that have financial value. Click on each of the numbered buttons at the bottom of the screen to learn about different types of assets. Cash - Cash is the money you have in your checking, savings, and money market accounts. Investments - Investments are any stocks, bonds or mutual funds that aren't in retirement accounts. Retirement accounts - Retirement accounts include any money that you have in employersponsored defined benefit plans, defined contribution accounts (such as 401(k), 457, or 403(b)), as well as individual retirement accounts. Life insurance with cash value - Life insurance with a cash value doesn't include term life insurance that only has a death benefit. Real estate - Real estate includes the current market value of your property, not what you paid for it. If you re not certain of the value, ask a local real estate agent or use a real estate valuation site on the internet. Personal property - Personal property includes the current value of your personal items, not what you paid for them.

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5 Slide 4 Determining Your Liabilities $258,765 $16,973 $4,061 $2,747 $32,659 + $14,603 $329,808 The next step in determining your net worth is to list your liabilities or what you owe. Liabilities would include things like your mortgage, any car loans, your credit card balances, personal loans such as school loans, and any outstanding taxes and alimony.

6 Slide 5 Determining Your Net Worth To arrive at your net worth, you ll need to subtract your liabilities from your assets. Obviously, you d like to have more assets than liabilities. If not, this should be your goal. Try not to focus on how you got there; focus on how you re going to improve your financial picture. Understanding your net worth can provide you with clues as to how you re spending your money and what steps you might need to take. For instance, if you have nothing in your retirement account, you may need to consider making it a priority to begin saving. You should consider creating a net worth statement periodically, such as every year.

7 Slide 6 Examining Your Cash Flow As a part of determining your net worth, it's a good idea to examine your cash flow. A cash flow statement helps you to see where your monthly income comes from and where it goes. You'll want to create general categories for types of expenditures and then break them down into more specific categories. For instance, you may have a general transportation category that's broken down into subtopics, such as gasoline, maintenance and tolls. The more specific you can be, the better. For expenses that occur only periodically, such as an automobile tune-up, you can divide your total annual cost by 12 and add the amount to your monthly statement. The key to creating a good cash flow statement is to be as complete as possible and to not underestimate or inflate costs. When considering your income, don't include an annual bonus or a tax refund, as neither are certainties.

8 Slide 7 Understanding the Bottom Line So you've examined your cash flow, but you're still not really sure where your money actually goes each month. A good place to start is your checkbook and bills. If you use your credit or debit card to pay for a variety of items, you may need to examine your receipts to divide your purchases among the various categories. Still not certain where it all goes? Try recording every purchase you make over a month's time. Don't change your purchasing habits; just jot down what you spend in a notebook. Both your net worth and cash flow statements can help you understand where you currently are and help you to determine your next steps. For instance, if your net worth statement shows you have $5000 in credit card debt and your cash flow statement shows that you're paying the minimum amount towards that balance while spending $500 to eat out each month, you may decide that you can eat out less often and improve your net worth by paying down the credit card debt.

9 Slide 8 SMART Specific Measurable Action-oriented Realistic Time bound SMART Once you ve determined where you currently stand, you need to consider where you want to be in your financial future. Your goals should be SMART. SMART is an acronym to help you remember that your goals should be specific, measureable, action-oriented, realistic and time bound. It s important to set goals so that you have something to work towards. Your goals can range from paying off a credit card to traveling around the world when you retire. It s a good idea to write down your goals since it s been proven that writing down your goals improves the likelihood that you ll achieve them.

10 Slide 9 Categorizing Your Goals Once you ve listed your financial goals, you ll need to prioritize them and determine which goals require your immediate attention. You ll probably have a number of financial goals that you want to achieve. Some will likely be in the next few years, while some may be decades from now. You ll want to categorize your goals by how distant they are in the future. Short-term goals are achieved in 1-2 years. Medium-term goals in 2-10 years and long-term goals are achieved in five or more years. When prioritizing your goals, you ll also need to consider major life events and the financial issues that could accompany them, since they may have an effect on your goals or determine additional goals. For instance, if you and your spouse are considering having a child in two years, you might need to consider the need for additional life insurance, future college tuition, and the possible temporary or permanent loss of one of your incomes.

11 Slide 10 Budgeting Once you ve determined and prioritized your financial goals, you will need to create a blueprint for accomplishing them. One way to do this is to create a budget. A budget serves as a benchmark for how you ll spend your money each month. Your cash flow statement can assist you with determining a number of your expenses. If you want to save more or your expenses are high, determine where you might be able to cut back. There are a number of software packages and websites that can assist in preparing a budget, or you can use a simple piece of paper. It may take some time to get used to the budget process. Spending just a few minutes each day tracking your expenses can help to ensure you re on the right path. Keep simple, accurate records to make tax filing easier, in addition to identifying any red flags.

12 Slide 11 Financial Goals College Retirement Let s take a minute to look at some specific financial goals that may affect you. There are two, major common goals that many people have putting a child through college and retirement. We ll walk through some of the considerations that accompany these events. Select the goal that you d like to learn about first.

13 Slide 12 Planning for College A college education can provide individuals with a variety of benefits: the opportunity to explore potential career paths, create networks, and lead a more well-rounded life. It also provides people with the opportunity to earn more over their lifetimes. A 2008 report from the U.S. Census Bureau found that the average college graduate earns $26,000 more than the average high school graduate.

14 Slide 13 Cost of Tuition Since 1981, the cost of college has risen more than 7% per year But a college education doesn t come cheaply. Since 1981, the average cost for tuition and fees of public and private colleges has risen at an average of 7.1% per year.

15 Slide 14 Yearly Costs $27,293 $11,990 $2,713 2-year public institution $7,605 4-year public institution (in-state tuition) 4-year public institution (out-ofstate tuition) 4-year private institution The College Board, a non-profit organization, reported the following average yearly costs for tuition and fees in For a two-year public institution, the cost was $2713. For a four-year public institution with in-state tuition, the cost was $7605. The cost for a four-year public institution with out-of-state tuition was $11,990. And for a four-year private institution, the cost was $27,293. So it s reasonable to assume that the cost for a four-year education could run into the tens of thousands of dollars or even over a hundred thousand dollars, depending on the school. A major financial expenditure by any definition! With a little bit of planning, you may be able to defray some of the costs for college. Let s look at a few ways.

16 Slide 15 Scholarships Scholarships are certainly one method of offsetting some of the cost of a college education. Scholarships come from a variety of sources, such as colleges, corporations, religious groups, civic organizations and other groups. Many scholarships are very competitive, while a large number go unclaimed each year. Scholarships can be based on individual needs, abilities, ethnic background, or academic merit. The internet is an excellent place to begin a search of scholarships for which you or your child may qualify.

17 Slide 16 Additional Resources But what if scholarships don t cover it all? There are a number of federal and state programs that parents and students can take advantage of as well. All states have established 529 Plans, named after the section in the Internal Revenue Code on which they re based. Plans vary from state to state, and most don t require you to be a resident to use, so it s important to shop around. Start by looking at your own state s plan, which may offer a tax deduction on your contributions. Like any investment, you ll want to determine if the plan offers an investment choice that makes sense for your situation and isn t overly expensive. Many plans offer age-based investment portfolios which are comprised mainly of stocks when a child is very young, but transition to more conservative investments as the child nears college age. You should also look at the plan s flexibility for changing the beneficiary and what kind of expenses can be paid for with the account.

18 Slide Plans Tax-deferred savings Pre-paid tuition Most 529 Plans follow the same basic structure, but there can be differences between them. There are two options as to how these plans can be structured. The first option allows you to save money in a tax-deferred account to pay for tuition at future prices. The second kind of 529 Plan allows you to prepay tuition at today's tuition rates. Click on an image to learn more about these plans.

19 Slide Plans Return This type of 529 Plan allows you to save money in a tax-deferred account now to pay for tuition at future prices. These plans have a number of benefits. Once an account is established, anyone, such as grandparents, other family members or friends, can contribute to it with an amount as little as $25 a month. There are no income limitations that might make you ineligible to use the plan. The contributions are invested in the options that the plan provides. While you can t change investment options once you ve selected them, you can roll your balance into another state s plan once every 12 months without penalty. When the money is withdrawn for educational needs, you won t pay federal taxes on the earnings and most states don t tax the withdrawal either. In the event that your child decides that college isn t in his or her future, the account can be rolled to another family member, such as the child s spouse, children, or sibling. Most states don t have an age limit by which the account must be used. Unused money may be withdrawn, but with taxes owed on the earnings. To learn about pre-paid tuition, click Return. If you ve finished, click the next button at the bottom of the screen to advance.

20 Slide Plans Tax-deferred savings Pre-paid tuition Now let s look at a 529 Plan with pre-paid tuition. Click on the picture of the two graduates.

21 Slide Plans Return This type of 529 Plan allows you to prepay tuition at today s tuition rates. These plans allow you to lock in today s tuition rates and then pay for tuition at one of the state s eligible institutions of higher learning. The plans will also pay an equal amount of money to private or out-of-state schools. You typically purchase tuition units or years in a single, lump sum payment or monthly installment payments. But you ll need to consider that this type of plan can affect a child s eligibility for financial aid. Pre-paid tuition plans also differ from state to state. Many plans require that you be a resident of that state, while some allow non-residents to participate. Some plans are financially backed by the state; others rely on the assets of the plan. If you live in a state that doesn t have a prepaid plan, you can consider the Independent 529 Plan, which is sponsored by a large number of colleges and universities. To learn about tax-deferred savings, click Return. If you ve finished, click the next button at the bottom of the screen to advance.

22 Slide Plans Tax-deferred savings Pre-paid tuition Now let s look at a 529 Plan using tax-deferred savings. Click on the picture of the graduate and her family.

23 Slide 22 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Federal programs may also help you pay for the cost of tuition. Click on each of the types of programs to learn more. Coverdell Education Savings Accounts These accounts are used to save for educational expenses for account beneficiaries who are under the age of 18 or who have special needs. The maximum annual contribution is $2000, and you may not exceed certain income level limitations to use these accounts. You may not take a tax deduction for the contributions, but the distribution is tax-free when used for qualifying educational expenses. The balances must be distributed within 30 days of the account beneficiary s 30th birthday. Any unused balance may be rolled into the Coverdell Account of another beneficiary or will be subject to taxes and penalties. Stafford loans Nearly all students are eligible for Stafford loans. These loans are guaranteed by the federal government and have low interest rates and don t need to be repaid while the child is a full-time or part-time student. Once students have withdrawn from college or graduated, they will have a six month grace period before they will need to begin repayment. Some Stafford loans are subsidized by the federal government, while others are not. Those that are subsidized are based on financial need, and the interest is paid by the government while students are within the grace period. Subsidized loans require students to be responsible for accrued interest earned while in school, which is added to the loan principal.

24 Perkins Loans Perkins loans provide up to $5500 a year for undergraduate education and $8000 a year for graduate schooling. Both have lifetime maximum amounts. These loans have a set interest rate of 5% for the duration of their ten-year repayment period. Perkins loans have a nine-month grace period after graduation or withdrawal from school before repayment must begin. These loans may be canceled if recipients agree to teach in lowincome schools or in designated teacher shortage areas. Pell Grants Pell Grants are awarded based on financial need and don't need to be repaid by their recipients. They are primarily for students from low-income households. Students are required to demonstrate financial need through the completion of the Free Application for Federal Student Aid (FASFA). The current maximum amount of a Pell Grant is $5800. PLUS loans PLUS loans are loans offered to the biological or adoptive parents of students enrolled at least half-time in eligible programs or institutions. These loans differ from the other loans that we ve discussed in that they are the financial responsibility of the parents and not the recipients. The annual loan amount is limited to the student s cost to attend the school minus any financial aid he receives. Payment is sent directly to the school. The interest rate is set at 7.9% and accrues as of the date that the loan is disbursed. There are several repayment plans available.

25 Slide 23 FAFSA You're required to complete the Free Application for Federal Student Aid (FASFA) each year the student is in school in order to be considered for financial aid. You'll be providing demographic, income, and asset information to the U.S. Department of Education to determine your expected family contribution or share of the cost of the education. The prospective school will calculate the student's aid eligibility, and the Department of Education will inform both the student and the school of the approved amount. Since each college is different, the financial aid package will differ from school to school. It may include gifts, such as grants or scholarships, or be in the form of self-help, such as loans or a work-study program that allows eligible the student to earn money to be used for the educational expenses.

26 Slide 24 Financial Goals Exit College Retirement You ve learned about how to plan for college costs, now let s talk about retirement. Click Retirement to get started or Exit to go to the next section.

27 Slide 25 Planning for Retirement Whether you re 25 or 65, it s never a bad time to consider preparing for retirement. During your working years, you should be accumulating financial assets that you ll be able to turn into sources of income in retirement. Your employer may sponsor plans that will provide you with an easy way to save for your retirement or provide you with a monthly pension. If not, you ll have to do it yourself. In either case, you need to understand that Social Security, another source of retirement income, may not be enough to keep you in a comfortable lifestyle. As you reach retirement age, you ll need to determine when and how you ll tap into your income streams. Let s take a closer look at some of the ways to fund your retirement.

28 Slide 26 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Social Security provides retirement income to eligible workers. Most private-sector employees, military personnel, and self-employed individuals are covered under the program. Public sector employees may be covered by Social Security if their state has an agreement with the Social Security Administration. Federal employees who were hired prior to 1984 and employees covered by the Railroad Retirement System are not eligible for Social Security. Click the arrow at the top right of the page to learn more about Social Security. Contributions - Both you and your employer fund Social Security benefits by contributing 6.2% of your gross wages. Your gross wages are what you earn; they don t include income such as pension benefits, investment income, or inheritances. You re entitled to receive a benefit after acquiring 40 quarters of coverage. You earn a quarter of coverage by receiving a certain level of wages for that period, but the requisite level of wages can change yearly. Benefit Calculation - The monthly benefit amount you ll receive from Social Security is based on the 35 years that you earned the highest wages. The Social Security Administration adjusts your actual earnings to account for changes in average wages since the year the earnings were received. A formula is applied to these figures to arrive at the benefit you would receive at your normal retirement age. The Social Security website has a calculator which you can use to determine your future benefits. Normal Retirement Age You re eligible to receive your full Social Security benefit at your normal retirement age, which is determined by the year of your birth. You may begin to receive

29 benefits as early as age 62, but your monthly benefit amount will be permanently reduced in this case. If you elect to delay receiving your benefit until after your normal retirement age, your benefit can be increased until age 70 or when you begin to receive your benefit. Receiving Your Benefit - So when is the best time to begin receiving your Social Security benefit? It depends on your personal situation. You should consider your income needs, health and family longevity, in addition to whether you plan to work in retirement and other income sources you might have. For example, if your normal retirement age is 66 and your benefit is $1000, you could elect to receive a reduced benefit at age 62 of $750 or delay receiving it until age 70 when you would receive $1320. While delaying the benefit results in a larger monthly benefit, it also means that you are forgoing money you could have received. Annual Limits - If you begin to receive your benefit before your normal retirement age, you ll want to consider the fact that there s an annual limit of income that you can make before you lose a $1 for every $2 of benefits. You lose $1 for every $3 in the year you reach your normal retirement age until the month of your birthday. After this time, there s no limit on the amount of wages that you can receive.

30 Slide 27 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Your employer may offer a defined benefit plan, a defined contribution plan or both. Participation in a defined benefit plan is often a condition of employment, while a defined contribution plan is typically voluntary. It s best to take advantage of both if you have to opportunity to do so. Click the arrow at the top right of the page to learn more about defined benefit plans. Funding - A defined benefit plan is primarily funded by the employer, although many employers now require that employees contribute as well. The benefit amount is based on a formula, which typically accounts for the employee s age at retirement, compensation and years of service. Compensation is typically measured as an average of an employee s earnings over a pre-determined period of time, such as three or five years. Vesting - Individuals must be employed by their employers for a certain number of years, typically a maximum of five, before they're vested to their benefit. Vesting refers to the employee s entitlement to the benefit, even if they leave employment. The employer also establishes the retirement eligibility criteria, which is usually a combination of the employee s age and length of service. Plans may also offer employees the opportunity to retire earlier, but receive a smaller benefit. Annuities - A defined benefit plan must offer its retirees an annuity payment. An annuity is a recurring payment, typically monthly, that is paid for a retiree s lifetime. Most plans offer the option of a joint survivor benefit, which provides a lifetime benefit to the retiree and a

31 continuing lifetime benefit to another designated individual if the retiree dies first. Plans may offer other distribution options as well. Disability - Defined benefit plans may also provide employees with income if a permanent disability that prevents further employment occurs. It may also provide income to survivors in the event of an employee s death before retirement.

32 Slide 28 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Defined contribution plans come with a variety of names. In the private sector, they re called 401(k) plans. In the public sector, they re called 457 plans. Certain public school and university employees have 403(b) plans. While each type of plan is unique, they all share some common characteristics. It s important that you take the time to learn about how your plan works. Your human resource office can help you get the information you need. Click the arrow at the top right of the page to learn more about defined contribution plans. Funding - A defined contribution plan is funded primarily by the employee, and the employer may provide a matching contribution. Employees contributions may be a set dollar amount or percentage of their salaries and are typically deducted from their paycheck before it s taxed. The Internal Revenue Code establishes a maximum contribution amount, which can change annually. Plans provide a range of investments that employees can choose from. The benefit at retirement is based on the amount of money that has been contributed and the gains or losses from the selected investments. Unlike defined benefit plans, there s no promise of a certain benefit and the employee bears the investment risk. Enrollment - Enrollment in these plans is typically voluntary. Many plans have recently elected to provide automatic enrollment for newly eligible employees. Employees can elect not to participate, but defined contribution plans have proven to be a convenient method for employees to save for retirement. An important feature of these plans is that your balances grow on a tax-deferred basis. In other words, you won t pay taxes on the contributions and

33 potential earnings until you withdraw the money from the account. Your earnings will be reinvested and create more earnings, resulting in a larger balance. Example - Let s look at an example of this. James contributes $100 a month to his employer s defined contribution plan for a period of 20 years, for a total of $24,000. Assuming his investments average a gain of 6% a year, he ll have over $45,000! This occurred because earnings were reinvested, which allowed those earnings to potentially generate more earnings. Contributions - As we said earlier, your employer may also contribute money to your plan if you contribute. These contributions are typically a flat dollar amount or a match of some portion of your contribution. If possible, you should contribute at least the amount that will qualify you to receive the full employer match. Let s say your employer s plan will make a matching contribution of $0.50 for every dollar you contribute, up to 5% of your pay. If 5% of your pay equals $100, your employer s match is $50. Make certain that you take full advantage of any matching contributions in your plan; it s free money! Terminating Employment - If you terminate employment with your employer before retirement age, you ll need to carefully consider what you re going to do with your plan balance. Many employer-sponsored plans allow you to keep your money in the plan, provided it exceeds a minimum amount, often $5000 or more. You may want to transfer or roll over your balance to your new employer s plan, if the plan allows it. This will reduce the number of accounts that you need to keep track of, as well as the temptation to touch the money that s for your retirement. Any taxable money that you take as a distribution will be subject to 20% withholding for federal taxes and potential state taxes. You may also be subject to a 10% tax penalty if you re under the age of 59 ½ at the time of the distribution. There are exceptions to the 10% tax penalty, so talk with a tax advisor. Distribution Options When you retire, you may have a variety of distribution options, but it depends on your plan. You may be eligible to convert your balance into an annuity, which would pay you a lifetime benefit or installment payments which would last until your balance is exhausted. You may be eligible to take a lump sum distribution or partial distributions. You ll need to determine which payment option is most appropriate for your situation and when to begin receiving benefits. Age Restrictions - You must begin receiving a portion of the money from your plan as of the year you reach age 70 ½ or the year in which you retire, if later. You can delay receiving your first required minimum distribution (RMD) until April 1 st of the year after you reach age 70 ½. But you must take all subsequent distributions, including the year in which the first RMD was first paid, by December 31st. The RMD is calculated annually by taking your December 31 st balance and dividing it by a life expectancy factor that the IRS provides. Your plan provider will typically do the calculation, but you are ultimately responsible. There can be significant penalties if you fail to take the full

34 amount of the RMD by the deadline. You won t be able to roll over this RMD amount to another account.

35 Slide 29 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Not everyone works for an employer that provides a retirement plan. But this doesn t mean you can t create one for yourself. In fact, even if you are covered by your plan at work, you may still be able to create one. Individual Retirement Accounts, or IRAs, are personal savings plans that provide some of the same advantages that employer-sponsored plans do. IRAs are funded with earned incomes such as wages, alimony or self-employment income. Click the arrow at the top right of the page to learn more about IRAs. Contributions - IRAs can be set up with a bank, credit union or investment company. You can make your contributions either by check or by having the contribution amount withdrawn from your checking or savings account. It s best to have your contribution deducted from your bank account automatically if you receive a regular paycheck to ensure you ll never forget to do it. IRAs have lower annual contribution limits than employer-sponsored plans and you won t be able to have it deducted from your paycheck before it s taxed. But you may be able to deduct some or all of your contributions from your income tax return, depending on your age, income level and if you re covered by a retirement plan at work. Investment Choices - Depending on the institution that holds your IRA, you may have fewer or many more investment choices than someone in an employer-sponsored plan. As you research IRA providers, check that they have the investment choices that you think you need. In most cases, the financial institution will have someone who can discuss investment options with you.

36 Distribution Options - IRAs may provide you with various distribution options; check with your financial institution. You ll have to begin to receive a required minimum distribution from the account at age 70 ½. Roth IRAs - Roth IRAs are another type of Individual Retirement Account that many financial institutions offer. You can make contributions in the same manner as a regular IRA, but they aren t tax deductible. Instead, your investment gains aren t taxed at all provided the account has been open for at least five years and you don t withdraw funds until you reach at least age 59 ½. Roth IRAs aren t subject to the RMD rules that defined contribution plans and regular IRAs are. You may not be able eligible to open a Roth IRA if your income is above certain levels. Again, your IRA provider can assist you in determining your eligibility to open an account.

37 Slide 30 Financial Goals Exit College Retirement You've learned about how to plan for retirement, now let's talk about planning for college. Select College to get started. If you have already viewed both selections, click Exit.

38 Slide 31 Planning for the Unexpected We ve looked at a lot of different pieces of financial planning so far. A critical piece of successful financial planning is preparing for the what ifs. What if I get hurt or sick and can t work? What if my spouse or I die? While no one likes to think about these types of situations, you need to consider ways to protect yourself from the unexpected.

39 Slide 32 Health Insurance Health insurance should be the cornerstone of everyone s insurance plan. Even if you ve never been sick a day in your life, odds are that you will be at some point and the cost, depending on the situation, could be catastrophic. Most Americans have health insurance through their employers, who have contracts with health insurance companies. These companies charge premiums for their participants in exchange for paying a portion of the expenses. Health insurance companies may have also contracted with doctors and hospitals to provide care at a specific negotiated cost.

40 Slide 33 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Your portion of your expenses will be paid in a variety of ways. Click on each of the tabs to learn how. Premium - You ll pay a premium to the insurance company to have access to plan coverage. Many employers will share the cost with you while you re working for them. Premiums can vary between states and will be greater for family coverage than for an individual. Deductible - A deductible is the amount you must pay each year before the insurance company will pay anything towards your expenses. Typically, if your plan has a higher deductible, you ll pay a lower premium. Coinsurance - Some plans require that you pay coinsurance, or a percentage of the bill after you ve met your annual deductible. This is usually 20% of the bill and is capped at an annual maximum amount. Copayment - A copayment is a fixed dollar amount that you may pay for specific services, such as a visit to the doctor s office, an emergency room visit or prescription drugs. Out-of-pocket maximum - Your plan will also have an out-of-pocket maximum amount. This is the highest amount that your company will require you to pay towards your medical expenses in a year. This maximum amount helps to protect you from paying large amounts of money out of your own pocket. Once you ve reached your maximum for the plan year, the insurance company will pay all or almost all expenses it considers medically necessary.

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42 Slide 34 Health Insurance Plans Indemnity Plan Preferred Provider Organization Health Maintenance Organization When considering a health insurance plan, it s important to pick the plan that s right for you. Let s look a several types of health insurance plans. Click on any button to begin.

43 Slide 35 Indemnity Plan Exit Indemnity Plan Preferred Provider Organization Health Maintenance Organization An indemnity plan will allow you to choose any doctor you wish, but you ll have to meet a deductible before the insurance company will pay. These plans usually pay a percentage (80% for example) of what is usual and customary for a medical procedure in your area. If the medical provider charges more, you ll pay the difference. To learn more about the different types of plans, select one of the other buttons or click Exit when you're done.

44 Slide 36 Preferred Provider Organization Exit Indemnity Plan Preferred Provider Organization Health Maintenance Organization In a Preferred Provider Organization, or PPO, a health insurer has negotiated contracts with a network of health care providers for you to receive health services at discounted costs. You have the freedom to use doctors that are not part of the network, but you may have a higher copayment or deductible. To learn more about the different types of plans, select one of the other buttons or click Exit when you're done.

45 Slide 37 Health Maintenance Organization Exit Indemnity Plan Preferred Provider Organization Health Maintenance Organization A Health Maintenance Organization, or HMO, is a prepaid health plan in which you pay a monthly premium and the HMO covers your doctor visits, hospital stays, emergency care, surgery, preventive care, checkups, lab tests, X-rays and therapy. You must choose a primary care physician who coordinates all of your care and makes referrals to any specialists that you might need. In an HMO, you must use the doctors, hospitals and clinics that participate in your plan's network. To learn more about the different types of plans, select one of the other buttons or click Exit when you're done.

46 Slide 38 Reviewing Your Options Cost Frequency of visits Preventative care Doctor participation Your decision about what kind of health insurance plan you choose is important. You should consider a number of factors. How much does it cost? How often do you visit the doctor? Does the plan cover preventative health care, such as annual physicals? And does your doctor participate in the plan? You should spend some time reviewing your options and how the plans work before making a decision. Most employers allow you to change plans only once a year.

47 Slide 39 Life Insurance Life Insurance is very important if you have others, such as a family, who rely on you for income. In the event of your death, your family will face final expenses, as well as potentially on-going or future costs, such as a mortgage or college education for your children. These costs may present a financial burden on your survivors. But how much do you need? The amount will probably vary as you go through life. If you have children, you may want to ensure that they ll be able to go to college, which requires a larger amount of life insurance. But once they re done with college, the need may not be as great. If you re married, you may require additional life insurance, while divorce or widowhood may mean less is required. There's no one size fits all. Instead, you may want to speak to a life insurance agent or use an on-line calculator to determine the right amount for your situation.

48 Slide 40 Term Life vs. Whole Life Whole Life There are a variety of life insurance products, but the two most common are term life and whole life. Term life is purchased for a set period of time, and premiums can increase as you get older. Term life provides only a benefit in the event of the covered person s death; there s no cash value to the policy. Whole life also provides a death benefit, but part of your premium also goes to fund a savings account within the policy. Premiums for whole life insurance remain the same as you get older, but are generally higher than those for term life.

49 Slide 41 Employer Plans Most employers provide group life insurance for their employees that provide one or two times their annual salaries as a paid benefit. Many offer plans that allow employees to purchase additional life insurance through payroll deduction. The significant benefit of these employer plans is that the premium pricing is based on a large number of people, which generally makes it cheaper than if you were to purchase an individual policy. These are term life policies, which means you re covered only as long as you re considered to be an eligible employee and they only provide a benefit when you die.

50 Slide 42 Disability Insurance During your working years, are you more likely to become disabled or die? Become disabled Die You know that life insurance helps to protect your family when you die. But what happens if you become disabled? During your working years, do you think you re more likely to become disabled or die? Click on your answer.

51 Slide 43 Disability Insurance To many people, it s surprising that you have a greater chance of becoming disabled during your working years than you do of dying. But there are ways of protecting your financial future if you become disabled. Disability insurance replaces a portion of your salary if you re unable to work due to illness or injury. Short-term disability benefits can last between six months and two years. Long-term disability benefits begin when the short-term benefits end and can last until age 65 or even a lifetime, assuming you remain disabled.

52 Slide 44 PROPERTIES Allow user to leave interaction: Show Next Slide Button: Completion Button Label: Anytime Show always Next Slide Does my employer offer disability insurance? Many employers provide disability benefits as a standard benefit. If your employer doesn t, you should consider getting an individual policy. In either case, it s important to understand the benefits and limitations of each, as provisions can vary. Click on each of the questions to learn more about disability insurance. What qualifies as a disability? Plans have different definitions of what a disability is. Some will only pay benefits if you re unable to perform the duties of any job, while others pay only if you re unable to perform the duties of your own job. There are also policies that will only pay if you can t work in any occupation for which you have training or education. What can I expect from my policy? You should research policy details, such as how long you'd be required to wait before receiving benefits and how long the benefits would last. The cost of coverage can vary. Many employers provide some disability insurance as a standard benefit and pay the premiums. If your employer doesn t offer coverage or if you're self-employed, you can apply for an individual policy. Are there any other resources? Social Security can also provide disability benefits. The benefits don t start until you ve been disabled for a full five months, meaning it might be six months or more before you receive any benefits. The benefits will last only as long as you remain disabled. You can learn more about these benefits on the Social Security Administration s website.

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54 Slide 45 Long-Term Care At some point in your life, you may be faced with the need for something more than disability insurance. Due to the natural aging process or a medical condition, you may want to consider long-term care. Long-term care covers you when you re no longer able to perform the activities of daily living, such as bathing or eating. Care in a facility or even your home can be quite expensive, totaling tens of thousands of dollars per year. Long-term care insurance provides you with the opportunity to protect yourself against the high cost of this type of care. It provides you with the means of protecting your assets and family resources. Premiums are generally based upon your age and health. Again, it s important to research the benefits and waiting periods for available policies before making a decision.

55 Slide 46 Financial Planning On the Web Financial Literacy Planning is critical to ensure you have a secure financial future. The best way to begin is by determining your starting point and figuring out the best way to get where you want to end up financially. Using the tools you learned about in this module, you should be able to map out a plan and financial goals that are right for you. You ve also learned a number of ways to avoid potential problems along the way. While no one knows what the future may bring, having a plan helps you focus on your goals. Keep learning! For more information on this topic, select On the Web to visit Smartmoney.com where you ll find resources and tools to help you plan for your financial future. To view our other Financial Literacy presentations, select the Financial Literacy link.