PM R23 Flashcards
Compare human capital and financial capital
Total wealth is composed of both human and financial capital.
Human capital is the PV of future labor income. Probability of being alive, riskiness of amount adjusted through discount rate
Financial capital is all other assets of an individual
Relationship between human capital, financial capital, and economic net worth
Net worth is FC + HC - liabilities
younger workers = HC > FC
Financial stages of life
Education
Early Career
Career Development
Peak Accumulation
Preretirement
Early retirement
Late retirement
Economic (holistic) Balance Sheet
Includes HC in assets
Includes consumption and bequests included in liabilities
Risk in relation to human and financial capital
Earnings risk; job loss/career disruption
Premature Death
Longevity risk: living beyond your financial capital
Property risk: loss of value in physical property
Liability risk: legally responsible for damages
Health risk
Types of insurance for personal financial planning
Life insurance
Disability income insurance: protects from work injuries
Property Insurance
Heath and Medical insurance
Liability insurance
Basic elements of life insurance policy, and how a policy is priced
Temporary life insurance: set for a period of time
Permanent life insurance: builds up value sufficient to pay for remaining lifetime of insured.
Pricing is affected by the mortality estimates for the insured’s group.
Net Premium is earned to make payouts.
Load is the estimate losses and expenses
Gross Premium = Net Premium + Load
Discuss the use of annuities in financial planning
Economic opposite of insurance (pay lump sump, receive monthly payments).
Insures against longevity risk
Immediate annuities start instantly, deferred annuities start later
Fixed annuities vs Variable annuities
Fixed: Payouts do not change in amount. Reflect bond market at time of purchase
Variable: linked to a change in a reference asset, higher cost
Analyze and evaluate insurance program (risk table)
Severe, Frequent: Risk Avoidance
Severe, Infrequent: Risk transfer
Not severe, Frequent: Risk reduction
Not severe, Infrequent: Risk retention
How can asset allocation change depending on human capital
Should change depending on total economic wealth
Someone with high HC risk should choose lower FC risk
If HC is correlated with equities for example, diversify away
