Understanding Insurance, Roth IRAs, and Stock Investments

Understanding Insurance Risk

Risk is involved in any situation in which some kind of loss or misfortune is possible. These can include:

• Financial: Loss of savings due to catastrophe.
• Physical: Health, welfare, or inability to secure income.
• Material: Home, vehicle, or property.

What is Insurance?

Insurance: Provides compensation for loss and spreads the cost of sharing risk.

When to Purchase Insurance

Purchase insurance when the probability of loss is small but the cost of loss is devastating. For example, restaurants typically don't insure plates because the loss is small, whereas Florida houses are often not insured due to the high probability of hurricanes.

Key Insurance Terminology

Premiums: Periodic payments for an insurance policy.

Insurance Policy: A written contract between the insurer and the insured. Each individual contract covers a specific loss.

Coverage: A specific type of loss covered by an insurance policy.

Claim: A written request for reimbursement to cover loss or damage that occurred from a specific event.

Providers of Insurance

Most insurance is provided by private, for-profit corporations. Other sources of insurance coverage include:

• The U.S. government / social insurance
• Joint programs from federal and state governments

Most recipients of government insurance pay minimal or no premiums for coverage.

Understanding the Roth IRA

What is a Roth IRA and How is it Funded?

A Roth IRA is a retirement savings account, funded by earned income. Your contributions grow tax-exempt, and you pay no federal taxes at the time of withdrawal.

Roth IRAs offer a wide range of investment options, from very conservative to very aggressive, allowing you to utilize the power of compounding. Contributions are made on an after-tax basis.

Roth IRA Fees and Contributions

• No setup fee.
• Minimum contribution of $50 monthly.
• Annual maximum contribution of $5,500.
• Contributions are after-tax.

Roth IRA Withdrawal Conditions

Withdrawals from a Roth IRA can be made for specific reasons, including:

• Beneficiary
• Disability
• Higher education expenses
• Family needs
• Up to $10,000 for a down payment on a first home
• Certain medical expenses
• Unemployment

Introduction to Stocks

Stocks: Equity instruments representing ownership interest (shares – a piece of a firm).

You can buy shares from investment companies or buy/sell them in the open market. There is no guaranteed rate of return with stocks.

Firms that want to expand often issue shares to the general public.

Capital Appreciation and Dividends

Shares of firms may increase in value; when this happens, it's called capital appreciation (e.g., from $10 to $15).

Some firms also issue dividends, which are a part of the firm's profits returned to shareholders.

Total Return = Capital Appreciation + Dividends

Over the long term (e.g., 5 years), stocks typically average a 7-11% return.