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```					      Introduction to
Insurance Planning
Virtual Class 3 of 3

Education Planning, Financial Planning
for Changing Circumstances, and
Economic Concepts

Introduction to Financial Planning – Session 3 of 3
College Planning
• Determine the type of school that a young adult will
most likely attend: community college, state
university, private institution, Ivy League school, etc.

• Project the cost of that school in the future. Use school
inflation factor, not a GDP factor.

• Determine the future value needed.

• Calculate the amount needed (lump sum or annuity
payment) to fund goal.

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 1
Determine the PV of the 4 years of tuition,
starting at age 17.

•   n          =     4
•   i          =     3.7383 or 1.11/1.07 – 1 x 100
•   PMT        =     \$30,000
•   PV         =

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 1
Determine the PV of the 4 years of tuition, starting
at age 17.

•   n        =     4
•   i        =     3.7383 or 1.11/1.07 – 1 x 100
•   PMT      =     \$30,000
•   PV       =     (\$109,571.80)

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 2
Determine the PV of the lump sum calculated in Step 1
based on the estimated FV of education of \$109,572.

•   n         =    17
•   i         =    3.7383
•   FV        =    (\$109,572) computed in Step 1
•   PV        =

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 2
Determine the PV of the lump sum calculated in Step 1
based on the estimated FV of education of \$109,572.

•   n         =    17
•   i         =    3.7383
•   FV        =    (\$109,572) computed in Step 1
•   PV        =    \$58,712.85

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 3
Determine the annual payments needed to fund
college tuition costs.

•   n        =    17
•   i        =    11
•   PV       =    \$58,713
•   PMT      =

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#1
Assume a child is born today and you want to plan for his/her college
education. College will start at age 18 and run for 4 years. Tuition is currently
\$30,000 per year and the yearly increase in college cost is 7%.

Assuming an after-tax rate of return of 11%, what is needed at the end of
each year if the last payment occurs at the beginning of the first year of
college?

Step 3
Determine the annual payments needed to fund
college tuition costs.

•   n        =    17
•   i        =    11
•   PV       =    \$58,713
•   PMT      =    \$7,777.80

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#2
Assume college costs of \$36,000 per year in today’s dollars and that the
yearly increase in college cost is 6%. The student will start college in 5 years
and the rate of return is 5%. What is needed today to fund these four years of
college?

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#2
Assume college costs of \$36,000 per year in today’s dollars and that the
yearly increase in college cost is 6%. The student will start college in 5 years
and the rate of return is 5%. What is needed today to fund these four years of
college?

Step 1
Determine the PV of the 4 years of tuition starting in
5 years.

•   n      =     4
•   i      =     (.9434) or 1.05/1.06 – 1 x 100
•   PMT    =     \$36,000
•   PV     =

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#2
Assume college costs of \$36,000 per year in today’s dollars and that the
yearly increase in college cost is 6%. The student will start college in 5 years
and the rate of return is 5%. What is needed today to fund these four years of
college?

Step 1
Determine the PV of the 4 years of tuition starting in
5 years.

•   n      =     4
•   i      =     (.9434) or 1.05/1.06 – 1 x 100
•   PMT    =     \$36,000
•   PV     =     (\$147,461.38)

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#2
Assume college costs of \$36,000 per year in today’s dollars and that the
yearly increase in college cost is 6%. The student will start college in 5 years
and the rate of return is 5%. What is needed today to fund these four years of
college?

Step 2
Determine the PV of the lump sum calculated in Step 1
based on the estimated FV of education of \$147,461.

•   n       =    5
•   i       =    (.9434)
•   FV      =    (\$147,461) computed in step 1
•   PV      =

Introduction to Financial Planning – Session 3 of 3
Educational Planning Illustration
#2
Assume college costs of \$36,000 per year in today’s dollars and that the
yearly increase in college cost is 6%. The student will start college in 5 years
and the rate of return is 5%. What is needed today to fund these four years of
college?

Step 2
Determine the PV of the lump sum calculated in Step 1
based on the estimated FV of education of \$147,461.

•   n       =    5
•   i       =    (.9434)
•   FV      =    (\$147,461) computed in step 1
•   PV      =    \$154,618

Q&A

Introduction to Financial Planning – Session 3 of 3
Education Planning
•   Financial aid eligibility is determined by filling out a
Free Application for Federal Student Aid (FAFSA)
application.

•   The formula is called the expected family contribution
(EFC) for a child's education.

•   Some of the factors used in this calculation include:
1.   Taxable income
2.   Assets
3.   Retirement funds
4.   Benefits (such as unemployment and Social Security).

Introduction to Financial Planning – Session 3 of 3
Education Planning
The EFC calculation is used to determine eligibility for
financial aid programs, except for unsubsidized
student loans and PLUS loans, which are provided
regardless of financial need.

Here is the EFC calculation:
Tuition Cost of Attendance                                       \$ XXX
Less: Expected Family Contribution                               \$ (XXX)
Financial Need                                                   \$ XXX

Introduction to Financial Planning – Session 3 of 3
Educational Planning
The government excludes these assets from
consideration when determining the EFC:

•   Home equity in a primary residence
•   Retirement plans (i.e. IRA, 401(k), etc.)
•   Cash value life insurance
•   Annuities
•   Value of a small business owned and controlled by the family

Introduction to Financial Planning – Session 3 of 3
Educational Planning
The following are used to help a student with
college costs:

•   Pell Grant
•   Supplemental Educational Opportunity Grants
•   Perkins Loans
•   Federal Direct/Stafford Loans
•   PLUS Direct/PLUS Loans
•   Work-Study Programs

Introduction to Financial Planning – Session 3 of 3
Pell Grant
The federal Pell Grant is not a loan and does not require
repayment.

• Awarded to undergraduate students who have not
earned bachelor's or professional degrees.

Introduction to Financial Planning – Session 3 of 3
Pell Grant
The federal Pell Grant is not a loan and does not require
repayment.

• Awarded to undergraduate students who have not
earned bachelor's or professional degrees.
• Maximum awards for Pell Grants are \$5,350 per
student for the 2009-2010 school year.

Introduction to Financial Planning – Session 3 of 3
Pell Grant
The federal Pell Grant is not a loan and does not require
repayment.

• Awarded to undergraduate students who have not
earned bachelor's or professional degrees.
• Maximum awards for Pell Grants are \$5,350 per
student for the 2009-2010 school year.
• A student can receive only one Pell grant per year.

Introduction to Financial Planning – Session 3 of 3
Pell Grant
The federal Pell Grant is not a loan and does not require
repayment.

• Awarded to undergraduate students who have not
earned bachelor's or professional degrees.
• Maximum awards for Pell Grants are \$5,350 per
student for the 2009-2010 school year.
• A student can receive only one Pell grant per year.
• If a student is enrolled part-time, the full-time amount
of \$5,350 is prorated.

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
Provided by the United States Department of Education.
The loans are either:

1. Subsidized loans
2. Unsubsidized loans

All Stafford Loans have below-market interest rates and
the rate cannot exceed 8.25 percent.

Introduction to Financial Planning – Session 3 of 3
Stafford Loans

Subsidized Stafford loan does not accrue interest until
after the deferment period which is typically six
months after:

•   Leaving school
•   Dropping below half-time status

Introduction to Financial Planning – Session 3 of 3
Stafford Loans

Unsubsidized Stafford loan

A loan in which the borrower is charged interest on
the principal from the moment of disbursement until
the loan is paid off. There is an option of paying the
interest as it accrues.

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
The following allows the student to obtain a "deferment"
(a temporary postponement of payments):

• At least half-time enrollment at a post-secondary
school.

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
The following allows the student to obtain a "deferment"
(a temporary postponement of payments):

• At least half-time enrollment at a post-secondary
school.
• Enrollment in an approved fellowship program.

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
The following allows the student to obtain a "deferment"
(a temporary postponement of payments):

• At least half-time enrollment at a post-secondary school.

• Enrollment in an approved fellowship program.

• Enrollment in an approved rehabilitation training program for
the disabled

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
The following allows the student to obtain a "deferment"
(a temporary postponement of payments):

• At least half-time enrollment at a post-secondary
school.
• Enrollment in an approved fellowship program.
• Enrollment in an approved rehabilitation training
program for the disabled.
• Economic hardship (for up to 3 years).

Introduction to Financial Planning – Session 3 of 3
Stafford Loans
The following allows the student to obtain a "deferment"
(a temporary postponement of payments):

• At least half-time enrollment at a post-secondary
school.
• Enrollment in an approved fellowship program.
• Enrollment in an approved rehabilitation training
program for the disabled.
• Economic hardship (for up to 3 years).
• Former student's inability to attain full-time
employment (for up to 3 years).

Introduction to Financial Planning – Session 3 of 3
PLUS Loans
Parent Loans for Undergraduate Students (PLUS
Loans)

Allow parents with good credit history to borrow funds
for a child’s educational expenses when the dependent
child attends college at least half-time.

Introduction to Financial Planning – Session 3 of 3
PLUS Loans
•   The interest rate is variable but will never exceed
9 percent.

Introduction to Financial Planning – Session 3 of 3
PLUS Loans
•   The interest rate is variable but will never exceed
9 percent.

•   Interest accrues on the loan from the moment of
disbursement until the loan is paid off.

Introduction to Financial Planning – Session 3 of 3
PLUS Loans
•   The interest rate is variable but will never exceed
9 percent.

•   Interest accrues on the loan from the moment of
disbursement until the loan is paid off.

•   Typically a 4% fee to originate the loan.

Introduction to Financial Planning – Session 3 of 3
PLUS Loans
•   The interest rate is variable but will never exceed
9 percent.

•   Interest accrues on the loan from the moment of
disbursement until the loan is paid off.

•   Typically a 4% fee to originate the loan.

•   Loans must be repaid within 10 years.

Introduction to Financial Planning – Session 3 of 3
Campus-Based Student Financial
Aid
There are three campus-based programs that are
administered directly by the financial aid office at
participating schools. They are:

1.   Federal Supplemental Education Opportunity Grant
Program (FSEOG)

2.   Federal Work-Study Program

3.   Federal Perkins Loan

Introduction to Financial Planning – Session 3 of 3
Federal Supplemental Education
Opportunity Grant Program
(FSEOG)
• FSEOG is a grant, an outright gift, which need not be
repaid.

• The FSEOG is awarded to undergraduate students with
low EFCs and gives priority to students who receive
federal Pell Grants.

• Benefit amounts range from \$100 to \$4,000 per

Introduction to Financial Planning – Session 3 of 3
Federal Work-Study Program

students to earn money for education expenses
through jobs that pay at least current minimum wages.

Introduction to Financial Planning – Session 3 of 3
Federal Perkins Loan
students that have exceptional financial need (i.e.,
very low EFCs).

Introduction to Financial Planning – Session 3 of 3
Federal Perkins Loan
students that have exceptional financial need (i.e.,
very low EFCs).

• Although the loan is made with governmental funds,
the school is the lender.

Introduction to Financial Planning – Session 3 of 3
Federal Perkins Loan
students that have exceptional financial need (i.e.,
very low EFCs).

• Although the loan is made with governmental funds,
the school is the lender.

• The loan must be repaid at a 5 percent rate.

Introduction to Financial Planning – Session 3 of 3
Federal Perkins Loan
students that have exceptional financial need (i.e.,
very low EFCs).

• Although the loan is made with governmental funds,
the school is the lender.

• The loan must be repaid at a 5 percent rate.

• After students graduate, leave school, or drop below
half-time status, there is a nine-month grace period for
repayment.

Introduction to Financial Planning – Session 3 of 3
Federal Perkins Loan
This loan must be paid within 10 years from the start of
repayment. The following conditions will cancel the
loan:

• Death
• Total and permanent disability
• Becoming a full-time special education teacher, nurse,
or medical technician
• Serving in the Armed Forces

Introduction to Financial Planning – Session 3 of 3
Our first 5 questions in this session are back-to-back.
They will cover:

•   Educational Planning
•   Pell Grants
•   Stafford and PLUS Loans
•   FSEOG
•   Federal Work Study Programs
•   Federal Perkins Loans

Introduction to Financial Planning – Session 3 of 3
Poll Question #1
Which of the following is/are true regarding
federal Pell Grants?

1. The Pell Grant does not require repayment.
2. The maximum awards for a Pell Grant for 2009-2010 is
\$5,350.
3. A Pell Grant is only available for full-time students.

Introduction to Financial Planning – Session 3 of 3
Poll Question #1
Which of the following is/are true regarding
federal Pell Grants?

1. The Pell Grant does not require repayment.
2. The maximum awards for a Pell Grant for 2009-2010 is
\$5,350.
3. A Pell Grant is only available for full-time students.

Answer:                    Choices 1 and 2 are correct.
(Choice 3 is wrong as a Pell Grant can be prorated.)

Introduction to Financial Planning – Session 3 of 3
Poll Question #2
Which of the following is/are true regarding a
subsidized Stafford Loan?

1.   No interest is charged on the loan until repayment of the
loan begins.
2.   The loan begins 9 months after either graduation, leaving
school, or dropping below half-time status.
3.   All Stafford Loans have below-market interest rates cannot
exceed 8.25 percent.

Introduction to Financial Planning – Session 3 of 3
Poll Question #2
Which of the following is/are true regarding a
subsidized Stafford Loan?

1.   No interest is charged on the loan until repayment of the
loan begins.
2.   The loan begins 9 months after either graduation, leaving
school, or dropping below half-time status.
3.   All Stafford Loans have below-market interest rates that
cannot exceed 8.25 percent.

Answer:                     Choices 1 and 3 are correct.
(Choice 2 is true for 6 months.)

Introduction to Financial Planning – Session 3 of 3
Poll Question #3
Which of the following is/are true regarding an
unsubsidized Stafford Loan?

1.   No interest is charged on the loan until repayment of the
loan begins.
2.   All Stafford Loans have below-market interest rates that
cannot exceed 8.25 percent.

Introduction to Financial Planning – Session 3 of 3
Poll Question #3
Which of the following is/are true regarding an
unsubsidized Stafford Loan?

1.   No interest is charged on the loan until repayment of the
loan begins.
2.   All Stafford Loans have below-market interest rates that
cannot exceed 8.25 percent.

(For choice 1, interest accrues at the start of
the loan.)

Introduction to Financial Planning – Session 3 of 3
Poll Question #4
Which of the following is/are true regarding PLUS
Loans?

1.   Interest rate cannot exceed 8.25%.
2.   The rate is variable.
3.   There is typically a 4% fee to originate the loan.
4.   The Federal Perkins Loan must be repaid within 10 years.

Introduction to Financial Planning – Session 3 of 3
Poll Question #4
Which of the following is/are true regarding PLUS
Loans?

1.   Interest rate cannot exceed 8.25%.
2.   The rate is variable.
3.   There is typically a 4% fee to originate the loan.
4.   The Federal Perkins Loan must be repaid within 10 years.

Answer:                     Choices 2, 3 and 4 are correct.
(For choice 1, there is a 9% rate for the
PLUS loan.)

Introduction to Financial Planning – Session 3 of 3
Poll Question #5
Which of the following is/are true?

1.   The Federal Supplemental Education Opportunity Grant can be
obtained along with a Pell Grant.

2.   The Federal Perkins Loan has a 6-month grace period for
repayment.

3.   The Federal Perkins Loan is cancelled if you become a full-time
special education teacher, nurse, or medical technician.

4.   Loan must be repaid within 10 years.

Introduction to Financial Planning – Session 3 of 3
Poll Question #5
Which of the following is/are true?

1.   The Federal Supplemental Education Opportunity Grant can be
obtained along with a Pell Grant.

2.   The Federal Perkins Loan has a 6-month grace period for
repayment.

3.   The Federal Perkins Loan is cancelled if you become a full-time
special education teacher, nurse, or medical technician.

4.   Loan must be repaid within 10 years.

Answer:                       Choices 1, 3 and 4 are correct.
(Choice 2 should be 9 months.)

Q&A

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

• Tax-deferred growth. No AGI phase-out.

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

• Tax-deferred growth. No AGI phase-out.
• The beneficiary/student is not taxed on the gross
income earned within the plan.

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

• Tax-deferred growth. No AGI phase-out.
• The beneficiary/student is not taxed on the gross
income earned within the plan.
• The contributor can remove assets from their taxable
estate. \$13,000 x 5 years = \$65,000 for 2010.

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

• Tax-deferred growth. No AGI phase-out.
• The beneficiary/student is not taxed on the gross
income earned within the plan.
• The contributor can remove assets from their taxable
estate. \$13,000 x 5 years = \$65,000 for 2010.
• Many states provide state tax deductions and/or tax
exemptions for contributions.

Introduction to Financial Planning – Session 3 of 3
Qualified State Tuition Plans
(QSTPs)
Referred to as 529 Plans. The benefits include:

• Tax-deferred growth. No AGI phase-out.
• The beneficiary/student is not taxed on the gross
income earned within the plan.
• The contributor can remove assets from their taxable
estate. \$13,000 x 5 years = \$65,000 for 2010.
• Many states provide state tax deductions and/or tax
exemptions for contributions.
• The contributor/owner has full control of the assets
and can change the beneficiary.

Introduction to Financial Planning – Session 3 of 3
Prepaid Tuition Plans
Are plans where prepayment of tuition is allowed at
current prices for enrollment in the future.

• The parents assume the risk that the child will not
requirements, or

• The student may receive a scholarship from that
college or from another college.

Introduction to Financial Planning – Session 3 of 3
Poll Question #6
Which of the following is/are true regarding 529
plans?

1.   Tax-deferred growth with AGI phase-out limitations.
2.   The contributor/owner has full control of the assets and can
change the beneficiary.
3.   There is a possible state tax deduction for contributions
4.   No penalty if there is a distribution made due to a
scholarship or the death or disability of the beneficiary.

Introduction to Financial Planning – Session 3 of 3
Poll Question #6
Which of the following is/are true regarding 529
plans?

1.   Tax-deferred growth with AGI phase-out limitations.
2.   The contributor/owner has full control of the assets and can
change the beneficiary.
3.   There is a possible state tax deduction for contributions
4.   No penalty if there is a distribution made due to a
scholarship or the death or disability of the beneficiary.

Answer:                      Choices 2, 3 and 4 are correct.
(Choice 1 has no AGI limits.)

Q&A

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
A Coverdell ESA is an investment account established
with cash that is not deductible for the year
contributed.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
A Coverdell ESA is an investment account established
with cash that is not deductible for the year
contributed.

• The contributions are made for the benefit of children
that are under 18 years of age.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
A Coverdell ESA is an investment account established
with cash that is not deductible for the year
contributed.

• The contributions are made for the benefit of children
that are under 18 years of age.

• The contributions grow tax-free and are not subject to
tax if used for qualified educational expenses.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
A Coverdell ESA is an investment account established
with cash that is not deductible for the year
contributed.

• The contributions are made for the benefit of children
that are under 18 years of age.

• The contributions grow tax-free and are not subject to
tax if used for qualified educational expenses.

• If the funds are used for anything other than higher
educational expenses, the earnings are subject to
ordinary tax rates and a 10% penalty.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
• Assets are counted as child's.

• Annual contribution for 2010 is \$2,000 per beneficiary.

• Must be used by the beneficiary by age 30 or can be
rolled over to another beneficiary.

• If there is any remaining amount, it will be subject to
ordinary tax and the 10% penalty.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
Contributions can only can be made for 2010 when the
following AGI limits are met:

MFJ      \$190,000 - \$220,000;
Single   \$95,000 - \$110,000

Drawback of Coverdell ESAs is that a tax-free
distribution will preclude either the Hope Scholarship
Credit or Lifetime Learning Credit in the same year.

Introduction to Financial Planning – Session 3 of 3
Coverdell Education Savings
Accounts
Qualified elementary and secondary school expenses are:

• Tuition, fees, room and board, academic tutoring,
• Books, supplies, and other equipment such as
computers,
• Uniforms, transportation, and supplementary items or
services.

Used for the enrollment or attendance of the beneficiary
at a public, private, or religious school providing
elementary or secondary education kindergarten

Introduction to Financial Planning – Session 3 of 3
Poll Question #7
Which of the following is/are true regarding a
Coverdell ESA?

1.   The contribution must be made for the benefit of a child
before the child turns 19 years of age.
2.   Annual contribution is \$5,000 per beneficiary.
3.   A tax-free distribution can be used to pay for a computer,
transportation and uniforms.

Introduction to Financial Planning – Session 3 of 3
Poll Question #7
Which of the following is/are true regarding an
Educational IRA?

1.   The contribution must be made for the benefit of a child
before the child turns 19 years of age.
2.   Annual contribution is \$5,000 per beneficiary.
3.   A tax-free distribution can be used to pay for a computer,
transportation and uniforms.

(Choice 1 is under 18, choice 2 is \$2,000.)

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.

Step 2        Determine maximum contribution of \$2,000 multiplied
by number of eligible children.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.

Step 2        Determine maximum contribution of \$2,000 multiplied
by number of eligible children.

Step 3        Determine the amount allowed after AGI phase-out
limitation.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.
(The 15-year-old and the 12-year-old)
Step 2        Determine maximum contribution of \$2,000 multiplied
by number of eligible children.

Step 3        Determine the amount allowed after AGI phase-out
limitation.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.
(The 15-year-old and the 12-year-old)
Step 2        Determine maximum contribution of \$2,000 multiplied
by number of eligible children.
(2 children x \$2,000 = \$4,000)
Step 3        Determine the amount allowed after AGI phase-out
limitation.

Introduction to Financial Planning – Session 3 of 3
Coverdell Illustration
John is single with AGI of \$100,000 and has three children,
ages 18, 15, and 12, from a prior marriage. He wants to
know what is the maximum contribution to a Coverdell ESA
that he can make in 2010.

Step 1        Determine who is eligible.
(The 15-year-old and the 12-year-old)
Step 2        Determine maximum contribution of \$2,000 multiplied
by number of eligible children.
(2 children x \$2,000 = \$4,000)
Step 3        Determine the amount allowed after AGI phase-out
limitation.
(Note: the phase-out for a single taxpayer is \$95,000 - \$110,000).
Allowable is \$2,667, calculated as:
[\$110,000 upper AGI limitation - \$100,000 actual AGI] /
[\$110,000 upper AGI limitation - \$95,000 lower AGI
limitation] x \$4,000 maximum contribution = \$2,667.

Introduction to Financial Planning – Session 3 of 3
The Hope Scholarship Credit
(American Educational Opportunity Credit)
Comprised of:

• 100 percent of the first \$2,000 of qualified expenses
paid in the tax year, plus 25 percent of the next
\$2,000 for a maximum of \$2,500 per student.

• College enrollment must not be less than half-time
during the year.

Introduction to Financial Planning – Session 3 of 3
The Hope Scholarship Credit
(American Educational Opportunity Credit)
The AGI limits for 2010 are:

Single    \$80,000 - \$90,000
MFJ       \$160,000 - \$180,000;

• A 40% (maximum of \$1,000) refundable credit for
students who do not have a tax liability.

• The credit is increased to \$3,600 for Gulf Opportunity
Zone students.

Introduction to Financial Planning – Session 3 of 3
The Hope Scholarship Credit
(American Educational Opportunity Credit)
The credit is eligible for first four years of post-secondary
education for the:

• Taxpayer

• Spouse

• Dependent

Introduction to Financial Planning – Session 3 of 3
• Annual base amount is \$10,000.

• The credit is based on a 20 percent factor of the
qualified expenses.

• The maximum credit is \$2,000= (\$10,000 x 20%) and
applies to the family, not on a per-child basis.

• It can be claimed for an unlimited number of years.

Introduction to Financial Planning – Session 3 of 3
If two or more children in the same household incur
qualified expenses in the same year, the parents may
claim:

Introduction to Financial Planning – Session 3 of 3
If two or more children in the same household incur
qualified expenses in the same year, the parents may
claim:

Introduction to Financial Planning – Session 3 of 3
If two or more children in the same household incur
qualified expenses in the same year, the parents may
claim:

• a Hope Scholarship Credit for both children, or

Introduction to Financial Planning – Session 3 of 3
If two or more children in the same household incur
qualified expenses in the same year, the parents may
claim:

• a Hope Scholarship Credit for both children, or

• a Lifetime Learning Credit for one child and a Hope
Scholarship Credit for the other.

Introduction to Financial Planning – Session 3 of 3
If two or more children in the same household incur
qualified expenses in the same year, the parents may
claim:

• a Hope Scholarship Credit for both children, or

• a Lifetime Learning Credit for one child and a Hope
Scholarship Credit for the other.

However, only one credit is allowed per child per year.

Introduction to Financial Planning – Session 3 of 3
After you figure out the credit, the amount may be
reduced based on the following AGI limitation for
2010:

Single     \$50,000 - \$60,000;
MFJ        \$100,000 - \$120,000.

• The credit is 40% or a maximum of \$4,000 for Gulf
Opportunity Zone students.

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•    John (part-time night school) \$7,000
•    Mary (part-time night school) \$5,000
•    Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?
\$2,500 ((\$2,000 x 100%) + (\$2,000 x 25%))

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?
\$2,500 ((\$2,000 x 100%) + (\$2,000 x 25%))
3.   Who is eligible for the Lifetime Learning Credit?

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?
\$2,500 ((\$2,000 x 100%) + (\$2,000 x 25%))
3.   Who is eligible for the Lifetime Learning Credit?
(John and Mary. Ignore Hans as it is beneficial to take the Hope Credit).

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?
\$2,500 ((\$2,000 x 100%) + (\$2,000 x 25%))
3.   Who is eligible for the Lifetime Learning Credit?
(John and Mary. Ignore Hans as it is beneficial to take the Hope Credit).
4.   What is the allowable Lifetime Learning Credit?

Introduction to Financial Planning – Session 3 of 3
Illustration
John and Mary are married and have AGI of \$62,500 for 2010.
They have one child, Hans, who is in the third year of college.
The following are the costs for education:

•      John (part-time night school) \$7,000
•      Mary (part-time night school) \$5,000
•      Hans (full-time college)     \$32,000

1.   Who is eligible for the Hope Credit?
Hans is eligible.
2.   What is the allowable Hope Credit?
\$2,500 ((\$2,000 x 100%) + (\$2,000 x 25%))
3.   Who is eligible for the Lifetime Learning Credit?
(John and Mary. Ignore Hans as it is beneficial to take the Hope Credit).
4.   What is the allowable Lifetime Learning Credit?
\$2,000 (\$10,000 x 20%) It does not matter how John and Mary allocate their amounts.
No AGI limitations due to AGI < \$120,000

Q&A

Introduction to Financial Planning – Session 3 of 3
Series EE Bonds
For accrued interest to be tax-free, it must meet the
following exceptions:

• EE Bonds must be purchased in the name of one or
both parents of the student/child.

• The parent must be 24 years old before the first day of
the month of the issue date of the bond.

Introduction to Financial Planning – Session 3 of 3
Series EE Bonds
After you figure out the eligible accrued interest, the
amount may be reduced based on the following AGI
limitation for 2010:

Single     \$70,100 - \$85,100
MFJ        \$105,100 - \$135,100.

Introduction to Financial Planning – Session 3 of 3
(UGMA)

• Allows parents the option to put assets in a custodial
account for the child.

• State will determine age of majority.

• Possible “kiddie tax” issues.

• UGMA assets are the child's when determining financial
aid.

Introduction to Financial Planning – Session 3 of 3
Student Loan Interest
•   Maximum of \$2,500 of interest may be deducted as
an adjustment to the taxpayer's AGI.

•   The loaned funds must have been spent on:

1.   tuition and enrollment fees
2.   books, supplies, equipment
3.   room and board, or
4.   transportation expenses.

Introduction to Financial Planning – Session 3 of 3
Student Loan Interest
The phase-out for the eligible interest is as follows for
2010:

Single      \$60,000 - \$75,000.
MFJ         \$120,000 - \$150,000.

Introduction to Financial Planning – Session 3 of 3
Student Loan Interest
An employer can pay \$5,250 per year for an employee's:

• enrollment fees

• books, supplies, and equipment.

There are no phase-out limitations for 2010 and job-
related classes are not subject to these rules.

Introduction to Financial Planning – Session 3 of 3
Monetary Settlements
• Legal settlements

• Structured settlements

• Lottery winnings and monetary windfalls

• Lump-sum retirement distributions

• Insurance proceeds

Introduction to Financial Planning – Session 3 of 3
Legal Settlements
• How are they taxed when received? Generally,
amounts received as damages for injury are excluded.
Punitive damages are taxable.

• How do you pay damages as a defendant? Minimize
the exposure by doing a risk analysis. (This will be
explained in the next course.)

Introduction to Financial Planning – Session 3 of 3
Structured Settlements
• Injured victim receives a stream of income.

• The annuity stream received is tax-free.

• Types of structured settlements:

o   Temporary or permanent disability
o   Guardianship for minors or incompetents
o   Worker's compensation
o   Wrongful death

Introduction to Financial Planning – Session 3 of 3
Lottery and Other Windfalls
• If there is a lump-sum or annuity option, help the
client determine the best choice.

Introduction to Financial Planning – Session 3 of 3
Lottery and Other Windfalls
• If there is a lump-sum or annuity option, help the
client determine the best choice.

• The amount is subject to income taxes.

Introduction to Financial Planning – Session 3 of 3
Lottery and Other Windfalls
• If there is a lump-sum or annuity option, help the
client determine the best choice.

• The amount is subject to income taxes.

• Because most lottery winners go bankrupt shortly
thereafter, help to manage the winnings.

Introduction to Financial Planning – Session 3 of 3
Special Circumstances
•   Divorce
•   Disability
•   Dependents with special needs
•   Terminal illness
•   Job change
•   Job loss

Introduction to Financial Planning – Session 3 of 3
Divorce Issues
• Division of assets and their tax basis
• Spousal support – alimony taxable to payee tax-
deductible to payor. Special recapture in year three if
• Child support is tax-free.
• Qualified Domestic Relations Order (QDRO) for assets
in a qualified account.
• Social Security: When married more than ten years,
divorced individuals will use a former spouse for
maximum payout calculations.

Introduction to Financial Planning – Session 3 of 3
Other Special Circumstances
Issues

• Dependents with special needs

• Terminal illness - consider a viatical settlement

• Non-traditional family division of assets upon death

Q&A

Introduction to Financial Planning – Session 3 of 3
Supply & Demand
We will now switch to an interactive web page

Introduction to Financial Planning – Session 3 of 3
Price Elasticity
The quantity demanded of a good in response to changes
in that good's price.

• A good is elastic when its quantity demanded
responds greatly to price changes.

• A good is inelastic when its quantity demanded
responds little to price changes. Beer and gasoline,
considered necessities by some, will remain in demand
no matter what the price.

Introduction to Financial Planning – Session 3 of 3
Substitutes & Complements
• Substitutes - increase in the price of one will cause
an increase in demand for the other. For example, if
the price of oil, gas, or propane suddenly rose sharply,
the demand for firewood would most likely increase.

• Complements - products that are usually consumed
jointly. They are related such that a decrease in the
price of one will cause an increase in the demand for
the other. For example, when jelly goes on sale,
peanut butter will most likely increase.

Introduction to Financial Planning – Session 3 of 3
Diminishing Marginal Utility
As the rate of consumption increases, the marginal utility
derived from consuming additional units of a good will
from the consumption of an additional unit for a good.

Example: All-you-can-eat shrimp at Beefsteak Charlie’s.

Introduction to Financial Planning – Session 3 of 3
Poll Question #8
Which law indicates that demand for an economic
product will vary inversely with its price?

1.   The   law   of   competition
2.   The   law   of   supply and demand
3.   The   law   of   demand
4.   The   law   of   supply

Introduction to Financial Planning – Session 3 of 3
Poll Question #8
Which law indicates that demand for an economic
product will vary inversely with its price?

1.   The   law   of   competition
2.   The   law   of   supply and demand
3.   The   law   of   demand
4.   The   law   of   supply

Answer:                         The law of demand is the

Introduction to Financial Planning – Session 3 of 3
Fiscal Policy
• Comprised of taxation, expenditures, and debt
management by the federal government.

Introduction to Financial Planning – Session 3 of 3
Fiscal Policy
• Comprised of taxation, expenditures, and debt
management by the federal government.

• Changes in taxation affect corporate earnings,
disposable earnings, and the overall economy. As tax
rates increase, corporation after-tax income declines,
which reduces their ability to pay dividends.

Introduction to Financial Planning – Session 3 of 3
Fiscal Policy
• Comprised of taxation, expenditures, and debt
management by the federal government.

• Changes in taxation affect corporate earnings,
disposable earnings, and the overall economy. As tax
rates increase, corporation after-tax income declines,
which reduces their ability to pay dividends.

• Tax rate increases also reduce individual’s disposable
income and limit the amount of money entering the
economy.

Introduction to Financial Planning – Session 3 of 3
Deficit Spending
• When government expenditures exceed revenues/tax
collections.

Introduction to Financial Planning – Session 3 of 3
Deficit Spending
• When government expenditures exceed revenues/tax
collections.

• By selling debt securities to the public to finance
deficits, Treasury Securities compete with other issuers
of debt securities.

Introduction to Financial Planning – Session 3 of 3
Deficit Spending
• When government expenditures exceed revenues/tax
collections.

• By selling debt securities to the public to finance
deficits, Treasury Securities compete with other issuers
of debt securities.

• This demand drives the value of debt down due to the
increased supply of debt, causing the yields on debt
instruments to rise to meet competition.

Introduction to Financial Planning – Session 3 of 3
Poll Question #9
Which of the following describes supply if the
quantity supplied does not change significantly
with a change in price?

a)   Unit elastic
b)   Elastic
c)   Inelastic
d)   Variable

Introduction to Financial Planning – Session 3 of 3
Poll Question #9
Which of the following describes supply if the
quantity supplied does not change significantly
with a change in price?

a)   Unit elastic
b)   Elastic
c)   Inelastic
d)   Variable

Answer:                    A quantity supplied that does not
change insignificantly with a
change in price is called inelastic.

Introduction to Financial Planning – Session 3 of 3
Poll Question #10
Which of the following government actions would
best describe fiscal policy?

1) Increase in government spending
2) Decrease in the money supply
3) Decrease in income taxes

Introduction to Financial Planning – Session 3 of 3
Poll Question #10
Which of the following government actions would
best describe fiscal policy?

1) Increase in government spending
2) Decrease in the money supply
3) Decrease in income taxes

Answer:                 Choices 1 and 3 are correct.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Reserve (Fed) is charged with three primary
responsibilities:

• Maintain sustainable long-term economic growth.

• Maintain price levels that are supported by that
economic growth.

• Maintain full employment.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The reserve requirement for a member bank of the
Federal Reserve is the percent of deposit liabilities that
must be held in reserve.

• As this requirement is increased, less money is
available to be loaned to customers resulting in a
restriction of the money supply.

• Conversely, as reserve requirements are decreased,
more money is made available for loans.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Funds Rate is the overnight lending rate
between member banks.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
Open market operations is the process by which the
Federal Reserve purchases and sells government
securities in the open market.

• The Fed buys government securities to cause more
money to circulate, thereby increasing lending and
lowering interest rates.

• The Fed sells government securities to restrict the
money supply. As investors purchase government
securities, more money leaves circulation, which
decreases lending and increases interest rates.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Reserve discount rate is the rate at which
member banks can borrow funds from the Federal
Reserve to meet reserve requirements.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Reserve discount rate is the rate at which
member banks can borrow funds from the Federal
Reserve to meet reserve requirements.

• When the Fed raises the discount rate, it increases
short-term borrowing costs and discourages member
banks from borrowing funds. This results in the money
supply contracting.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Reserve discount rate is the rate at which
member banks can borrow funds from the Federal
Reserve to meet reserve requirements.

• When the Fed raises the discount rate, it increases
short-term borrowing costs and discourages member
banks from borrowing funds. This results in the money
supply contracting.

• The Fed will lower the discount rate when it wants
to increase the money supply.

Introduction to Financial Planning – Session 3 of 3
Monetary Policy
The Federal Reserve discount rate is the rate at which
member banks can borrow funds from the Federal
Reserve to meet reserve requirements.

• When the Fed raises the discount rate, it increases
short-term borrowing costs and discourages member
banks from borrowing funds. This results in the money
supply contracting.

• The Fed will lower the discount rate when it wants
to increase the money supply.

• Banks are able to borrow funds at lower rates and lend
more money, which increases the money supply.

Introduction to Financial Planning – Session 3 of 3
Poll Question #11
What action taken by the Fed will lead to increased
money supply?

a)   Lowering the prime rate
b)   Lowering the discount rate
c)   Selling Treasury securities
d)   Increasing reserve requirements

Introduction to Financial Planning – Session 3 of 3
Poll Question #11
What action taken by the Fed will lead to increased
money supply?

a)   Lowering the prime rate
b)   Lowering the discount rate
c)   Selling Treasury securities
d)   Increasing reserve requirements

Answer:                   Lowering the discount rate (not the prime
rate) is the correct answer. Note, when the
Fed buys securities and/or increases the
reserve requirements, the money supply is
decreased.

Introduction to Financial Planning – Session 3 of 3
Business cycles are swings in total national output,
income, and employment marked by widespread
expansion or contraction in many sectors of the
economy.

• Business consists of two general phases: expansion
and contraction

• Has two points: peak and trough

• Each phase of the business cycle passes into the next
phase and is characterized by different economic
conditions

Introduction to Financial Planning – Session 3 of 3

Q&A

Introduction to Financial Planning – Session 3 of 3
Upcoming Risk Management
Sessions
For the next three sessions students will learn how to identify risk management techniques
and calculate the insurance payout in the event of a claim. The facts and circumstances of
each situation determine whether a current insurance policy has any deficiencies and whether
alternative solutions will need implementing.

The first virtual session will focus on definitions used in insurance contracts, how to evaluate
risk exposure, and how to implement an insurance policy based on a given situation and the
limitations of both the policy and the insurance company.

Modules to complete before the next virtual classroom session:
• Course Preview
• Principles of Insurance
• Legal Aspects of Insurance
• Evaluation & Analysis of Risk Exposure
• Insurance Needs
• Insurance Policy Selection
• Insurance Company Selection

Introduction to Financial Planning – Session 3 of 3
Thank You!
See you at the next session!

Risk Management
Session 1 of 3

Introduction to Financial Planning – Session 3 of 3

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