C4 - Fin products and customer needs Flashcards
List 5 main types of social security, financial products, contracts or schemes
- Insurance contracts
- Reinsurance contracts
- Pension scheme
- Investment scheme
- Derivatives
Define insurance contracts
Insurance contract: in return for a single payment (or a series of payments) an insurance company will pay and individual or his/her heirs an agreed amount (or series of amounts) that start or end on a pre-specified event. This event may happen to the individual, the individual’s property or a third party.
Define Reinsurance contracts
Reinsurance contract: an insurance contract for an insurance company, which allows the transfer of (direct) risk taken on to a third party
Define pension scheme
Pension scheme: a vehicle that involves the accumulation of funds, which are paid out on a later event; usually retirement, but the event may also be death or early withdrawal from the pension scheme.
Define investment scheme
Investment scheme: a vehicle that involves and individual paying a single payment or a series of payments to a provider with the expectation that a higher amount will be paid back at a later date.
Define Derivatives
A derivative is a financial instrument whose value depends on the value of other investments (eg shares, bonds) or variables (eg interest rates, exchange rates).
Explains:
1. Idea behind means testing done by state
2. How it may impact individuals
Means Test : An assessment to determine the eligibility for benefits e.g. eligible if they earn less than a certain level of income per year.
Impact on individual:
1. Financial disincentive to individuals to make alternate provisions
2. Citizens may or may not be required to contribute to the cost of social security scheme
3. Political risk that the state may change or withdraw benefits.
List 5 main types of social security benefits offered by state.
- Retirement pensions including survivor benefits
- Medical care
- income support due to unemployment, illness or disability
- Housing support due to low income
- Long term care support.
What is insurable Interest
Insurable interest: Insurance is valid only if
1. Person taking out the contract has a financial interest in the insures event
2. To prevent moral hazard, fraud and other crime
What is ‘Pre-funding of the risk’ ?
Individuals an corporate bodies put aside money in advance of the occurrence of an uncertain event:
The uncertainty might relate to:
1. Whether the event will happen at all, e.g fire, flood
2. The timing of a certain risk event, e.g. death
3. The cost of an event that is certain to occur
What is ‘pooling of risk’
Individuals may group together and pool their finances (cost effective)
Two types of Customer Needs
- Emotional: Emotional needs are identified by considering an individual’s feelings. Note that this may result in an individual getting what they want rather than what they truly need. E.g.
- Current spending on enjoyment
- To generate more income in retirement than is actually needed
- To avoid the guilt of not protecting dependants
Logical: Determined after careful analysis and prioritisation, (i.e. a ‘fact find’). This is followed by fitting products to those needs. An individual’s logical needs may be identified as:
1. Maintaining current lifestyle
2. Protection, e.g. against death, loss, illness, accident
3. Accumulation for a purpose, e.g. retirement income, mortgage repayment
4. Accumulation for a purpose as yet unknown, e.g. tax-efficient saving
Current vs Future Needs
Current need is one triggered by an event that will have an immediate effect on an individual’s circumstances. An example is:
Protection, e.g. against death, loss, illness, accident
Future needs relate to future aspirations. Examples include:
Accumulation for a purpose, e.g. retirement income, mortgage repayment
Accumulation for a purpose as yet unknown out of any remaining disposable income or capital, e.g. saving in a tax-efficient way
