C4 - Fin products and customer needs

Question 1

List 5 main types of social security, financial products, contracts or schemes

Answer 1

1. Insurance contracts
2. Reinsurance contracts
3. Pension scheme
4. Investment scheme
5. Derivatives

Question 2

Explains:
1. Idea behind means testing done by state
2. How it may impact individuals

Answer 2

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:
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.

Question 3

List 5 main types of social security benefits offered by state.

Answer 3

1. Retirement pensions including survivor benefits
2. Medical care
3. income support due to unemployment, illness or disability
4. Housing support due to low income
5. Long term care support.

Question 4

What is insurable Interest

Answer 4

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

Question 5

What is ‘Pre-funding of the risk’ ?

Answer 5

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

Question 6

What is ‘pooling of risk’

Answer 6

Individuals may group together and pool their finances (cost effective)

Question 7

Two types of Customer Needs

Answer 7

1. 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.
2. Current spending on enjoyment
3. To generate more income in retirement than is actually needed
4. 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

Question 8

Current vs Future Needs

Answer 8

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