Ch4: Intro to financial products and consumer needs

Question 1

Means test definition and negatives

Answer 1

• Assessment to determine eligibility for benefits
• E.g. only eligible to specific benefit if they earn less than a certain level of income per year
• May be financial disincentive to make alternative private provision

Question 2

Social security benefit types (6)

Answer 2

• Retirement pensions including survivor benefits
• Medical care
• Income support due to unemployment, illness or disability
• Housing support due to low income
• Child support
• Long-term care support

Question 3

Insurance principles

Answer 3

Existence of insurable interest
* Contract only valid if person taking out the contract has a financial interest in the insured event
* Primarily to prevent moral hazard, fraud, and other crime
* Assumed that individuals have unlimited financial interest in their lives, spouses and dependent children

Pre-funding of risk
* Money is put aside in advance of the occurrence of an uncertain risk event
* Uncertainty in timing, cost and whether event will happen at all
* How much to put aside depends on probability of risk event, cost, risk tolerance and return that can be earned on the pre-funded money before risk event occurs

Pooling of risk
* Protect against uncertainties that may exist
* Pool large amount of similar risks
* Economies of scale in:
* Provision (sharing of fixed costs)
* Admin costs
* Investment (larger pool to invest)

Question 4

Logical needs can by analysed as follows

Answer 4

• Maintaining a current lifestyle
• Protection E.g against death, loss, illness
• Accumulation for known purpose E.g retirement, repayment of mortgage
• Accumulation for a purpose not yet known

Question 5

Vulnerability can arise from (6)

Answer 5

• Low levels of education
• Limkited knowledge of financial products and markets
• Low income levels
• Poor health status
• Limited access to advice
• Limited financial security due to low income or asset levels