Chapter 12: Insurance and Tax

Question 1

Explain Risk Management.

Answer 1

Risk Management is a planned approach to minimising risks that a business or household is exposed to.

1. Identify possible risks
2. Cost if the risk occurs?
3. Cost to protect against that risk?
4. Take action if cost of protection is far cheaper than the cost if the risk happens.

Question 2

Explain three examples of risk management.

Answer 2

1. Security Measures: Security guards or an alarm.
2. Proper training: Send staff on health & safety courses.
3. Insurance: Insurance company provides compensation for any
   loss.

Question 3

Explain with an example utmost good faith as a principle of insurance.

Answer 3

When filling out Proposal Form you must answer all questions truthfully and volunteer any other relevant Material Information that would affect the insurance company’s decision to provide cover. E.g. Tell them you smoke getting health insurance.

Question 4

Explain with an example insurable intrest as a principle of insurance.

Answer 4

You can only insure something that you own with a monetary value and you must lose money if anything happens to the item. The person must have a ‘Legal Relationship’ with the item insured. E.g. Can’t ensure against failing an exam, can’t insure a friend’s bike.

Question 5

Explain with an example indemnity as a principle of insurance.

Answer 5

You cannot profit from insurance. The compensation you receive is exactly the amount that you lost. Over-insuring doesn’t lead to profit. Under-insuring means you only get a fraction of the compensation. E.g. If you crash a car you get the value of the car at the time of the crash not when you bought it.

Question 6

Explain with an example contribution as a principle of insurance.

Answer 6

Contribution: Principle states that if you insure an asset with more than one company (say 3) then you do not receive 3 times the compensation. Instead each company pays you a third in the ratio of the amount that you insured with each company. E.g. Insured a €1000 bike with two companies, receives €500 from each.

Question 7

Explain with an example subrogation as a principle of insurance.

Answer 7

This principle states that once the insurance company has given you full compensation for an item you give up your right to further claims. The insurance company now owns the item and can pursue any claims for further or retrospective compensation. E.g. After you crash a car the insurance company own’s the scrap metal.

Question 8

What is premium and what five factors does it depend on?

Answer 8

It is the amount of money you pay for insurance.

1. Risk: Higher risk = higher premium. A loading is an extra charge added to cover higher risk situations EG Young drivers
2. Value: The more valuable the item = Higher premium
3. Claims: The more insurance company’s pay out in compensation the
   higher premiums will be to cover costs.
4. Profit: Add on to the premium a % for profit.
5. Tax: Government adds on a tax on premiums which increases the
   cost to consumers.

Question 9

Explain seven types of business insurance.

Answer 9

1. Fidelity Guarantee Insurance: Protects against losses from dishonest employees. E.g. Employees stealing.
2. Public Liability Insurance: Protects the business if any member of the public is injured. On the premises due to negligence.
3. Product Liability Insurance: Protects the business if customers injure themselves as a result of using the product. E.g. damages caused by defects.
4. Employers Liability: This protects businesses against the risk of an employee getting injured or sick at work due to negligence on the employer’s behalf.
5. Motor Insurance: If a business has any cars, trucks etc it must have motor insurance by law.
6. Theft: Covered for any stock stolen from the business.
7. Plate Glass: Covers the businesses windows.

Question 10

Differentiate between third party fire and theft and comprehensive car insurance.

Answer 10

Third Party Fire and Theft: Covers damage to other party in a crash, if it’s your fault, but not your car. Also covered if vehicle is stolen or burnt out.
Comprehensive: Covers all parties and covers all risks.

Question 11

Explain the three reasons insurance is important for a business.

Answer 11

1. Business Survival: Won’t have to close down in the case of a serious accident. They will be compensated.
2. Risk Management: To lower the premium of insurance the business might take steps to further lower the risk. E.g. Alarms, Warning signs, Training etc.
3. Improved Cash Flow: Pay a small amount each month/year instead of a big chunk of cash when an accident happens.

Question 12

Explain five different types of household insurance.

Answer 12

1. Health Insurance: Pays for private medical bills in case you or your family get sick or injured.
2. Life Assurance: Company pays a certain amount of money to your next of kin when you die.
3. House and Contents: Covers the building and everything inside if the home is damaged or destroyed.
4. Motor Insurance: Legal requirement for a car.
5. Mortgage Protection Insurance: If the family cannot pay their monthly repayments due to ill health, redundancy or death then the insurance company will pay it until they can afford to pay it again.

Question 13

Differentiate between two types of life assurance.

Answer 13

Whole Life Policy-Covers you until you die

Endowment-Pays out on a certain date or if you die before that date.

Question 14

What is taxation? Who runs the tax system?

Answer 14

Money that all businesses and households pay to the government to run the country. Pays for schools, roads, Garda, hospitals etc.
Revenue Commissioners collects taxes.
Rates and types of taxes are decided by the government.

Question 15

Explain the three reasons for taxation.

Answer 15

1. Raise Money: Pay for essential services such as hospitals, roads etc
2. Redistribute Wealth: Take money from high earners and give it to low or no income individuals.
3. Discourage Consumption: Impose high taxes on items that are bad for people EG Cigarettes and alcohol.

Question 16

Explain eight taxes paid by households.

Answer 16

1. PAYE: Pay as You Earn. Its a direct tax, meaning it directly taxes your wages so you get less take home pay. Employers deduct the tax and pay it to Revenue. Employees get paid their net pay. Employees are entitled to tax credits which reduce the tax they have to pay depending on circumstances.
2. PRSI: Another direct tax. Pay PRSI so in future we qualify for social welfare if we ever need it.
3. USC: Universal Social Charge. Direct tax on ALL INCOME, not just wages. It was introduced in 2011 at the height of the economic crisis as a way to generate extra revenue for the government. It was supposed to be a temporary measure. The more you earn the higher the % tax you pay. Very low income earners pay zero USC.
4. VAT: All households pay VAT on almost all goods and services. The business includes VAT in the price and pays it to Revenue. Essential items are VAT exempt EG Funerals, children’s clothes, medicines.
5. CGT: Capital Gains Tax: Tax to be paid on profits on assets sold (capital gain) EG Shares, holiday home.
6. CAT: Capital Acquisitions Tax: Tax on any gift or inheritance you receive over certain thresholds.
7. DIRT: Deposit Interest Retention Tax. Tax on interest earned from money in deposit / savings account. The bank deducts the DIRT at source.
8. Motor Tax: By law every car has to be taxed. More pollution = more tax.

Question 17

Explain six taxes paid by business.

Answer 17

1. Income Tax: Tax for self employed entrepreneurs based on the profits they earn. Self-assessed and paid to Revenue on 31st of October. Revenue conducts audits.
2. Corporation Tax: Tax companies pay on profits. Ireland’s rate is very low, 12.5%, to encourage companies to set up here. Self-assessed. Revenue conduct audits.
3. VAT: Value Added Tax, Businesses work out their price including their profit mark up and then they add on VAT to get the price for the consumer. The Business collects this VAT and pays it to Revenue.
   They are also entitled to claim VAT back on any purchases they buy that have VAT on them as businesses operate outside of VAT.
4. Commercial Rates: Fees levied by local councils on business properties. Pays for roads, bins, lighting, paths etc.
5. Customs Duties: Tax on items purchased from outside the EU. Goods will not be released by customs until tax is paid.
6. Employers PRSI: Tax on employers for having employees. % of all your employees gross wage.

Question 18

Explain four effects of taxation on a business.

Answer 18

1. Lower Profits: Less money left for the owners after tax paid out of profits.
2. Lower Sales: Adding VAT to sales price makes them more expensive
   therefore consumers can buy less.
3. Higher Costs: Employers PRSI is a higher cost on top of paying employees their wage. Also businesses employ accountants to do their accounts and work out their tax. This is an extra cost for the business.
4. Less Overtime: Business find it hard to get employees to do overtime in busy periods as high rates of PAYE, PRSI, USC act as a disincentive. Government would take half of their overtime earned.

Question 19

Explain 4 Similarities and 4 differences between business and household taxation.

Answer 19

Differences:

• Businesses get more tax deductions than households - can claim tax deduction for cost of buying fixed assets.
• Businesses can claim a refund on VAT.
• Businesses collect tax on behalf of revenue
• Businesses pay more taxes than households.

Similarities:

• Both register with Revenue - E.g. detailing name, address etc.
• Both must calculate the amount of tax owed for some taxes. E.g. CGT
• Both try to minimise tax liability and take advantage of government incentives. E.g. Household pension scheme.
• Both must keep proper tax records for at least 6 years. E.g Proof of paying when audited

Question 20

Explain P21 Form.

Answer 20

Given at the end of the year shows difference between how much tax was paid and how much was owed for that year. If an employee overpaid they receive refund from Revenue. If an employee underpaid they must pay the amount they owe to Revenue.

Question 21

Explain P60 Form.

Answer 21

Form is given to every employee at end of tax year by employer. Details of how much gross income was earned and what tax was deducted. Used as proof to qualify for social welfare.

Question 22

Explain P45 Form.

Answer 22

Form given to employees when they leave a job. Contains details of employees gross pay and tax paid from start of year till they left the job. Needed to claim social welfare.

Question 23

Explain Self Assessment Income Tax.

Answer 23

Paid by self-employed.
Paid on their business profits and the income they received from them.
Individual must work out the tax they owe and file a tax return to the Revenue by the 31st of October each year.
Subject to audits by the Revenue.

Question 24

Explain proposal form.

Answer 24

Is the application form that a person fills in when they are applying for insurance. Ask questions to be answered truthfully. Uses answers to decide what risk the person is and if they should insure them.

Question 25

What is meant by being underinsured?

Answer 25

Means the business has inadequate cover and will only receive a fraction of the compensation when a claim is made. The amount underinsured would have to come out of the business which could lead to bankruptcy.