Chapter 4 Introduction to Financial Products and Customer Needs

Question 1

5 Examples of customer needs (5)

Answer 1

1. Py off debt owing
2. Save for retirement
3. Save to purchase a house
4. Protection against unemployment / death or illness
5. Protection against theft / breaking down of household items

Question 2

What is social security?

Answer 2

Benefits offered by the state which is usually means-tested. Exposed to political risk, i.e. benefits can stop due to political reasons, such as change of government

Question 3

What is meant by means-tested

Answer 3

Earnings have to be below a certain to level to qualify

Question 4

Examples of social security (5)

Answer 4

• Retirement pension
• Medical care
• Income support due to unemployment, illness or disability
• Child support
• Long-term care support

Question 5

What is an insurance contract

Answer 5

In return for a single / series of payments an individual / heirs or third party receives an agreed-upon amount starting and ending n a specific event occurring.

Question 6

What is a reinsurance contract

Answer 6

Insurers pass some of the risk they are taking on to a third party at a specific reinsurance premium

Question 7

What is a pension scheme

Answer 7

Individuals accumulate funds, which are paid out at a later stage. Usually retirement, death or early withdrawal

Question 8

What needs are met through a pension scheme? (3)

Answer 8

• Accumulate assets to provide income in retirement
• Increase income in real terms, so to maintain live standard
• Protect heirs against the individual’s death before and after retirement

Question 9

What is a benefit scheme?

Answer 9

Similar legal and tax structure as a pension scheme. Provides protection against events such as medical expenses or unemployment

Question 10

What is an investment scheme?

Answer 10

Individuals pay an amount or a series of amounts with the expectation a larger sum of money will be paid back in the future.

Question 11

What are derivatives?

Answer 11

A financial instrument, where its value is dependent on another investment (bonds/shares) or variable (interest rate)

This is also used to pass risk to a third party.

Question 12

What is micro-insurance?

Answer 12

Provides insurance protection for low-income households for lower value assets, illness and death.

Question 13

What are the 3 main principles of insurance and pensions (3)

Answer 13

• Insurable interest - Person taking out the contract has a financial interest in the insured event, to prevent moral hazard, fraud and other crime.
• Pre-funding - Putting money aside in advance of an uncertain risk event (in timing, occurrence and size)
• Pooling of risk - Protects a group of individuals who pool their finances, against uncertainty in financial costs, which then leads to more cost-efficient provision.

Question 14

Logical vs Emotional needs

Answer 14

Logical needs: Carefully deciding what is needed

Emotional needs: What is wanted not what is needed

Question 15

How are logical needs decided? (3)

Answer 15

Analysing and prioritising what is needed for example:

• Maintain lifestyle
• Protection against death, illness and unemployment
• Accumulation for a known or unknown purpose

Question 16

What are current needs?

Answer 16

A current need is one that has an immediate effect on an individual’s circumstances.

For example:
- Protection, e.g. against death, loss, illness, accident

Question 17

What are future needs?

Answer 17

Future needs relate to future aspirations.

For example:

• Accumulation for a known purpose, e.g. retirement income, mortgage repayment
• Accumulation for a purpose yet unknown out of any remaining disposable income or capital