Chapter 4: Introduction to financial products and customer needs Flashcards
List the main types of provision categories
- Social security
- Financial products
- Contracts
- Schemes
- Transactions
List the main types of social security benefits that may be offered by the State.
- 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
Insurance contracts
Under insurance contracts, in return for a single payment, the provider will pay an individual or any heirs an agreed amount that start or end on the occurrence of a pre-specified event.
This event may happen to the individual, the individual’s property or a third party.
Reinsurance contracts
Providers of insurance products can pass some of the risks that they take on to third parties through reinsurance contracts.
Pension schemes
A pension scheme 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.
Benefit schemes
Benefit schemes have a similar legal and tax structure to that of pension schemes, but may provide a different type of benefit, such as to cover medical expenses, or unemployment.
Investment schemes
Investment schemes involve an individual paying a single premium or a series of payments to a provider with the expectation that a higher amount will be paid back at a later date.
Derivatives
A derivative is a financial instrument whose value depends on the value of other investments or variables.
Summarize the 3 main principles of insurance and pensions that impact the design of financial products and the benefits that they can provide
- Insurable interes:
* In most countries, an insurance contract is only valid if the person taking out the contract has a financial interest in the insured event.
* This is primarily to prevent moral hazard, fraud and other crime.
* Individuals are generally assumed to have unlimited financial interest in their own lives, and the lives of spouses and dependent children, but other financial interest are limited in amount to prevent overinsurance - Pre-funding:
* The key principle of insurance and pensions is that individuals or corporate bodies put money aside in advance of the occurence of an uncertain risk event.
* The key issue is how much money is needed to provide a given level of benefit with the desired probability. - Pooling of risk:
* Grouping individuals together and pooling their finances will help to protect the individuals against some of the uncertainties that may exist in the cost of financing the benefits.
* Pooling can also have operational advantages
* It may lead to more cost-effective provision than if each individual made their own financial provision.
Microinsurance
Microinsurance refers to insurance products that offer coverage to low-income households.
A microinsurance plan provides protection to individuals who have little savings and is tailored specifically for lower valued assets and compensation for illness, injury or death.
Discuss how a customer’s logical needs can be analysed
- Maintaining a current lifestyle
- Protection
- Accumulation for known purpose
- Accumulation for a purpose as yet unknown out of any remianing disposable income or capital.
This may involve taking advantage of tax-efficient arrangements.
How can emotional needs be identified?
Emotional needs are identified by considering an individual’s feelings. This may result in an individual getting what they want rather than what they truly need.
For example:
- to generate more income in retirement than is actually needed
- to avoid the guilt if not protecting dependents
What are current needs?
A current need is one that has an immediate effect on the customer’s circumstances.
What are future needs?
A future need may be one that relates to a customer’s future aspirations.
Explain how attitude to risk affects an individual’s financial decisions
A risk-averse individual will prefer protection against future events even at the expense of a worse immediate lifestyle.
A high-risk individual will prefer to work on the assumption that rare events will not happen to them, and will prefer to address such events when they occur. In the meantime they will use the money saved by bot making provision to enhance their immediate lifestyle.
