Chapter 5: Introduction to financial products and customer needs Flashcards
5 Main types of products that an individual or company can use to protect against risk
- Insurance contracts
- Reinsurance contracts
- Pensions schemes
- Investment schemes
- Derivatives
Customer needs can be desribed as (4)
- logical, or
- emotional
and - current, or
- future
Logical needs
Genuine needs that are determined after careful analyses and prioritisation.
E.g.
- protection against death, loss, illness, accident
- accumulation for a known purpose, (eg retirement, or to pay off a loan)
- accumulation for a purpose as yet unknown (eg in a tax efficient way)
Emotional needs
Determined by playing on an individual’s emotions. If customers emotional needs are met then they may get what they want rather than what they really need.
E.g.
- current spending on enjoyment
- avoiding the guilt of not providing for dependents on death
- avoiding the shame of being poor in retirement
Current need
One that is triggered by an event that will have an immediate effect on an individual’s circumstances.
e.g. protection against death or illness.
Future needs
Relate to future aspirations.
e.g. retiring at age 60.
Pensions scheme
Involves the accumulations of funds for retirement.
Often a benefit might be paid on an event that happens before retirement, such as death, ill health or withdrawal.
2 Main types of benefit scheme
- Defined benefit scheme
- Defined contribution scheme
Defined benefit scheme
The benefit is defined in terms of a set of rules, e.g. a percentage of final salary for each year worked.
The benefit is NOT DIRECTLY RELATED to the contributions paid in, or the investment returns earned.
The scheme may be funded or unfunded.
Defined contribution scheme.
The benefit depends directly on the contributions paid and the investment returns earned on those contributions, net of any charges.
Defined ambition scheme
A scheme where risks are shared between the different parties involved, e.g. scheme members, employers and insurers.
E.g. a defined contribution offering minimum investment or retirement income guarantees.
