Insurance concepts

Question 1

Insurance

Answer 1

-A legal entity that is quite sophisticated

-Its important that both the insured and the insurer are familiar with the legal requirements and the jargon that is used to express certain occurrences within the industry

Question 2

Non-compulsory insurance

Answer 2

-Refers to insurance where the insured has the option of insuring against certain risks that may and may not occur

-The decision to insure an asset, lies solely with the insurer and is not influenced by the government

Question 3

Over-insurance

Answer 3

-It occurs when assets are insured for more than its market value by the insured

-The insurer can choose to reinstate the insured

Question 4

Under-insurance

Answer 4

-Occurs when assets are insured for less than its market value

-The insured will be compensated partly for damages, in the event of a claim

Question 5

Forms of investment

Answer 5

-RSA retail savings bonds

-Unit trusts

-Shares

-Fixed deposits

Question 6

The impact of RSA retail savings bonds

Answer 6

-The investment is available to people from all income groups

-The investor receives interest payments twice a year from the government

-This investment cannot be offered as a form of security in return for loans from financial institutions

-Investors don’t have te option of freely exchange retail bond amongst themselves

Question 7

Impact of unit trusts

Answer 7

-Lowers the potential risk and allows more people to invest in the fund

-Investors have free access to the fund and may convert them to cash in the event of an emergency

-This investment option is not suitable for investors who want to evade risks

-This investment option is not recommended to investors who want to invest for a limited period

Question 8

Impact of shares

Answer 8

-The shares may be freely sold and purchased on the JSE

-The investor’s return on investment is based on the financial performance of the company

-Investors must rely on the goodwill of the company to declare a dividend

-The value of the dividends declared by the company is determined by the directors of the company

Question 9

Impact of fixed deposits

Answer 9

-The duration of the investment period is determined solely by the investors

-The return on investment of this type of investment is higher

-Penalties may be charged for early withdrawal

-The return in investments may be lower than the general rate of inflation

Question 10

Debentures

Answer 10

-Companies that require additional funding may access debentures on the JSE

-Its a financial instrument that allows companies to borrow money from the public

-The investor lends a certain amount of money to a company for a certain period

-The investor receives annual returns on her investment from the companies to whom the debentures were issued

Question 11

Dividends

Answer 11

-The return on an investment in shares which is paid regularly by a company to its shareholders

-Dividends are decided and managed by the companys board of directors and approved by the shareholders through voting rights