Topic 4: dealing with long term risks Flashcards
1
Q
Risk + reward
A
- greater possible reward = greater risk
- risk: possibility of harm/damage occurring due to things going wrong
- risk associated with: uncertainty + probability + chance taking + unexpected outcomes
- speculative risk: chance taking when outcome could be favourable or adverse
2
Q
Relationship between risk + reward
A
- people take risks due to the reward
- someone wanting potentially high rewards must accept higher risk level of loss
- someone avoiding risk must accept they’ll earn lower returns
- ‘trade off’ between the two
3
Q
Savings/investments products risk levels
A
- premium bonds: no risk, 100% backed by government, no guaranteed reward
- bank savings account: little risk, low interest
- unit trusts: more risk (stocks), good returns
- established company shares: carry risk, reasonable dividend chance
- new company shares: higher risk, return could be high
4
Q
financial services compensation scheme
A
- insurance (helps people manage long-term risks)
- all savings/investments carry some risk
when a firm is in default- the fscs covers: - deposits in banks, building societies, credit unions (authorised by PRA): 100% of first £85,000 per person per authorised provider
- investments: 100% of first £50,000 per person per firm
- home finance: 100% of first £50,000 per person per firm
- long-term insurance: 100% of claim (no upper limit)
- compulsory insurance: claims protected in full
- non-compulsory insurance: 90% of claim (no upper limit)
- general insurance advise: 90% of claim (no upper limit)
5
Q
wills
A
- decide what’ll happen to their money, property, possessions
- minimise inheritance tax
- over 18s only
- of sound mind, voluntarily making it
- signed in presence of two witnesses (unnamed in the will) who also sign
6
Q
main items included in wills
A
- asset details: properties, savings, pensions, insurances, accounts, shares
- beneficiaries names/details
- guardianships for under 18s
- executors names (persons responsible for ensuring wishes are carried out)
7
Q
inheritance tax
A
- 40% paid on the estate over nil rate band (£325k or £500k if direct descendant)
- 36% if 10% is to charity
- paid by will executor
8
Q
risk averse
A
- try avoid risk wherever possible
9
Q
risk transfer
A
- pay premiums to insurance companies
10
Q
impact of risk
A
- money amount involved (more lost => greater impact)
- effect on lifestyle
- timing of event
- frequency of event
11
Q
degree of risk=
A
probability x impact
(higher number=higher risk)
12
Q
life assurance
A
- whole of life assurance: no fixed time limit, sum assured is payed upon the death, expensive, uncommon
- term assurance: sum assured payable if death occurs before end of specified term, otherwise cover ceases, no refunds (often used as mortgage protection)
13
Q
reasons for buying life assurance
A
- family protection
- debt protection
- managing a tax liability
- cover for older people
14
Q
critical illness insurance
A
- guaranteed cash lump sum payout if person is diagnosed with a critical illness
- policy sets list of illnesses covered
15
Q
income protection insurance
A
- pays a tax-free, inflation-linked, monthly income if an accidental injury or long-term illness occurs (so unable to work), until fit enough to go back to work or plan ends
- pays up to 60% of current gross earnings up to max £12,500/month
