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LIBF Unit 2 > Topic 4 - Dealing with long-term risks > Flashcards

Topic 4 - Dealing with long-term risks Flashcards

1
Q

What are the different categories to risk? 4

A
  • peoples attitude
  • how attitude changes through a persons life cycle
  • risks attached to financial products
  • how people can deal with risk.
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2
Q

Why do people take financial risks?

A

It usually brings large rewards

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3
Q

What are some possible risks? 4

A
  • physical injury or death
  • loss of or damage to possessions
  • legal liability
  • financial loss
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4
Q

Why is uncertainty assosciated with risk?

A

because the future cannot be predicted accurately

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5
Q

Why is risk associated with probability?

A

the risk of an adverse event is higher when a situation makes it more likely to go wrong

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6
Q

Why is risk associated with taking a chance?

A

the outcome could be either favourable or adverse, known as speculative risk.

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7
Q

What is risk associated with?

A
  • uncertainty
  • probability
  • taking a chance
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8
Q

What can cause a risk to arise?

A

When the actual outcome of an event or situation differs from what someone expected or planned for.

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9
Q

In terms of financial products, why would people take risks?

A

if the product involves a customer taking a higher reward or return, individual is prepared to take for a given level of reward depends on their attitude to risk, which is covered in a later section

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10
Q

What are consequences of the risk reward relationship?

A
  • Someone who wants a higher level of risk of loss; or vis a versa
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11
Q

How are the consequences of the risk reward relationship resolved?

A

A trade off between the two, when deciding what combination of risk reward to accept
- a saver or investor pays for the chance of earning a higher reward by accepting less risk in order to receive a lower reward

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12
Q

What savings and investments products carry risk? 5

A
  • premium bonds
  • savings accounts
  • unit trusts
  • shares in an established company
  • shares in a newly quoted company
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13
Q

What risks do premium bonds carry?

A

no risk as they’re 100% guaranteed by the government

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14
Q

What risk does a bank savings account carry?

A

little risk but pays little interest - therefore little reward

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15
Q

What risk do unit trusts carry

A

more risk as their value can go down as well as up
(dependent on stock market movements )
- risk is spread over many different companies thus a possibility of goods return

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16
Q

What risk do shares in an established company carry?

A

some risk as there is no diversification but a reasonable chance to receive dividends

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17
Q

What risk do shares in a new quoted company carry

A

higher risk as the company is unknown
- if in an innovative sector the return could be higher

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18
Q

What is an interest rate?

A

reward earned on savings

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19
Q

What 2 ways would someone buying investment products hope to be rewarded in?

A
  • earning a return
    -make a capital gain.
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20
Q

What was the lowest the bank rate has been and how long for?

A

0.5% for 7 years until it dropped to 0.25% in 2016

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21
Q

Why does the bank rate kept low?

A
  • to make it easier for people to borrow
  • so people can come out of its low level of activity
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22
Q

Why was the bank rate reduced to 0.25%

A

in 2016 due to Brexit
- then to a lower 0.1% because of covid this is due to the uncertainty of the economy.

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23
Q

What does the interest rate do when borrowing money?

A
  • the interest rate they pay reflects the risk to the lender
  • the rate charged on a mortgage which is a secured loan, is cheaper than the rate quoted on a personal loan.
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24
Q

What would people with low risk acceptance do when investing?

A
  • invest in multiple companies as a unit trust rather than one or two
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25
Q

What would someone with high risk acceptance do?

A
  • willing to purchase high risk investments
  • buying shares in a new company in a high risk sector
  • hoping for a high return
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26
Q

What would someone do with an average degree of risk tolerance? When buyin a home

A

Borrow money in order to buy their home and take the risk that something might happen to stop them from keeping up with their repayments
- limiting the risk to what they know they can repay

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27
Q

What does it mean to be risk averse?

A

Unwilling to take a high risk

28
Q

What is meant by risk transfer?

A

When Someone who faces a risk spends money to pass it on to someone else.

29
Q

What would someone take out to help risk?

A

Insurance
- owner of phone pays insurance company to cover cost of the mobile phone in cost phone insurance

30
Q

How can you asses the impact of risk 4

A
  • amount of money involved
  • consequences of loss
  • timing of the loss
  • requejcy of loss
31
Q

What are the 2 main dimensions of risk?

A
  • impact of the risk
  • probability of the risk occurring
32
Q

What is the impact of the risk?

A
  • someone sustaining loss or damage means the effect it has on their life is related to the severity of the event
33
Q

What is the impact of the amount of money involved to the risk?

A

The more money lost the greater the impact

34
Q

How is the impact of the effect of lifestyle involved to the risk?

A

Risk events can change someone’s life

35
Q

How is the impact of the timing of the event involved to the risk?

A

Dependant on the age of the consumer
- if young could use up savings leaving lack of savings in the future

36
Q

How is the impact of the frequency of the event involved to the risk?

A

If it happens on several occasions the accumulated impact will be much worse

37
Q

What is meant by probability of risk?

A

The chances of the risk happening

38
Q

How is significant of a risk calculated?

A

Probability x impact = degree of risk

39
Q

What 4 ways of using insurance to deal with long term risk?

A
  • life assurance
    # critical illness
  • income protection
  • accident
  • sickness and unemployment
40
Q

What r the different types of life assurance? 2

A
  • while-of-life assurance
  • term assurance
41
Q

What is whole of life assurance?

A

The sum assured is payable on the death of the life assured whenever the death occurs
- no fixed time limit
- remains in force until the policyholder dies or surrenders it
- more expensive as it’s certain the sum paid out in the future

42
Q

What is term assurance?

A

Sum assured payable only if the person dies before the end of a specified term
- if the person survived the cover ceases and no payment or refund of premiums is made
- helpful for mortgage payments to ensure debts are repaid easily

43
Q

What are 4 reasons people might buy life assurance?

A
  • family protection
  • debt protection
  • managing a tax liability
  • cover for older people
44
Q

What does critical illness insurance do?

A

Pay out a guaranteed cash lump sum if the insured person is diagnosed with a critical illness.

45
Q

What is income protection insurance?

A

Pay out monthly income to insured people who have succeed accidental injury or long term illness and thus unable to work.

46
Q

What does ASU stand for?

A

Accident, sickness and unemployment

47
Q

What is ASU insurance?

A

Provides cover to the insured party in the event of an accident or sickness that prevents them from working or if becoming involuntarily unemployed
- only pays out for 12 or 24 months maximum

48
Q

What does FSCS stand for?

A

Financial services compensation scheme

49
Q

What protection does FSCS offer? 6

A

Deposits in banks - 100% of first £85k per person per authorised provider by the PRA
Home finances - 100% of the first £85k
Long term insurance - 100% with no limit
Compulsory insurance (motor insurance) - claims protected in full
Non- compulsory insurance (home and general) - 90% with no limit
General insurance advice and arranging - 90% with no upper limit.

50
Q

How can people provide for others after death?

A
  • making a will
  • providing for inheritance tax
  • Guardians
51
Q

What is a will?

A

Provisions for property after death

52
Q

What does it mean to die intestate?

A

Dying without making a will

53
Q

What are the advantages to making a will?4

A
  • ability to decide what will happen with money, property and possessions. Otherwise legal rules,es come into effect determining how allocations will occur. Thus important to change the will of circumstances change
  • providing for a partner where there is no marriage or civil partnership that doesn’t allow them to automatically inherit.
  • ability to make arrangement for children in event of death of one or both parents
  • minimise how much inheritance tax is payed.
54
Q

What are the main items people include in their will? 4

A
  • Details of their assets
  • names and details of all beneficiaries
  • arrangements for the guardianship of any children under the age of 18
  • names of the executors
55
Q

What is an executor of a will?

A

Person or people responsible for making sure that the wishes of the deceased are carried out as a set out in the will.

56
Q

What makes a will valid? 3

A
  • made by a person 18 or older
    • must be sound of mind and aware of what it contains
    • made voluntarily without pressure from others
  • made in writing signed by the person making the will
  • made in the prescience of 2 witness
57
Q

What is inheritance tax?

A

paid on an estate when somebody dies if the value of the estate exceeds a certain amount known as the nil rate band

58
Q

What is a nil-rate band?

A

a specific amount of money credited with 0% taxation from the total inheritance tax

59
Q

How is inheritance tax paid?

A
  • payable at the rate of 40% on the amount over the nil-rate band
  • if a partner in a marriage died, the survivor can use the unused portion of the deceased partners nil rate band to increase their own.
60
Q

how is inheritance tax calculated?

A
  • all assets in the deceased persons estate are valued
61
Q

What is a trust??

A

financial relationship whereby property Is held by one party for the benefit of annother

62
Q

Who is the trustee?

A

The person who holds and creates the account

63
Q

Who is the beneficiary?

A

that person who benefits from the trust

64
Q

What are the 2 types of a junior ISA?

A
  • cash junior isa, interest tax free
  • stocks and shares junior ISA, cash is invested and child does not pay tax on any capital growth or dividends
65
Q

what is a legal guardian?

A

person with legal authority and corresponding duty to care for the person and property of another person.
- also known as a ward

66
Q
A

LIBF Unit 2 (9 decks)

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