Unit 2 Topic 4

Question 1

Accident, sickness and unemployment (ASU) insurance

Answer 1

A policy that provides cover to the insured party in the event of accident or sickness that prevents them from working or if they become involuntarily unemployed

Question 2

Beneficiary

Answer 2

In relation to trusts, a beneficiary is a person whose property is held as part of a trust and looked after by a trustee

Question 3

Civil partnership

Answer 3

A legal union between same-sex couples

Question 4

What is this defining?
An assessment of an individual’s creditworthiness based on their record of money borrowed and repaid

Answer 4

Credit rating

Question 5

Critical illness insurance

Answer 5

Insurance that pays out a guaranteed cash lump sum if the insured person dies or is diagnosed with a specific critical illness

Question 6

Estate

Answer 6

The sum of a person’s assets minus all debts and obligations (aka net worth)

Question 7

Financial Services Compensation Scheme

Answer 7

A compensation scheme that pays compensation to account holders of up to a certain amount per provider if the provider is in default

Question 8

Impact of risk

Answer 8

The effect on someone’s life of sustaining loss or damage

Question 9

What is this definition describing?

A policy that allows people to manage the risk of loss of earnings over a long term. It pays out a monthly income to insured people who have suffered an accidental injury or long-term illness and who are therefore unable to work.

Answer 9

Income protection insurance

Question 10

Inheritance tax

Answer 10

A tax that may be payable on the estate left by someone when they die

Question 11

What is this definition describing?
The term used to describe someone who has died without having made a will. In this situation, intestacy laws set out what happens to the person’s possessions.

Answer 11

Intestate

Question 12

Legal guardian
Are wards always children?

Answer 12

A person who has the legal authority and the corresponding duty to care for another person, known as a ward.
The ward is usually a child (under 18) but could also be an incapacitated or disabled person who is not able to make decisions for themselves.

Question 13

Probability of risk

Answer 13

The likelihood of a damaging or harmful event happening

Question 14

Risk averse

Answer 14

Reluctant to take any kind of risk

Question 15

Risk transfer
Give an example?

Answer 15

A way of managing risk by transferring it (at a cost) to someone else who will accept the financial responsibility.

Best example is insurance, which passes the risk of loss or damage on to the insurance company.

Question 16

Trade union

Answer 16

An organisation that represents workers within a particular industry or carrying out a particular type of job.

Question 17

What do trade unions seek to do?

Answer 17

Trade unions seek to protect the rights and enhance the working conditions of their members and also offer a range of benefits, such as legal advice.

Question 18

Fill the gaps:
A _________ ___________ whereby property is held by one party (the _______) for the benefit of another (the ___________).

Answer 18

Financial relationship
Trustee
Beneficiary

Question 19

Trustee

Answer 19

A person who holds property for the benefit of another party as part of a trust. They have legal title to the property but also duty of care to the beneficiary.

Question 20

Will

Answer 20

A legal document setting out what a person wants to happen to their belongings (assets) after their death

Question 21

Name as many features of risk as you can (there’s 6 on here)

Answer 21

Physical injury or death
Loss or damage to possessions
A legal liability
Uncertainty
Probability
Taking a chance

Question 22

Describe the relationship between risk and reward

Answer 22

The higher the risk —> higher the reward

Question 23

Can you name the tiers of the risk pyramid (hint: there’s 5 tiers) , in order of their increasing risk?

Answer 23

Most risky —> Shares in a newly quoted company
Shares in an established company
Unit trusts
Bank savings account
Least risky —> Premium bonds

Question 24

Why does placing shares in an established company carry risk?

Answer 24

They carry risk as there is no diversification

Question 25

Why are unit trusts risky?

Answer 25

Carry risk because their value can fluctuate according to stock market movements.

Question 26

Why do premium bonds carry no risk?

Answer 26

Because they’re 100% backed by the government

Question 27

What is the current UK base rate of interest?

Answer 27

5.25%

Question 28

What kind of products would people with high risk acceptance be willing to purchase? Can you give an example?

Answer 28

High-risk investments
Shares in a new company in a high-risk sector

Question 29

What products would people with an average degree of risk tolerance be willing to purchase?

Answer 29

Loans, any kind of borrowing

Question 30

What products would people who are risk averse be willing to purchase/use?

Answer 30

Bank accounts

Question 31

Name two aspects of the impact of risk

Answer 31

The amount of money involved
The effect on lifestyle

Question 32

An individual CAN calculate the probability of risk. True or False?

Answer 32

False - not something an individual can calculate, however it is possible for someone to have an idea of the likelihood of an event happening if they have some control over the event and are able to take some risk reduction measures.

Question 33

Name two main types of life assurance

Answer 33

Whole-of-life assurance
Term assurance

Question 34

What type of life assurance do these features correspond with?
1.Policy has no fixed time limit and remains in force until the policyholder dies or surrenders it.
2.More expensive, less common.

Answer 34

Whole-of-life assurance

Question 35

What type of life assurance do these features correspond with?
1.Sum assured is payable only if person assured dies before end of specified term. If person survives term, cover ceases and no payment or refund premium is payed.
2.Suitable as mortgage protection.

Answer 35

Term assurance

Question 36

Name four reasons as to why people may buy life assurance

Answer 36

Family protection
Debt protection
Managing a tax liability
Cover for older people

Question 37

Name two features of critical illness insurance

Answer 37

Can be combined with a life insurance policy as an additional option
Normally includes illnesses such as certain cancers, heart attacks or strokes

Question 38

Name two features of invoke protection insurance

Answer 38

Allows people to manage the long-term risk of loss of earnings and being unable to pay their mortgage, other debts and household bills.

Pays out a monthly income to insured people who have suffered an accidental injury or a long-term illness and who are therefore unable to work

Question 39

Name two features of ASU insurance

Answer 39

Covers involuntary unemployment

Only pays out for a limited period (cost usually lower than the cost of IPI)

Question 40

Can you name the areas of savings and investments that the FSCS protects if a FSP defaults?
Bonus points for the percentages!

Answer 40

Investments (100% of the first £85,000 per person per firm)

Home finance

Arranging (100% of the first £85,000 per person per firm)

Long-term insurance (100% of the claim with no upper limit)

Compulsory insurance (90% of the claim with no upper limit)

Non-compulsory insurance (90% of the claim with no upper limit)

Question 41

Name 3 benefits of making a will

Answer 41

Minimises the amount of inheritance tax paid

Allows for people to make arrangements for their children in the event of the death of one or both parents

Allows people to make arrangements to provide for a partner where there is no marriage or civil partnership involving them

Question 42

Name 3 items that may be included in a will

Answer 42

Details of the persons assets
Names and details of the beneficiaries
Arrangements for the guardianship of any children under the age of 18