unit 4 insurance and taxation

Question 1

principles of insurance - 1. insurable interest

Answer 1

the insured person must gain from the item’s existence and suffer financially from its loss. the insured must gain from the existence of the exposure unit and suffer from its loss.

eg you can insure your own car but not your neighbours neighbours car.

Question 2

principles of insurance -2. subrogation

Answer 2

once compensation has been paid any legal right to the item recovered passes to the insurer. if a third party is responsible for damaging your car in an accident and you are compensated by your own insurer, your insurer can then sue the other driver. this prevents you collecting twice for the same damage and gives your insurer a way to recoup its losses. (so you don’t break the principle of indemnity by profiting on two pay-outs )

Question 3

principles of insurance - 3. contribution

Answer 3

this applies if an item is insured against against the same risk with more than one insurance company. this principle states that if you hold more than one insurer liable for your losses, they have to share the loss

eg if you take out two policies on your car , you cant collect from both insurers

Question 4

principles of insurance 4. indemnity

Answer 4

the insured person cannot make a profit from insurance i.e. insurance can at best put an insured person into the same financial position as they were prior to a loss occurring.

eg if you take out two policies on your car, you can’t collect from both insurers

Question 5

principles of insurance - 5. utmost good faith

Answer 5

the insured person must declare all material facts about the item being insured. the person taking out the insurance must answer all question truthfully on the proposal form. failure to do so can make the insurance cover worthless. if the insurance contract is obtained by way of fraud or misrepresentation it is void.

eg a driver should declare truthfully the number of penalty points on his licence

Question 6

what does being underinsured mean ?

what are the possible effects on a business of being underinsured ?

Answer 6

the insured fails to insure for the full value of the policy. in the event of a claim for total loss or partial loss underinsurance may result in economic losses to the policy holder, since the claim would exceed the maximum amount that can be paid out by the insurance policy.

effects on being underinsured -
the motivation of being underinsured is the lower premiums paid by the policy holder, or they may be unaware of it. businesses should review and update cover annually.

underinsurance could result in a serious financial crisis in a business depending on the asset that is insured

Question 7

insurance forms, terms and types of cover for a business and household

Answer 7

-insurance proposal forms are used to apply for insurance cover and the company is given full particulars of the risk against which the insurance protection is desired. Insurance proposal forms helps the insurance company to calculate the premium based on all the potential risks in relation to the insurance policy.

-the insurance policy is your contract with the insurance company and outlines the terms and conditions of the insurance cover.

-a loading on a policy will increase the premium due to it increases the risk eg a loading might apply for health insurance if the person is a smoker.

• a deduction on a policy will decrease the premium due to a reduced risk of an event occurring eg a no claims bonus
• an assessor is the person who calculates the amount of compensation to be paid to a claimant
• an actuary is the person who measures the risk involved and the probability of an event occurring and it’s likely financial consequences. they help decide the size of the premium

Question 8

what is an insurance premium ?

Answer 8

an insurance premium is the amount of money an individual or business must pay for an insurance policy

Question 9

what factors influence the size of someone’s insurance premium ?

Answer 9

1. level of risk - the greater the level of risk, the greater the premium e.g. inexperienced drivers are more likely to be involved in a motor accident, therefore they face higher premiums as they are more risky to cover than an experienced driver with no previous claim.
2. value of the item - higher premiums for more valuable asset insured e.g. a diamond ring, as the compensation they would have to pay out would also be higher.
3. number of similar claims - if the number of claims (pay-outs) increases for a certain type of claim, premium will increase to cover the cost of these pay-outs.
4. profit margins required on types of claims - the likes of Aviva and Irish life health and PLC’s so need to hit profits targets, so they may need to build in a desired level of profits on top of the cost of all claims, increasing premiums.

Question 10

types of insurance a business may have - 1. public liability insurance

Answer 10

covers the risk to the business of customer injuring himself or herself while on the business premises and claiming for it

Question 11

types of insurance a business may have - 2. employer liability insurance

Answer 11

covers the risk to the business of a worker injuring himself wile carrying out his job in the workplace.

Question 12

types of insurance a business may have - 3. product liability insurance

Answer 12

covers the risk to the business of a company’s products being harmful to the public as a result of defective products that may have caused harm

Question 13

types of insurance a business may have -

Question 14

types of insurance a business may have - buildings & contents insurance

Answer 14

covers the risk to the business of structural damage to the factory, warehouse or office building caused by fire, flood or storm and damage or burglary to stock, raw materials or components in their building

Question 15

types of insurance a business may have - motor insurance

Answer 15

the risk of being involved in a road traffic accident. third party fire and theft insurance, provides third party cover. Comprehensive insurance protects everyone injured in an accident, including the policy holder.

Question 16

types of insurance a business may have - key person insurance

Answer 16

the risk of losing a valuable member of staff

Question 17

types of insurance a business may have - fidelity guarantee insurance

Answer 17

the risk of having cash or stock being stolen by an employee. it protects the business against dishonesty or fraud committed by an employee

Question 18

types of insurance a business may have - goods in transit insurance

Answer 18

the risk of loss or damage to goods while they are moving from one place to another or being stored during a journey.

Question 19

types of insurance a business may have - plate glass insurance

Answer 19

the risk of shop windows being smashed

eg shop windows smashed in an accident

Question 20

types of insurance a household may have - health insurance

Answer 20

provides protection against the cost of medical care eg GP visits, operations and hospital stays.

Question 21

types of insurance a household may have - life assurance

Answer 21

a contract where the insurance company will pay a sum of money either upon the death of the policy holder (whole life assurance ), or at the end of a specific time period from when the policy is taken out( endowment assurance)

Question 22

types of insurance a household may have - house & contents insurance

Answer 22

house insurance covers the replacement of fixed features in your home eg walls, floors . contents cover - covers possessions or personal items that you may take if moving house eg furniture, clothes, tv

Question 23

types of insurance a household may have - motor insurance

Answer 23

it is a legal requirement to have motor insurance to drive on the road in Ireland. 3rd party cover, covers you for damage caused to everyone in an accident that was your fault, except your own losses ( eg damage to your own car not covered ). fully comprehensive covers damages to all other parties and to you as well, as a result of an accident that you have caused

Question 24

types of insurance a household may have - mortgage protection insurance

Answer 24

a type of life insurance policy that pays off the remainder of your mortgage if you were to pass away before the loan has been repaid. it may also cover mortgage payments should you become disabled and unable to work .

Question 25

types of insurance a household may have - gadget insurance

Answer 25

insurance cover to protect you should your mobile phone get robbed or lost, or should you damage the phone. eg drop ir or smash it

Question 26

what are the similarities and differences between a household and business in insurance

Answer 26

similarities - both need to carry out risk management and choose what risks to insure against. both need to apply and fill out all insurance forms ( proposal form, claim form …). both should re-assess and update values of items insured so they aren’t under or over insured.

differences - businesses face a larger amount of risks ( employer, product, public liability ) . businesses may face a larger financial loss than a household, businesses can treat insurance premiums as a taxable expense, whereas households can’t pay for insurance before being taxed .

Question 27

what is risk management ?

Answer 27

risk management involves the identification of all possible risks/ losses eg the risk of fire, employer negligence, personal injury loss , legal liability etc and taking action to minimise the impact of these risks occurring.

Question 28

what are the methods a business could consider to minimise its risks ?

Answer 28

1.take out insurance - transfer the risk to an insurance company for a premium where the company will make good on any loss suffered.

2. safety procedures - the manner/ act of doing something is strictly laid out and adhered to / stringent monitoring procedures/ secure procedures for managing cash.
3. staff training in health and safety - of personnel in health and safety. drills, courses of action and medical training.
4. appoint health and safety representatives in the work force - report safety issues, regular safety inspections/ audits. investment in new, replacement, upgraded equipment.

5.install security systems - upgraded or use motion alarms, install fire doors, use CCTV monitoring etc. to deter people from stealing from you

Question 29

types of taxes and their implication for a business - value added tax

Answer 29

VAT is an indirect tax charged on the sale of goods and services, it is a tax on consumer spending. the standard rate is 23% in Ireland (2023), with lower rates including 0% for medicine and food staples. A business can register for VAT and get any VAT refunded.

implications for a BS - the collection of VAT has administration costs for a business. changes to VAT will impact competitiveness- in 2019 the VAT rate for hospitality and tourism went from 9% to 13.5%, reducing profits or forcing prices to increase to maintain profits.

Question 30

types of taxes and their implication for a business - corporation tax

Answer 30

an annual tax on company’s profits. the corporation tax rate in Ireland is currently 12.5-15%, which is one of the lowest corporation tax rates world wide. the tax is calculated based on a company’s net profit position.

implications for a BS - it may impact where a bs locates- Ireland’s low rates attracts lots of FDI here. corporation tax reduces the size of the profits made, or held by the company after tax is paid, for retained earnings.

Question 31

types of taxes and their implication for a business - customs duties

Answer 31

a tax on imports, also called excise duties. applies on top of VAT for goods imported from outside of a trading bloc like the EU. eg on US goods sold to Ireland

implications for a bs - if bs’s are importing stock or raw materials from outside the Eu, they will have to pay additional tax on them.

Question 32

types of taxes and their implication for a business - commercial rates

Answer 32

these are charges bs owners pay to local authorities ( county councils ) where they do business to fund the upkeep of the local community eg footpaths, parks, roads, …

implications for a bs - these rates need to be paid so a bs can operate in a certain area, so this will reduce profit levels. paying of these rates could go to improving the infrastructure around the business, increasing footfall/ sales.

Question 33

types of taxes and their implication for a business - employers PRSI

Answer 33

PRSI is the main source of funding for social welfare payments - both the employer and employee contribute to this

implications for a bs - the cost of employing a worker is higher then the actual wage paid, as the employer also has to pay Employers PRSI on top of this wage

Question 34

types of taxes and their implication for a business - PAYE

Answer 34

a direct tax on the income earned from employment. a bs collects the tax when paying their staff, and gives it to the government

implications for a bs - the collection of PAYE is an administrative cost for the business. high rates of PAYE are a disincentive for people to do overtime. the higher the PAYE , the less disposable income to spend on goods

Question 35

what is a tax rate ?

Answer 35

a tax rate is the percentage charged for a certain tax. PAYE is taxed at two different rates. the rate at which tax is paid depends on the level of taxable income.

eg the current tax rates are the standard rate of 20% up to 40000 and the higher rate if 40% which applies to the balance earned above 40000

Question 36

what is a tax credit ?

Answer 36

this is an entitlement to different allowances depending on eac persons personal circumstances, which will reduce the tax liability calculated on a persons gross pay.

eg if a person was liable to pay 20000 in paye and had tax credits of 3300 they would only have to pay 16700 in tax.

eg blind cedit, guide dog allowance, paye credit, widow/widowers credit

Question 37

what is a tax band ?

Answer 37

a person may be charged at different rates of tax depending on which bracket of earnings they fall in to - these different brackets of earnings are called tax bands

eg 20% is called the standard rate and applies to earnings in the tax band of 0-40000 , and any earnings above 40000 are charged at the higher rate of 40%

Question 38

what is the difference between tax evasion and avoidance ?

Answer 38

tax evasion - when taxpayers illegally reduce the amount of tax they are due to pay. a person may underreport earnings or move money offshore to try to avoid paying the correct levels of tax on it.

tax avoidance - when taxpayers use the tax system to arrange their affairs so that they end up paying the lowest levels of tax possible. it is legal to do this.

Question 39

types of taxes a household may pay - PAYE (pay as you earn )

Answer 39

a direct tax on income earned by an employee. it is a progressive as the more you earn, the more you pay. it therefore takes more from higher earners- you would have to pay PAYE at 20% of income earned up to 40000, and then 40% for anything earned above 40000

Question 40

types of taxes a household may pay - local property tax (LPT)

Answer 40

a charge on all residential property based on the market value of the property ( as assessed by the home owner ).

Question 41

types of taxes a household may pay - self-assessment income tax

Answer 41

paid if you earn your own income(not an employee/ PAYE earner). you must file and return your own income each year to revenue to be taxed.

Question 42

types of taxes a household may pay - PRSI ( pay related social insurance )

Answer 42

a social insurance that acts as a tax. taken as a percentage of pay. used to determine future entitlements of the person for social welfare benefits should they require them.

Question 43

types of taxes a household may pay - deposit interest retention tax (DIRT)

Answer 43

a tax on interest earned in a deposit/ savings account. it is 33% in 2022. it can be increased by the government to incentivise spending (consuming ) over saving by citizens.

Question 44

types of taxes a household may pay - capital gains tax (CGT)

Answer 44

a tax paid on the sale, gifting or exchange of assets like land, buildings, shares, etc …. and other assets of value such as jewellery or paintings.

Question 45

types of taxes a household may pay - capital acquisition tax (CAT)

Answer 45

a tax paid on gifts and inheritances. you are allowed to receive gifts of a set value over your lifetime. it is paid on inheritances, gifts of cash, jewellery, house/land, stocks/shares.

Question 46

types of taxes a household may pay - universal social charge (USC)

Answer 46

this is a tax payable on your total income. it is a progressive tax as the rate increases as your income increases. you only start paying USC when you earn more than 13000.

Question 47

types of taxes a household may pay - motor tax

Answer 47

collected by the local council on behalf of the government. any household that owns a car must pay this tax and display their tax certificate in their window screen. there are higher charges based on higher levels of emissions ( impact on environment/pollution).