Financial ProductsModule 2

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Agenda

Protection

Mortgages

Pensions

Savings and Investments

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Protection

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Insurance

What insurance policies do you or your family have?

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Protection Needs

Against death

Against loss of income

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Factors affecting protection requirements

Age

Dependants

Income

Financial liabilities

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Protection Products

Term AssuranceWhole of Life AssuranceCritical Illness CoverIncome Protection InsuranceLong Term CarePrivate Medical Insurance

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Term AssurancePays on death if it occurs within the term

No ‘cash in value’ if the plan is stopped

No pay out at the end of the term

The cheapest type of life insurance

Various types are available

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Whole Of Life AssurancePays on death whenever it occur

Normally has investment content

If stopped early there may be a ‘cash in value’

‘Cash in value’ likely to be low in early years

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Critical Illness CoverPays a lump sum on diagnosis of a critical

illness

Provider will have a list of the illnesses covered

If you fully recover the money is still yours

No ‘cash in value’ if stopped early

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Income Protection InsurancePays an income if unable to work due to

sickness or injury

Starts after deferred period and ceases when policy holder returns to work, dies, or plan stops (retirement)

Benefit can be level or increasing

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Long Term Care Insurance

Covers cost of your own care needs when you are older

Pre-funded through regular contributions when you are younger

Paid when unable to do a number of ‘Activities of Daily Living’ (ADL)

Amount paid depends on number ADLs unable to perform

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Private Medical Insurance

Benefits for those seeking private medical care outside NHS

Contract renewed annually

Written on single/joint/family basis

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Protection Exercise

In groups answer the following:What are the main features of term

assurance?In what event will critical illness cover pay

out?How long do the payouts from income

protection insurance normally last for?What does long term care insurance cover?

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Mortgages

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FINANCIAL SERVICES

Mortgages - Interest Rate Options

Fixed rate

Variable rate

Capped and/or Collared

Flexible Mortgage

Low start

Discounted

Deferred Interest

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Mortgages - Associated Costs

Arrangement feeLegal FeesStamp DutySurveyInsurances

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Pensions

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Basic State Pension

Dependent on number of working years in which you have been paying National Insurance contributions

The number of ‘qualifying’ years you need for a full basic State Pension depends on your age and whether you are a man or a woman: Men born before 6 April 1945 usually need 44 qualifying years Women born before 6 April 1950 usually need 39 qualifying years Men born on or after 6 April 1945 need 30 qualifying years Women born on or after 6 April 1950 need 30 qualifying years

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Occupational PensionsEmployer contributes to the pension fundEmployee may also be required to

contributeEmployee has options to make additional

contributionsTwo main types:

• Defined Benefit (Final Salary)• Defined Contribution (Money Purchase)

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Defined Benefit (Final Salary) schemes

The income in retirement is a fraction of your final salary

The fraction is agreed in advance

The greater the number of years you are in the scheme, the greater the fraction of your final salary

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Defined Benefit (Final Salary) example

In groups, work out the answer to the following question:

If someone is in an 80ths scheme for 20 years and their final salary is £20,000, how much income would they get in retirement?

Answer:20/80 x £20,000 = £5,000

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Defined Contribution (Money Purchase) schemes

The income in retirement is dependant on how the pension fund has performed

The fund is used to provide and income for the rest if your life

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Personal PensionsIndividual pays into the pension fund

Income in retirement dependant on how the fund performs

Can pay into a Personal Pension as well as an Occupational Pension

Some employers offer Group Personal Pensions to their employees instead of Occupational Pensions

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Savings and Investments

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Why people save...

Major expenditure - house, carEmergency fundEducationRetirementOpening Business

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Lump Sum Investment Objectives

To increase capital

To build capital for future income

To increase current income levels

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Bank and Building Society Accounts

Current accountSavings accountNotice Period accountFixed Term investmentsCash ISA

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Exercise – Two groups

Group One – list the advantages of Bank and Building Society accounts

Group Two – list the disadvantages of Bank and Building Society accounts

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Advantages Disadvantages

Short termEasy accessUnderstandableCapital is risk free

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Worst medium to long term performer

‘Real’ value of capital may be at risk

No opportunity for growth Uncertainty of return

Collective InvestmentsExamples include Unit Trusts, Open Ended

Investment Companies (OEICs) and Investment trusts

The money is invested into shares or other types of asset (for example property, government gilts)

The risk is spread over a variety of assetFund manager usually makes the decisions

as to where to investCharges apply to run the fund

Prices are quoted daily: