topic 4

• Financial decision


  A decision made because the person believes it will bring them some type of reward
• The greater the risk


  The higher the reward
• Features of risk


  • Risk is associated with uncertainty because the future cannot be predicted accurately
  • Risk is associated with probability
  • Risk is associated with taking a chance
• Types of risk


  • Physical injury and deaths
  • Loss or damage of possession
  • A financial loss
• Relationship between risk and reward


  • The financial product that involves a customer taking a higher risk must offer them a higher reward
  • Someone who wants a potentially high reward must accept a higher level of risk of loss
  • Someone who is keen to reduce or avoid risk must accept that they will earn a lower return
• Examples of savings and investment products


  • Premium bonds
  • Bank savings account
  • Unit trust
  • Shares in an established company
  • Bitcoin
• Degree of risk acceptance

  • People with low-risk acceptance invest in collective schemes
  • People with high-risk acceptance purchase high-risk investments
  • People with average risk tolerance borrow money to buy a home
• Risk averse


  Very cautious and always try to avoid risk
• Risk transfer


  A person who faces a risk decides to spend money on passing the risk to someone else, who will accept the financial responsibility
• Risk transfer


  • Insurance, where people pay a premium and pass the risk of loss or damage to the insurance company
• Measuring risk


  Not an exact science, people's perceptions are subjective
• Aspects of the impact of a risk

  • The amount of money involved
  • The effect on lifestyle
  • The timing of the event
  • The frequency of the event
• Probability of risk


  How likely it is that an event will happen
• To calculate the significance of a risk

  Probability x impact = degree of risk
• Life insurance


  Designed to cover the policyholder for a specific term
• Life assurance


  Covers the policyholder for their entire life
• Reasons for life assurance

  Family protection, debt protection, managing tax liability, cover for older people
• Critical illness insurance


  Pays out a guaranteed cash lump sum if the insured person is diagnosed with a critical illness
• Income protection insurance


  Pays out a monthly income to people who have suffered from an accidental injury or a long-term illness
• Accident, sickness and unemployment (ASU) insurance


  Covers people who have had an accident or sickness that prevents them from working or becoming involuntarily unemployed
• 'Rainy day' money


  Money saved against the risk of having to face unexpected negative events such as illness or loss of property
• Making a will


  Allows someone to make a provision for their property after their death
• Intestate


  A person dies without making a will
• Estate


  The deceased's money, assets and possessions
• Executor


  A person in charge of granting the deceased's wishes
• Benefits of making a will

  • Minimise the amount of inheritance tax
  • Provide for a partner where there is no marriage or civil partnership
  • Make arrangements for their children in the event of death of one or both parents
• Inheritance tax


  Paid on an estate when somebody dies if the value of the estate exceeds £325k
• Trust


  A financial relationship whereby property is held by one party (the trustee) for the benefit of another (the beneficiary)
• Child Trust Fund (CTF)


  A long-term tax-free saving account that aimed to ensure that every child living in the country has savings at the age of 18
• Junior ISA


  Replaced Child Trust Funds in January 2011
• Legal guardian


  A person who has the legal authority and the corresponding duty to care for the person and property of another person, known as a ward
• Ward


  Usually a child but could also be an incapacitated or disabled person who is not able to make decisions for themselves