Financial Services Products: An Overview

Financial Services Industry Overview

• Financial products address individuals' financial needs and manage their financial risks.
• Key sectors include life insurance, short-term insurance, retirement, healthcare, investment, and banking.
• Financial firms may offer products spanning multiple sectors.

Characteristics of Financial Services Products

• Financial products provide an intangible benefit in the form of peace of mind against unforeseen events.
• Monetary payments may occur many years later, or not at all.
• Trust is crucial, as customers entrust their money with the expectation of future benefits.

Cash Flows in Financial Services Products

• Cash flows represent the money that changes hands due to a financial services product.
• The amount or size can be known up front or unknown.
• Cash flows may be fixed or variable, changing with inflation or a set rate.
• The frequency can be regular (e.g., monthly premiums) or one-time (e.g., a death benefit).
• Certainty can vary; some cash flows are certain (e.g., sales expenses), others depend on events (e.g., death benefit).
• The timing and term can be uncertain (e.g., death benefit date) or certain (e.g., monthly premiums).
• Cash flows can be once-off (lump sum) or regular (regular premium).

Life Insurance Sector

• Life insurance provides long-term coverage for death, disability, or critical illness diagnosis, offers savings policies.
• Financial needs addressed include:
  • Providing for dependents when a breadwinner dies. The payout can cover school fees, living expenses, or home loan balances.
  • Mitigating the risk of outliving savings in retirement through income for life.

Life Insurance Terminology

• Policy: The contract between the person and the insurance company.
• Policyholder: The person entering into the contract.
• Benefit payments: Payments the insurer promises to make, contingent on specified risk events.
• Beneficiaries: Individuals other than the policyholder who receive benefits.
• Premiums: Payments made by the policyholder to receive protection; can be a lump sum or regular payments.
• In force: Policy status when the policyholder continues to pay premiums.
• Lapsed: Status when the policyholder stops paying premiums and no benefit is paid.
• Surrendered: Status when the policyholder stops paying premiums and a benefit (surrender value) is paid out.

Types of Life Insurance Products

• Risk products: Pay a benefit upon a risk event, like death or critical illness; the benefit is the sum assured, paid to beneficiaries.
• Savings products: Used to save for specific goals like retirement or education.
• Annuities: Provides regular benefit payments to the policyholder, protecting against "living too long.".

Risk Policies, Types

• Whole life assurance: Provides cover until death, premiums payable for life unless agreed otherwise.
• Term assurance: Cover for a specified period, with a sum assured paid to beneficiaries if death occurs during the term.
• Deferred assurance: Pays a death benefit only if death occurs after a specified period.
• Endowment assurance: Has both risk and savings components; pays a benefit upon death within a fixed term or at the maturity date.

Savings Polices, Types

• Endowment assurance: Acts as a savings policy paying benefits at maturity if the policyholder is still alive.
• Pure endowment: Pays a benefit only if the policyholder survives to the maturity date, usually combined with a death benefit.

Annuities, Types

• Whole life annuities: Payable as long as the policyholder is alive.
• Temporary annuities: Payable while the policyholder is alive, but only for a maximum term.
• Deferred annuities: Become payable after a deferred period if the policyholder survives, continuing for the rest of their life.
• Guaranteed annuities: Provide a minimum payment period regardless of whether the policyholder is alive or not.
• Annuities can be paid monthly, in advance (including a payment at time 0), or in arrears (no payment at time 0), and can be level or increasing.

Cash Flows under Life Insurance

• Premiums: Paid by the policyholder to the insurance company.
• Benefit payments: Paid by the insurance company to the policyholder or beneficiaries.
• Expenses: Costs incurred by the insurance company to sell and maintain the policy.

General Insurance

• General insurance has shorter contract terms, typically one year but it can be longer for liability or extended warranty.
• Multiple claims are possible, and the claim amount can vary.
• It covers risk events not covered by life insurance, like car and household and specialized insurances, like pet insurance.

General Insurance Terminology

• The definition of policy, Policyholder, is as it is in life insurance.
• Claims are payments for coverage, whereas benefit payments are similar.
• Policyholders can renew the contract at the renewal date when the premium is reviewed.

Types of General Insurance Policies

• Property damage: Covers loss or damage to property like buildings, cars, boats, or contents.
• Liability: Covers instances when the policyholder is required to pay compensation due to negligence.

Types of Liability Insurance

• Motor third party: Covers the owner of a vehicle if they owe a third party due to death, injury, or property damage caused by their driving.
• Employer's liability: Covers damages an employer has to pay if sued due to employee death, injury, or illness at work.
• Public liability: Covers damages a business owner may have to pay for incidents at their premises.
• Product liability: Covers damages the policyholder may have to pay for death, injury, or damage caused by their sold product.
• Professional indemnity: Covers compensation the policyholder pays their client that suffered loss from their alleged negligence.

Retirement Funds

• Retirement funds are designed to help people save for retirement.
• Employers and employees contribute, payments known as contributions.
• The fund is a separate legal entity, protecting employees if the employer goes bankrupt, employees are members.
• These are managed by a board of trustees, overseen by an administrator.
• Benefits are received on retirement, can be a lump sum or a monthly income called a pension.

Medical Schemes

• Medical schemes helps people cover medical costs.
• Medical schemes covers doctor visits, dentist visits, and surgery costs.
• The trustees appoint an administrator caring for the medical claims.
• Medical scheme members contribute regular payments.
• Benefits are based on medical cover from the scheme.
• Coverage stops when contributions stop, unlike retirement funds, where accumulated contributions remain due to the member.

Banking

• Savings aggregated from households/businesses into deposits are then lent as loans to individuals/businesses/government.
• Loans must be paid back with interest, either as a lump sum or incrementally.
• Banks pay interest on deposits but charge higher rates on loaned money.
• Banks offer different accounts based on customer needs.

Types of Loans

• Personal loan: smaller loans, to pay unexpected expenses.
• Home loan: large loan, for purchasing price of home, long repayment.
• Business loan: used by entrepreneurs to start/support/expand business.
• Overdraft facility: borrow smaller amounts quickly from an account.
• loan eligibility is determined by credit worthiness.
• Microlenders offers smaller loans to low-income earners.

Investments

• The decision of consuming or saving money must be made when it is available.
• Money should be saved for any potential mismatch when spending it.
• Asset classes have unique characteristics.

Asset Classes

• The traditional asset classes, interest-bearing instrument offers interest on the invested amount and is very secure.
• Bonds are the borrowing of money by governments and corporations who then pay interest on fixed interest and index linked bonds.
• Common stock that is bought and sold in a stock exchange, and its profits are distributed to its share holders.
• Renting a property to tenants is income.

Investment Vehicles

• Savings policies are offered by insurances.
• Fixed deposits offers fixed rate investments for fixed terms.
• Investment in bonds or equities
• Unit Trusts offered by asset companies, where portfolios are managed.
• Exchange Traded Funds (ETF): track performance of a group of assets.
• Collective investments allows investor to invest in asset classes faster.