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PWM Ch2 Notes

The document discusses insurance planning, outlining its meaning, principles, functions, and characteristics. It emphasizes the importance of insurance in wealth management and details various types of insurance, including life, general, and health insurance. Key principles such as insurable interest, indemnity, and utmost good faith are highlighted, along with the roles of insurers and insured parties in managing risks and providing financial protection.

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15 views39 pages

PWM Ch2 Notes

The document discusses insurance planning, outlining its meaning, principles, functions, and characteristics. It emphasizes the importance of insurance in wealth management and details various types of insurance, including life, general, and health insurance. Key principles such as insurable interest, indemnity, and utmost good faith are highlighted, along with the roles of insurers and insured parties in managing risks and providing financial protection.

Uploaded by

khushugandhi2050
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT II Insurance Planning and Investment Planning Chapter 2 (a) Insurance Planning Structure: 2.1 Meaning and Introduction 2.2. Principles of Insurance 23. Functions of Insurance 24 25 2.6. Discuss the different classes of Insurance 2.7. Types of Life Insurance Policy 2.8 General Insurance 2.9 Health Insurance 2.10 Human Life Value 2.11 Belth Method 2.12 Review Questions 2.1 Meaning and Introduction Insurance planning is the process of analysing what types of insurance is needed for the ction of a person's assets and ability to create assets, You can insure pretty much anything these ‘from the usual life, health, home and car insurance to the uncommon things like # person's hair, foot or even smile, ‘An insurance company (referred to usually as the insurer) Promises to pay to the owner (insured) ficiary of the asset, a certain sum of money (sum assured), if a loss occurs, so that they may try ‘continuance of the financial benefits, The insured pays a certain amount (consideration) to ance company for bearing the risk, Which is known as premium, © Scanned with OKEN Scanner Wealth Ma 46 s a co-operative arrangement to spread the loss Caiseq Insurance can also be defined a people who are exposed to it, in exchange for a sim 50 | particular risk over a large number of money. Insurance can be also be defined as a bear it, to someone who has the capacity t0 ‘Actuarial Science is the course to be done for Insurance Job. There are 15 papers. On clearing papers one is referred to as Acturial. process of transferring the tisk from someone who voor for such risk, in return for a consideration, In simple terms, insurance is: © aprocess of, © passing or transferring the risk of incurring loss by the owner (who cannot bear the ris) an asset; ‘to the other party (insurance company) who can bear the risk; © In retum for a consideration (premium). ‘An accident or an event like fire may happen or may not happen. The owner can take precautionary steps to prevent the event. But still there is a likelihood that the event may happes There is an uncertainty against which the owner would like to safeguard himself. If the unexpected event does occur, there will be a situation where the owner will lose the benefits he was deriving from the asset. It is in such situations that insurance steps in and assures the owner that the benefits will be protected. The insurance company covers only those events that are possible to occur but are not certain. If the occurrence of an event at a given point of time and its impact are certain then the insurance company may not cover such events. In short, insurance means ‘loss of a few shared by many’. Insurance is pooling of risks. In a contract of insurance, the insurer (insurance company) agrees/undertakes, in consideration of a sum of money (premium), to make good the loss suffered by the insured against a specified risk such as fire and any other similar contingency or compensate the insured against a specified risk such as fire and any other similar contingency or compensate the insured/beneficiaries on the happening of a specified event such as accident or death. Thus, there ate two parties to an insurance contract: (@ insurer/assurer/underwriter and (ji) insured/assured/benefici: eneficiary. The document laying do¥? the terms of the contract is called (insurance) policy. The property which is insured is the sube=t Foam e ausurance. It may be insured against loss arising from uncertain evens/casualties/peris in ouch as aes oc Santee the property or death, disablement of a person. The inter ject-matter of insurance is known as i i nding ‘he subject-matter, the types of insurance include, nteraia, the following, © Life insurance, under which a speci a‘ insured or upon the expiry of a speci * General insurance, which covers lo ified amount becomes payable on the death of ified period of time, whichever is earlier. $0 on, ses caused by fire, accident and marine adventures Concept _ A purchased policy that transfers ri , Policy pays out benefits to covera lose, ae soos the issuing company fora fee. When invoke a loss, as specified by the cont © Scanned with OKEN Scanner planning cannot be Insured? z insurance contract to be valid a and enfi ot against public poli eaten oor gai icy. The subject matter of 2) es hie deal with matters which are legal = urance contract must be legal. surance policy covering stol bane purposes would elaine '8S, smuggled goods, arms and ammunition to be ‘contract that is void is not valid and cannot Soe, + em wie le ay inal leath caused by self-inflicted injuries as tpsurance policies ca jomping signal. ipsurance Planning and its importance in Wealth Management Insurance is a very important tool in wealth mana; ‘i ss igement. Insuran< rodt sesment risk and als0 as a wealth protection tol. Financial Planner aaa Wrath Marcoer acaec amend insurance products in all stages ofthe life cycle ee a 1. Young Adult ~ Wealth Protection or Financial Security 2. Mid careers - Growth 3, Late careers — Pension and retirement planning do not cover fi ines Payable for traffic offences such as breaking traffic rules So it is relevant for learners to understand the various insurance concepts. 2.2 Principles of Insurance SS Insurable Interest —> Novation +> Principle of Indemnity eases Principle of Subrogation Principle of insurance |——[—_ Principle of Contribution (ears Principle of Utmost Good Faith Principle of Cause Proxima Leer ee ee ee ee © Scanned with OKEN Scanner Wealth 4, mm 8 4. Insurable Interest n 4 Denne js said to have an ‘insurable interest’ when they stand to gain for benefit & fe ee sah bal son or property insured, and would continued existence (safety) and well-being of the Pe P Sif, financial loss if there is damage to the person or Property Reet: Insurable interest is the legal right of the person to insure the subject matter with which they ha, legal relationship recognized by law. Importance of the principle of Insurable Interest ‘The principle of insurable interest is very important as it forms the legal basis for deciti whether insurance can be taken or not. The proposer has to prove that they have insurable interes, the subject matter for which they want to take [Link] interest means that a persoy entering into a contract of insurance would stand to lose financially on the occurrence of the event insured against. With reference to life insurance, a person who gets the benefit of an insurance contrac, must have an insurable interest in the life of the insured. In a valid contract of insurance, the insurable interest must exist at the time of entering into/application for an insurance contract. 2. Novation ‘ompany. If the insurer agrees to the transfer, the contract will be virtually a new one. This alteration is termed as novation, 3. Principle of indemnity The insurance company compensates the insured onl red 0 t does not profit from insurance. The insured should neither be hee ot tHe 108s 80 that the inst Pica ‘ter off nor worse off after the claim Definition Insurance is meant to indemnify (ie. com, : pensate for | as an insurance should place the insured inthe me oe ¥, according to the principle : Bo fed ‘ore it; no better. The principle of indemnity ensures that ing otion after ee a: ae ee insure ibe of indemnity aso makes sure thatthe insured person insurance by making the same claim with two insurance companicn j@°°8 BOt make indemnify the insured in the sense that he isnot allowed to menn*®, !surance Re wy Principle implies thatthe financial positions of the insured must be vost OM them. The yeni before suffering the loss. ee enjoyed Corollaries of the Principle of Indemnity: There are two principles which are corollaries to the princi [Link] of Subrogation and Contribution, Poors of indemnity, The + They are as oe © Scanned with OKEN Scanner Plannin pn ciple of Subrogation 9 “e the insurance company compensates ne transfered tothe insurance ose for 1 erson ge rance company, The . the financial loss, the rights of the ins! person to the insurance company is known as Process Cabra 88 OF tnster of sights from the petition Iso be defined a subrogation can a ined as surrender of ri paraneeeomPany that has paid a claim, of rights by an insured against the third party to an sl ibrogation ensures two things: 1, Having paid the claim, the insurance ¢o 5 from the party who caused the loss pany gets the right to make good the damages 2, Having been indemnified by the insurer, the a insured does not retain the right to get compensated by the party who caused the loss and thus make profit from a 5, Principle of Contribution The principle of contribution ensures that if there is more than one insurance policy drawn up on the same subject matter, the insured cannot recover their loss from all the insurers, in which case they will ecover more than their loss, or even make a profit, The principle of contribution ensures two things: 1. The insured does not profit by making separate claims from multiple companies for the same event. 2. Each insurer pays only their proportionate share of the loss, The principles of subrogation and contribution do not apply to life insurance policies or personal accident policies. This is because loss of life and human suffering can never be fully assessed or compensated, 6. Principle of Utmost Good Faith Insurance Contracts Are of A Fiduciary Nature And Are Based On Trust. In Insurance, The Relevant Facts Relating To The Subject Matter of Insurance Are Known To One Party To The Contract LE, The Proposer And Cannot Be Known To The Other Party LE, The Insurance Company, Unless Disclosed By The Proposer. ‘The principle of utmost good faith (Uberrima Fides) implies full and accurate disclosure of facts material to the risk to the insurer without being asked. A material fact is a fact which would influencelaffect the judgment of @ prudent insurer in deciding whether or not to accept a risk for insurance and on what terms. Breach of this principle would make the insurance contract null and void. Based on the information received from the proposer, the insurance company can decide: 1, Whether to accept the proposal or reject it; and ; 2. The appropriate premium to be charged if the proposal is accepted. Example Following are some examples of material facts, ‘© Life Insurance: own medical history, family history of hereditary illnesses, habits like ‘smoking and drinking, absence from work, age, hobbies etc. © Scanned with OKEN Scanner | Weaty Me 0 : Iding, age of the builds Fire Insurance: construction and usage of building, nb. ae am ises ete. : . saree Insurance: description of goods, method of packing etc. ce: description of vehicle, date of purchase, details of driver ete © Motor Insura 1: The insured person should make a possipje inimizatio The principle of loss minimiza % minimize the damage to her property in event of a disaster. ‘ Example ; If a house is insure against fire, and there is accidental fire, the owner must take al] steps to keep the loss minimum. He is supposed to take all steps which a man of ordinary will take under the circumstance to save the insured property. PMdene, 8. Principle of Cause Proxima The doctrine of proximate cause is based on the principle of cause and effect, which stats jy having proved the effect and traced the cause it is not necessary to go any further i.e. cause of cau, 2.3 Functions of Insurance Functions or insurance can be divided into parts: 1. Primary Functions. I. Secondary Functions. (!) Primary Functions 1. Certainty compensation of loss Insurance provides certainty of payment at the uncertainty of loss. The elements of uncertity are reduced by better planning and administration. The insurer charges premium for provide certainty. There are different types of uncertainty in a risk. The risk will occur or not when will occur, i much loss will be there? In other words, there are uncertainty of happening of time and amount of ls: Insurance removes all these uncertainty and the assured is given certainty of payment of loss. T# ‘insured charges premium for providing the said certainty. 2. Insurance provides protection eats ; ; main function of insurance is to provide protection against risk of loss. The insurance Po!® of loss. The insured person is i 4 ju thus provide financial protecti on is indemnified for the actual loss suffered by him, Ins pechy be see wa on to the insured, Life insurance policies may also be used aS collate! The insurance guaran insurance cannot check ee of loss and thus progress the assured from suffering’: "™ 3. Risk sharing 8 of risk but can provide for losses at the happening of the * All business concerns face the problem of, isk. Ris + #8 a device is the outcome Of the existence sk and insurance are interlinked with ea°° pt of Various ri ve, It does Various risks in our day to day life. It © Scanned with OKEN Scanner inate sks but it reduces the financ a large number of persons Who are ex the! w secondary Functions 1. Prevention of losses The insurance companies help in preventi ich are engaged in 10ss prevention measures, Tee cE ate aa eee ii bs aera reduction in losses means that the insurance companies would be required to pay lesser compensati ec giines which in tural esse eae — sa to the assured and manage to accumulate remiums, 2. Providing funds for investment Y risks. Insuranc, posed by a pation ce spreads the Insurance provides capital for society. Accumulated funds through savings in the form of insurance premium are invested in economic development plans or productivity projects. LIC have decided to fund Infrastructural up-gradation of Indian Railways. LIC is a significant shareholder in {eading Indian Companies. 3. Insurance increases efficiency The insurance eliminates the worries and miseries of losses. A person can devote his time other important matters for better achievement of goals. Businessman feel more motivated and encouraged to take risks to enhance their profit earning. This also helps in improving their efficiency. 4, Social to social problems Insurance take care of many social problems. We have insurance against industrial injuries, road accident, old age, disability or death etc 5, Encouragement of savings Insurance not only provides protection against risks but also a number of other incentives which encourages people to insure. Since regularity and punctuality Pf payment of premium is perquisite for keeping the policy in force, the insured feels compelled to save. 2.4 Characteristics of Insurance The following are the characteristics of Insurance 1. Transfer of Risk ‘The transfer of risk distinguishes insurance from certain other financial instruments and provisions by which an enterprise deals with or manages the insurance-related exposure, This risk often attaches to risks attached to the insured subject, ic. is a “personal” risk. 2. Pooling of risks ‘Two aspects of risk pooling can be distinguished ; + Due to the inability of an individual/enterprise to deal effectively 2 Sue on an as to the frequency, timing and/or the severity of pertinent contingent Events, pooling of reasonably homogencous risks is necded. In this way, the individual kere able to spread her/his risk by transferring it to a pool of similar risks. (b) Insurer view: The insurer has the ability to manage these risks through @ number tisk management iechniques, including the pooling of similar risks (usually similar in terms aaa ee sect ine riok subjects, but this pooling could occur over time as well) or © Scanned with OKEN Scanner aa 2 Meaty, only in a limited set of circum, securitization of the risks (this has been doné 2 4 pooling of risks is benef, For both the contract-owner and the insurer, this poolitie of TKS is beneficiy sy both obtain the benefits of this pooling when the contract ued, oy accident in motor insurance, ete, Th O85 rc i e, ; Example: Incase of theft in burglary insurance, accidft fA from these events if insured are shared by all the insure‘ 3. Co-Operative Device The most important feature of every insu persons who, in effect, agree to share the financial : Such a group of persons may be brought together volu solicitation of the agents. An insurer would be unable to compensate all the los a large number of persons, he is able to pay the sna compulsion here on anybody to purchase the insurance policy. 4. Value of Risk in Advance " ‘The risk is evaluated before insuring to charge the amount of share of an insured, Herein cy, consideration or premium. There are several methods of evaluation of risks. If there is expectatog, more loss, higher premium may be charged. So, the probability of loss is calculated at the tine, insurance. 5. Payment at Contingency The payment made at a certain contingency insured. If the contingency occurs, Payments mit Since the life insurance contract is a contract of certainty, because the contingency, the death or expiry of term, will certainly occur, the payment is certain. In other in insurance contrac, & contingency is the fire or the marine perils etc., may or may not occur. So, if the contingency cca payment is made, otherwise no amount is given to the policy-holder. 6. Amount of Payment ‘The amount of payment depends upon the value of loss occurred due to the particular insureds! provided insurance is there up to that amount. In life insurance, the purpose is not to make good financial loss suffered. The insurer promises to pay a fixed sum on the happening of an event. 7. Large Number of Insured Persons To spread the loss immediately, smooth i . , ly and cheaply, large number of persons should perotie sesueninn of a small number persons may also be insurance but it will be limite! + The cost of insurance to each member may be higher. So, it may be unmarketable. 8. Insurance is not a gambling rance plan is the co-operation of large 1 Joss arising due to a particular risk which Pe intarily or through publicity gy "™% ses from his own capital. So, by loss. Like cooperative devices, the © a : oa : | iain Te, ease the productivity of the community by elimi The ONY and increasing initiative. The uncertainty is chan . \certair ‘ ft e é because the insurer promises t pay a definite sam. MH due oe 9 Insurance is not Charity Charity is security and safe | Consideration © Scanned with OKEN Scanner Planning se sources at the time of disasters e oro" : asters only by ana Yojana ONE can get 7 Y chargin ot life insurance cover by 00,000 accident coe, rominal premium for the service. Under cover ‘ae Scheme. Paying premium @ ys Y P@¥ing premium & 12 per year and 330 per year. Govt. has also launched Crop 2.5 Rights and Responsibilities ‘asa smart consumer, of Insurer and Insured you should be a: ware re of your duties and Tights about your policy coverage pi claims. esponsibilities of a insured When you buy a policy: ¢ Fill the proposal form your Eiict Self correctly and truthfully, it is the basis of the insurance # Donot leave any column blank, s , donot sign ab «You willbe responsible for any infonaston ip hee 0 infor psipelias “all iatortaf ais mation in this document as it bears your signature ion” about the risk ‘you want to cover. Select the term of the policy as per your needs Select the amount of premium you can afford to pay Choose between Single Premium or Regular Premium Choose your premium paying frequency such as annual, half-yearly, quarterly or monthly. ee ae electronic payment of your premium (ECS) for your convenience, safety and records. @ Ensure to register nomination under your policy. Fill the nominee's name correctly. After you buy the policy © Once the proposal is submitted, you should hear from the insurance company in 15 days © If not, take up the matter in writing. © Ifany additional documents are asked for, comply immediately. © Once the proposal is accepted by the insurance company, the policy bond should reach you within a reasonable amount of time. If not contact the insurance company about it. When policy bond is received, check it and be sure that the policy is the once that you wanted. Go through all the policy conditions and be sure that these are the same that were explained to you by the intermediary/insurance company official at the time of sale. © In case of doubts, contact the intermediary/insurance company offi clarification. © Ifnecessary contact Maintaining the policy © Pay your premium regularly on the © Do not wait for a premium notice. avoids lapsation or other penalties. eoeee immediately for the insurance company directly. due dates/ within the grace period This only a courtesy It is your duty to pay the premium © Scanned with OKEN Scanner Cath ” to pick your cheque t for your intermediary OF anyone to pick y ‘AUC UD. Make pan ye aying the premium on time. Q se, pease intimate the insurance COMPANY immedig, y * ‘ arrangement for pay! «If there is a change of addres Nomination ae After the policy is issued, you can change the nomination PY: Filling a notice of change o ‘Sending them to the insurance ¢* ypoint an f nomination and ompany for them to register it in their records . appointee to receive any claim paid while the yp ing Ifthe nominee a minor, ap still a minor. Get the appointee to sign in the endorsement showing consent t0 act a8 an appointeg If your policy lapses : If you fail to pay the premium in time, your policy may lapse. Contract the inst, company for reviving it. i Ifyou lose your policy policy bond, report it to the insurance company immediately, @ Ifyou lose your Get a duplicate policy by complying with the formalities. ‘¢. The duplicate policy confers the same rights as the original policy bond. ies of the Insured 2.5.1 Rights & Responsib' 1. Right to information about Your policy, your cover, how the product meets your needs and claims settlement proces, How your insurance policy works? How your premium is invested? How your savings are growing (in case of money back policies)? Your policy details at any point of time? 2. Right to Privacy is Be aa one faa by Insurance Company in order to getthe surance, the responsibility of keepin; i i lis erie eenaae ity ping your information confidential li 3. Right to Guidance You hi i ; eee the right to be guided to choose a product which suits your needs after evaluation ‘your risk, based on assessment of the gap between your assets and sibilities. 4. Grace Period assets and responsibilities. The Insurance Compan 4 p pany offers a ‘grace period’ of 15 /30 days in case you are unable to! you premium on time, As a Seta per IRDA an Insurance company has to offer a grace period ©! 5. Free-look Period If you are not sati : é Satisfied with the Policy terms and conditions, you can cancel your policy during the “Free-look le it paidefind, PK Peiod Le. within 15 days of recent nf policy and get prem™ © Scanned with OKEN Scanner — 6, Right to Thmely Claims Settemeng The company is required to settle 4 claiy hs documents. One should take m within 30 Setlement ratio and not with ye n°, ih Insurance Compan an of al the necessary 1, Right 10 Fede Profesingr gc MH? slower 'Y Which has highest Claim ‘he insured has a right to vice Premium, ‘ deal wi standards like honesty, integrin, itt life : insurance : ‘rity, faimes, Professionals who exhibit high ethical 4, Right to Complaint Resolution "4 °°™Prehensive knowledge of the na # If the insured have a complaint about the servic ices approach the insurer. In case the json: You have received, you have the right t theright to approach ombudsman, ® Stabe to resolve the compton te ee 2 & : 3 = & z 5 ai 2 = z 2 z : 0 insuran from one i you don’t have to lose the benefits yea hea tcl ae ee s #ccumulated. In the past in health insurance policies, such a move resulted in “pre-existing Diseases”. ur losing benefits like the waiting period for covering 152 Rights & Responsibilities of the Insurer , Right to collect premium from the insured Insurer has the right to collect in advance a spe obligation of reimbursing the loss to the insured as 2, Rights to specify the rules and the co1 policy Insurer explicitly state as to what risks the subject to which losses will be reimbursed, 3. Responsibility to pay for the losses occurred and claimed by the insured Once the insured suffers losses and lodges claims, the insurer is obliged to honour payments, provided, they are within the contractual terms, cified sum as premium or his taking and when it occurs. nditions that govern the Promise made under the policy covers and the terms & conditions, . You can port your policy from and to any general insurance company or specialized health insurance company. You can port any individual/family policies Your new insurer has to give you the credit relating to waiting period for pre-existing conditions that you have gained with the old insurer. Your new insurer has to insure you at least up to the sum insured under the old policy. The two insurers should complete the porting as per the time-lines prescribed in the IRDA (Protection of Policyholders’ Interests) Regulations and guidelines. Conditions, * You can port the policy only at the juncture of renewal. That is, the new insurance period will be with the new insurance company. . © Scanned with OKEN Scanner ee, © Apart f the new policy ; from the waiting period credit, all other terms of ic premium are at the discretion of the new insurance company, a "Cling At least 45 days before your renewal is due you have to ‘Write to your old insurance company requesting a shift Specify company to which you want to shift the policy Renew your policy without a break (there is a 30 day grace period if Process) Following are the Responsibilities of the Insured 1, Understand the product features Plan Type: Market Linked or Traditional Premium Mode: Single Premium or Regular Premium Premium Amount, Premium Paying Term and Tenure of the plan Plan Benefits ~ Before and at Maturity Lock-in period and Surrender Charges Check the Benefit Illustration 2. Fill in the proposal form yourself and provide true information about your health, finzey status and occupation, asl 3. Read the policy document carefully ceee Pomtag and understand the terms and conditions, 4. Pay your premiums regularly to keep your policy in- benefits. It is advisable to opt for any of the a Payment as they reduce chances of missing force so that you continue to avails tutomatic debit modes for renewal prem Payment by due date. © Scanned with OKEN Scanner on 7 Insurance Ennai ritg General insurance (Feoinerance_| [Warne rear} Miscellaneous Motor Liability Health Beka 2.7 Types of Life Insurance Policy bie Insurance Products/Services Life insurance deals with covering the lives of son is the ‘economic value’ of the person, A twtedge, ability and other factors, The family, human beings. In life insurance, the asset in Person's earning capacity depends on his skills, employer and indirectly the users of products created , efits. A human life is an income generating asset. But tis aset can be lost through unexpected, early death or made non-functional through illnesses or <ésbilities caused by accidents. Death is certain, but its timing is uncertain. If death occurs very early ‘nihe career, insurance contributes to help those dependent on this asset, Just as dying early is a problem, living too long can also be a problem, Example: Based on his expenses in the retirement year and factoring the rise in future inflation and based sitte life expectancy (for example 80 years) the person may have made financial arrangements for enext 20 years. But if the person lives too long, in this case beyond 80 years, then he will run out of ial resources. Life insurance can help in safeguarding people against such risk of longevity in ‘form of pension plans. Life insurance products are based on core risk coverage needs of individuals as well as their long- Sm ivestment concerns. These are mainly divided into four groups, namely, (1) Term insurance O)Wholesife insurance, (3) Endowment, and (4) Annuities. While the first two are focused on risk S38 the later two focus on investments. Different companies design products around these main Bri Vaccticnasiin sbenfils add tings rpestto” Gastonder‘epraus Unit tked mtn ‘te also available now. L Term Insurance Policy: Term Insurance policy provides pure risk cover without any clement of saving for a specified period only and may be described as temporary insurance. sum assured is payable only ifthe insured dies during the specified/sclected period. In ase the i See does not die during the tenure of insurance, nothing is payable. The term ; plans could be of different types. Under Level Term Insurance, the premium and benefit is uniform throughout the term of the policy. © Scanned with OKEN Scanner waa aandeyo stip ur sarueduios aounsut £q parayjo sionposd 1910 pus sionposd aeaqg s sunay ia HOA ‘SUE 15Eq OAM] AOQN OM JO HOREUIGUIOD w axH YorKYK souIPY snoLNA soya a 0 OA joj 3240 ose SorURUIOD aouEuNstH OFF (suw|d woUMOpUD 2xnd) axnuer Aowod op cai 2 2 soop pasnsu qh J! 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Hdsoy jouuoU soy yuoLayp oq Aeus Kup 10d ne d -yuouneo onus pu woIssImpe AD] es au, ‘TuaUNEAN JO 1809 atf| Jo Is94u Paxy st junoure { paunsur oy) oy yUNoUTe Yse Ajrep Poxy v ray0 Oste solmeduro souBINsut MLE" ee ‘pauodas st youn oup soy Be 4 ‘ us ure yn Jaye ps2 194930 ern 305 souEAS ayo ost squadncy sooeuns EN A “ aad al od aos! OU ‘pazyTendsou ot isos © scanned with OKEN Scanner © scanned with OKEN Scanner ™ “To convert i to end she wes the ts of ‘She nme w find out i the rte of rou she ate of return 0 the poli fo tha ye: ae c de> peas ol. Her annual premium (P) i € 2200 fora 2,00,000 whole life poi Ty 1 "ns mc ea rn 6 220 0S i ey of yb eof py pc SRST 70. Te anal dividend forthe most recent policy year was Wm] One of the Tac or benchnask prices 1 detemine the assumed yearly price per 10a) ampli ‘Pesce, She wans to find out fhe rate of return she's receiving on the savings compen | pa ‘Wine policy reasonable Calculate Belt yearly rate of return r sete Be eat ate of ream method = ((CV + D)*EXPT (OB~CV) (001)/(P+CVP)} -1 {= { (£800 + 8) + (109200,000 8,800) (001) / 2,200 + 7,600) } —1 = (10782, 9800) —1 ints-1 ‘Thus i= 101,06 101%, ‘Thi Lal's ate of retum on the poi for that yea done for __ Once () acon © Scanned with OKEN Scanner © Scanned with OKEN Scanner © scanned with OKEN Scanner Meat Mergen, uy them? eo a ave your gals changed? Are you meeting them? Docume gg, oi tn a nol 2.3 ‘types of Investment Risk ves soe exp ae pe ok Le ow GEE rks can gy When yu ives you'r Jour inveseent tums vt a ng ve em cv tg seinen i Aaa currency sk aquty rick apps oan aestent in shares, The market price of shares vrs l time depending on demand and suply. Equity risk is the risk of loss because ofa dopa the marke price of shares. terest rte sk applies to debt investments suchas bonds. It isthe risk of losing mow because ofa change inthe interest rae. For example, ifthe interest rate goes up the mus vale of bonds wll drop. ‘© Currency risk applies when you own foreign investment. Iti the risk of losing ms because ofa movement in the exchange rte. For example, if the U:S. dollar becomes valuable relative tothe Canadian doll, your U.S. stocks will be worth less in Canali ola 2. Liquidity risk ‘The risk of being unable to el your investment at a fir price and ‘money out wie) vant to To sll he ines, you may nee to aecept lamer price a soune cases such ES! !arketivesient, it may not be pose el the investment al 3. Concentration risk ‘The risk of oss because your money is er ‘you diversity your ine concentrated in | investment a type of ‘emp ets 00 spread the risk over diferent types of " Pevildios anus vad ae tee iy wil buy fewer good and services Infos ene te the sae amount of nis like bonds. Shares offer some press ee eee the prices they charge to thei customen. Shee ice “ fon, Realestate also offers some proton because ct see wilt 1. Horizon risk ‘The risk that your investment horizon may be shortened because ofan unforeseen event, foe camp, te loss of your jb. This may force you to ell investens at you were expecting to hed fethe lng term. Ifyou must ell ata time when the markets are down, you may ese mosey, 8. Longevity risk ‘The isk of outiving your savings. This ik is partially evant for people who are retired, or ‘ee earing retirement, 4 Foreign investment risk ‘The risk of loss when investing in forcgn counties. When you buy foreign investments, for example, the shares of companies in emerging marke, yu fae isk tht Jo not exis in Canad, for zampl, the risk of nationalization 10. Manager risk ‘The chance that a pooled fand will underperform due to poor investment decisions ofthe fund anager. ‘11. Business risk : a This refers to the risk ofa particular busines filing and thereby losing its investment _ business performance may be caused by a variety of factors like heightened competition, emergence of {echnologies, ete fs on borowed funds If company se a large mare ar reid oon at re) ont nese and exposes compar foal © scanned with OKEN Scanner th Hy, | mt ine ® factors: Major change in wx rt ape owner mart OS ‘inflation rates, @ change jn ¢°™&% Eames, an iene oF SOTTIS ease intematona oil prices eg NS Mok factor: Stke in company, ba es sect key company OMe, unexpected ey gy St major supplier, death Resi wil prevail the Investment objectives and the client risk profi ane ene aie 10 take on considerable risk with different pools of assets. They might be wwestor viling asset they cama fora oy neers at ry nonctteie tata tes ogee aa What is a 'Risk Profile’ ease for their children's education Possible with that 200, but nt withthe money they rouse of mind organizations WiISDEDES 10k rik ire enich en onda i expose Aik profil entifes: me * individual or corporation is prepared to 1 The acepable lee of ik an indivi a Per le nenp oSemie How the corporation's wing ag someon a laf its oe decision-making statqy 2. Theva ets ced by an india. Te ik role may ince the prot vrattegsegave eles, and an outne ofthe potential costs and level of dimuon Be omer it i ee its i enw ie " typically seers as involving a “tril” o eae ? than as a “anger ora "loss Qusion npn “Three hey components comprise an india’ true risk profile: ecthdul Sas tlle ME Geer EE ‘Abii to tak rik relates “isk Capacity? to financial circumstances and iavesaet Simply stating heircomfor eels ES Une Sons foal, Genel peaking. the higher the level of wealth relative to Hable, al avestment choice prefirencs fer i ot ave can ee est i, ee ptr the ait 40 take kT ml a is, rca eae stan ea ea ane eer rming proces should cnsieral of thes sues earful, stock market. However, guestons ofthis nt ned to avid using fiancal jargon to 2. Willgnes or “ik atid’, o he other hand, relies to psychology, rate fit ensue that clients uly andestand the questions sed. facil cranstaes, Sons ini fn he prospect of investment voaiiy mt 4. Regret his negtive emotion arses fom making tbe wrong decison, Idi who are of losses distressing. Others are more relaxed about those Financial advises P — ‘sus point aneh rae eee ae ee iy led te pp ingens ocak cher oe a bieialst rine es ed is what ik rofling questionstes focus on, cates 'S. Propensity this takes ino account the historia financial decisions taken by the cient a ak ote "© Ratio of high ssk to low rik investments i : 1 Ratio of Libiies to Assets Ratio of Liabilities to Income “Atitude tis determines the clin's willingness fo take rsk. A risk profiles would typically attempt to evaluate a client's eacton to varios riser station, 7. Capacity isthe clients financial ability to take risk, Typical measure of capacity would be Factors Affecting Risk Profile of a Client 1. Knowledge individuals with more financial and investment knowledge are generally viling 0 accept invenet ik. Keowee indus cer tac iat ty ted o ake lst some riko gene high eur Shavers Races vals of inverment ned nt mater et ith implemen 6 © scanned with OKEN Scanner © scanned with OKEN Scanner Wealth Meresenn, ae Ee ‘can simply buy exposure to the other bo ste a pond funds and exchange tt “as to sel ing vlan ch ot eel Bie seen ‘Commas. You will reduce overall porto v0 discount ‘This can be dane at low cost through & ‘administration charge on the funds. tem, adding assets ca . ent a year wil outperform & returning endy $ pe cet «yer wil oupero© en ent one year and 7 pe cent the next ~ 6 enhance retums. For example, a diversified aiity and generate smoother returns, yoke eves, fa at Fe Of, With nin ee re annual return is the same, Pe 4 Monitor your asset allocation regularly ‘An asset allocation may need to assets can increase the volatility of a portflio, ‘especialy inthe years before retrent ‘oe changed over time, for two reasons: rises in the value and age can reduce the risk tolerance ofan invesy “To ensure highersk assets donot dominate portfolio, make sure you rebalance your pony ually, or when any one aset rises in vale by, 88), 20 pe cent. ‘Vanguard, the fund manager, has found that, over the Tong term, a portfolio split 60:40 betwee cutis and bonds but never re-balanced would have gradually drifted towards a more volatile spite ‘90710 ~ because shares historically outperformed bonds. '.Re-balance your portfolio Rebalancing simply involves selling some assets that have risen in value and reinvestng he ‘proceeds into those assets that have fllen below their target allocation For example, a portfolio that starts with 8 10,000 in equities and €10,000 in bonds may end year with the equities up 10% andthe bonds unchanged ~ a 5% return overall. So, to re-balance, au sell € 00 of equities and buy 8 00 of bonds. [Link] ‘ite syling™ To ensure market voltlity doesnot reduce your pofolio's value just before the mony ‘needed ~ for examrle to provide a lump sum - you sould consider gradually moving out of ih ‘isk assets, suchas equities, and into lower-risk assets, such as cash and government bonds, before money is needed. ‘This proves, known as life styling, sims to reduce the volatility in a portfolio over a pei 2.6 Asset Allocation Strategies . ‘Asset Allocation BI I = ; ‘sing @ Define your vaste san | | sentah | | Sterawaror | | ecraenree Boved approach 7396 tte || bse nay “aaa Be porolo pes, including 1, Adventurous: The adventurous pono, with + high proportion of equiy-bsed ive may a iver igh sk lee, eee Seng fnvestment time frame “Moderate: The moderate portfolio ha a lower percetae of equities compared to toads, and may suit investors with medium risk tolerance andor a medium imvestnet tie Fame Conservative: The conservative portli has low proportion of equities, and may suit those with low risk tolerence andor a shor time to ave These examples are hypothetical portfolios, and ar provided frst purposely. They eon a replacement for financial advice. lL Asset allocation by age | your purpose for investing isto save for your eicement, the proprio of equities to bonds tatyou hold may vary with your age. Atte simplest eve, his mens tat he younger you are, the ‘ce likely you are to have « higher proportion of elatvely hgh isk invesment, uch as equi, in {P= portolio, As you get older, you ar likely to want hold smaller Proportion of less volatile asets suc as ‘Scording to an investor's age. It is important 10 ‘ie whether this approach is suitable for you AS eve, ‘Your age = your bonds Wit this approach aange you pots 8200 bold in bonds is the sume as your age. That's it So iyo 72 ent bonds. If you'r 60 your portfolio shou bave 60 Pec 2 a portfolio so that the percentage of your porta should ave © scanned with OKEN Scanner © scanned with OKEN Scanner ee ‘every month. This kind of dip-system ig ” timing isan extreme example ‘ ovat Doty at iin am xt cas thing and ave he ht oon peat investment te. Mato anticipate the movemery 9 act ast ie wor tetgsing und snvng cn a agg bai es pinaéitmacee fae tends Of technical inca mt Ded on fr EEO the hat rn tome or ome il 8 and 2 ump pet tocol tne he mat on nce Si an, averaging which divers your costes a forebalancingnege’ Teles iis Wit Beseonent,reglt_auteposte 99, PTT rus and Tower your tax bill ver ting | farvesing which re nvesing PCOS tine. st aaviani saat oesmaaienanney wwilbert lary SAPS net eon Albert By 1. Term, bias into a strength ‘i wn =o ea teee went management makes we of priioing and Iverages mental acount eos ne "i sngeoe ye cass tober, Mental scouting means tat you mak decisions based on the my eee facet Pontoios eae tan view hem in te apgeane. While this coud ety |g) sector Retatlon: Sector or Seek sccatomas amy limita bois view of your finances. you cat also USE mental Sector Sector {0p rotation may apply comes [© Steed ont. Fore. Wace 7 7 0 bh ests ed on : oe Roki ry le the forthcoming period, then stocks partir cn eneimecting goods sectors would do well in ge ce St ma el oe ae " Wves a search for under priced x asks enact oni a “= seem Ses ocak ae ee eT ree Se ah fn nd ees Ie ee eee yoy oe oni per a esc of today to the liniities of tomorrow, we ensure that we aren't going to go into debt or fl, ‘hose goals This can also help determine if you're in danger of paying interest on something you cant afford For example, if yo fll short of target or goal, ke saving © 250,000 for a luxury vacationya. Ihave to decide whether to make up the shorall with creditor cut back on what you can afford. ‘When you use credit or unexpectedly downsize, you are using form of debt. The fists | ‘nancial and the second is peychologcal. Goals help you manifest your intentions without incarng eb¢ of any kind. 10, Achieve optimal returns, Sill, many financial advisers recommend actively managed investments for significant portions Goal-based wealth managementmaiches you ime horizon to your asset allocation, which meas | te clients" portfolios. Active management includes mutual funds and exchange-raded fnds, a8 oe ke on the optimum amount of risk. When you misllocte, it can mean saving too much ort 18s portfolios of stocks, bonds and other holdings managed by financial advises. Among the Sein ot om retus ih o comera sting of ising your goal if you tak 8 Fc a ape ar cece ee lal een Creamy cos of eae vesting cin tat it cases sero deviate fom a int stocks or bonds ‘sliocation because portfolio holistically. In fact, it has been shown throug) > x i tions, and other strategics to insure against ‘series of papers (see below) that when ae Ps ae Hedging: The ability to use short sales, put options, done corel, goal-based investing is just as efit tas 2.8 Active & Passive Investment Strategies ‘There are two basic approaches o investment management: ? Active ase managements based 094 ‘must spend time to seek out these ineficienie © scanned with OKEN Scanner © scanned with OKEN Scanner © scanned with OKEN Scanner

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