FIN2106 Lecture Notes - Lecture 8: Burglary, Co-Insurance, Earthquake Insurance
FIN2106 – Module 8
-Introduction
oA financial plan must take into account the possibility of risks and aim to:
eliminate them, or
minimise their effect
oWealth protection is just as important as wealth creation
-Risk
oSpeculative risk
Arises where there is a chance of a loss or a gain.
Examples:
Gambling. Once the bet is placed, there can only be a win or a
loss.
Setting up a business. The business will succeed or fail.
Investments. Profit or loss.
oPure risk
Arises where there is only a possibility of loss or no loss
Personal
Property
oHome and contents
oMotor vehicle
Liability
oe.g. negligence
-Risk management process
oIdentification of risks
Identify as many existing risks as possible so that provision can be made
for possible consequences
oQuantification of risk
find more resources at oneclass.com
find more resources at oneclass.com
oStrategies for handling the risks
Risk elimination
Risk reduction
Risk retention (self insurance)
Risk transfer (insurance)
oImplementation of the program
oReview of the program
-Life insurance
oProvides cover against premature death (Figure 1 – Ways to Go)
oUses of life insurance
Replacement income to maintain family with death of breadwinner
To meet expenses at future stage
Provide for death of a business partner
Equalising wealth distribution
To cover business debts
Needs analysis
Funeral and associated expenses
Final medical expenses
Mortgages and other debts
Emergency funds
Taxes and legal costs
Provision for family living expenses
Provision for other specific needs
Cover needed is the total amount of needs calculated less current cover
and realisable current resources
-Total and permanent disablement (TPD) insurance
oGenerally offered as an extra option with a life policy
oCovers the same needs as for death cover plus possible home modifications
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Introduction: a financial plan must take into account the possibility of risks and aim to: eliminate them, or. Minimise their effect: wealth protection is just as important as wealth creation. Arises where there is a chance of a loss or a gain. Once the bet is placed, there can only be a win or a loss: pure risk. Arises where there is only a possibility of loss or no loss. Identify as many existing risks as possible so that provision can be made for possible consequences: quantification of risk, strategies for handling the risks. Risk transfer (insurance: implementation of the program, review of the program. Life insurance: provides cover against premature death (figure 1 ways to go, uses of life insurance. Replacement income to maintain family with death of breadwinner. Cover needed is the total amount of needs calculated less current cover and realisable current resources.
