International Diversity in Measuring the Fair Value of Life Insurance Contracts - Assignment Example

Life insurance Outline Questions and answers References Appendices -Financial Fact Finder - Statement of Advice -Checklist -Outline of on-going services Life insurance 1 (a) You ring Bess and book an appointment to see her. She wants to know if she has to bring anything along with her. Tell Bess which documents she needs to bring along with her, and explain why you would need each document. Bess needs to come with the following documents that will be necessary for identification, filling of the forms and explaining her status. The documents will be as follows: -Valid identification documents. She will be required to identify herself, marital status, nationality and where she resides in the identification document. Therefore, for this purpose, the documents that will be required will include drivers permit, a passport and or an identity card. These will be submitted in copies. - Contact information. Bess will be needed to bring her contact information which will be used as a way to get in touch with her. The contact information required will include the place of residence, phone number or mobile phone number, an e-mail address and a post office mail address. Residential contact is important when an individual needs to be accessed at home and so and therefore it should give other details which include city or location. In the case where there is a form of joint ownership, the contact information document that will be provided must be signed by all owners. - A letter of original contract. It is imperative that Bess provides her employment contract letter that is original. This will help prove her ability to cover the premiums and will establish her credibility as an employed individual. This should come from the school where she teaches violin and any other place here she works. In the case of lost original contract form, she should provide a Declaration of Lost Policy form. This together with a Signed Statutory Declaration form should as witnessed by a commissioner of affidavits. Furthermore, there are other requirements that she will need to present and which will include a duly stamped Release of Assignment by Board of Revenue, and where necessary and applicable, Power of Attorney will be needed. Additionally, she will be needed to fill other documents like Deed of Assignment and Declaration of Trust and finally issue her official documentation of the bank she uses, branch and account number. (b) As a follow up to your telephone conversation, draft an e-mail to Bess explaining what you intend to discuss in your first appointment. Hallo Bess. Following our last telephone conversation, I felt it was it was of utmost importance to inform you beforehand some of the issues we will discuss when you come to the office. We will discuss the type of life insurance that you will wish to take. It is imperative to underscore to the fact that there are many forms of life insurance with different insurance policies. You will need to know the two broad categories of life insurance policies which will include term life insurance and permanent life insurance policies. In the latter, you will understand that it builds cash value and provides he insured with life time coverage through its policies. In addition, it provides certain important elements of savings lifelong protection. The combination of both as you shall see will provide an investment fund as well as life coverage and payment on your death with a fixed and stated amount. On the other hand, we will also discuss term life insurance which has no investment component and only payable for a specific period of time if an insured dies. It is affordable for short time insurance needs, meeting life insurance needs which are temporary and diminishing and requires short time protection such as child tuition and home mortgage. In our discussion and with a good knowledge of your financial and personal situation, you will be able to choose which life insurance suits you best. (c) At your first meeting with Bess, you are legally required to present her with a document. Explain to Bess, in a language that she understands, what this document is and summarize the key points she needs to know. The document that will be provided to Bess will be an application form requesting for cover. She will be required to know which occupation class she falls into. That can either be professional, white collar, light manual, skilled or unskilled occupations. Additionally, she will need to give her health information; take the form to her employer to fill the employer section and in any cases there is a beneficiary, it would be appropriate to attach details on a separate sheet of paper. (d) If, at a later stage, Bess wanted to complain about your advice, what are her options? What are you required to make known to her at your first meeting? In a situation where Bess would have complains or a problem, it would be appropriate that she contacts the insurer whose contact address will be provided to her. Additionally, she would come to the customer care department which will give her the best services she would need. However, it is important to make known to her a number of issues that might raise concerns. To begin with, it is important to let her know that she will need to wait after making an application for insurance cover until the application matures. The number of days or months for waiting may vary but after completing an application form and submitting it, it will be limited to 90 days. Secondly, if she ceases employment, she will not continue having the insurance cover unless her premiums can be covered by her superannuation account balance. Furthermore, she will need to know how to claim benefits. Costs incurred in paying certain fees from non-attendance and procedures for blood tests during the completion of a claim form are not recoverable. Other areas she will need to be aware of are the waiting periods when claiming benefits and the roles of the insurer. Finally, to avoid problems, set enough premiums to cover the month so it does not lapse, heck all statement your insurer will send you and have correct details of the insurance company. 2 (a). What techniques and/or tools will you use to obtain relevant information needed from Bess before giving her advice? Some of the techniques that will be used to get needed information from Bess will include the use of questionnaires. She will be given forms with questions to fill and which will provide questions that will require detailed answers. Also, an interview will be conducted and in this sense, she will be able to answer the interviewer’s questions as directed both on phone and in the office. (b) During the fact finding process you feel that Bess is reluctant to give, or may be withholding certain information. i) What would you say to Bess to overcome her fears? I would let Bess understand that as an insurance company, there is a policy on privacy and that whatever she will share with the company shall remain private. The information received will not be sold but will be used to process her application, communicate with her, and keep track of her dealings with the company. ii) What are you legally required to say to Bess? She is suppose to know that the insurance company she is seeking services from has policies that makes secure and confidential customers personal and financial information through procedural, electronic and physical safeguards. Moreover, some of the private information about health will be collected at the applicants consent. The customer reserves the right to sue the company if she feels her privacy has been violated. (c) Complete an attached Financial Fact Finder for Bess, based on the existing data (see Appendix !) 3 Risk, in an insurance sense, is quite different to investment risk. (a) How would you explain the difference to Bess? Risk in insurance is any form of plan that offers a number of restrictions and limited benefits. This will be due to high premiums and slow process of acquiring the benefits. Risks in insurance in life places an individual as either being in standard risk or preferred risks. On the other hand, investment risk requires an individual to make some kind of investments on assets. The types of investment risks would include business, valuation and force of sale risks. (b) Bess says that she’s not comfortable with the thought of facing any loss of income. What questions will you ask to confirm her needs? Some of the questions she will be asked will include: Will you have any problems paying the premiums? How stable is your job? (c) Given the information you now have on Bess’ current situation and her understanding of risk, does she have enough insurance cover? If not, explain what other risks she might insure for. She has enough insurance cover. This is so because she has insured other properties with CTP insurance and so what is remaining to keep her family financially independent can be taken care of by this new insurance company. 4 Recommend the appropriate level of cover that Bess will need to be adequately covered in: i) Personal insurance (Including health insurance) ii)General insurances For both, she will need to take the permanent life insurance policies which provides a wide range of benefits in terms of protection and investment funds. (b)There are many ways you can gather information about the products and services you recommend to your clients. Describe two (2) research processes you would use to make sure that the recommendations you make to your clients are based on the most current and appropriate information. The first method would be through qualitative data and quantitative data which would mainly use images, sounds or words and numbers. Secondly, data that is structured and unstructured can be used. This involves questionnaires and surveys. (c) Give two reasons why conducting research is so important and how it assists you in your role. Provide at least (2) reasons. Conducting a research is important in the sense that it provides an individual with an opportunity to understand the market segments and the needs of the clients and so plays an important role in enabling an individual carry out the role of effectively meeting the needs. 5 (a) Summarize your recommended solutions in an appropriate form for Bess, defining any technical expressions you might have to use. Some of the recommended solutions for Bess would be: -To evaluate insurance policies to determine how much coverage she needs taking into account benefits from work, debts from credit card, personal and mortgage loans and her income. - Another recommendation is that she takes into account if there are free trials by the Insurance Company, portability and coverage effective dates. (b) Bess is surprised at high premium she would have to pay for any trauma cover. Explain to her why this is the case. It is so since at such times the company will have to cater for the cost of taking care of the hospital bills. (c) Bess says she cannot afford such a high level of cover. What suggestions could you make? The best thing for her to do would be to go to the affordable term life insurance which is cost effective, simple in policies and affordable. 6 (a) Prepare and submit a statement of Advice (SOA) to Bess. (see appendix) (b) How would you check that Bess understands the SOA that you have given to her? -Make the language simple to understand and provide the all the details necessary in an organized manner. (c) Explain (2) concerns that Bess might have with the SOA and explain how you would address them. - She would have a problem with premiums to be paid if they are high. I would suggest she switches to an affordable policy. - She might have a problem with the privacy of her personal information. This may be handled through assurances of complete protection of information. 7 (a). Bess has agreed, in principle, to your SOA. Explain to Bess what happens next. After agreeing with the SOA, Bess will be issued with a fee structure of what needs to be paid, when and how. (b). Explain your fee structure to Bess, in plain English. Remember to mention the following points: - Commission received - Relationship to insurers - Policy renewals About the fee structure, it will tell her about what fee she will pay, the commission received as a share by her which can be high or low depending on the whatever she intends to insure. Also, depending with the premium, the policy for the payments is renewable. 8. Develop a checklist, to be attached to Bess’s file, to ensure that you have gathered all the necessary information from Bess (see appendix). 9. Draft an outline of the level of ongoing service you intend to recommend to Bess. In your outline, discuss the type of information that you would regularly provide to Bess in relation to her SOA. (b) Explain how, as a financial advisor, you would provide an adequate on going service to Bess. When situations change I will find it imperative to make adjustments to the agreements and plans made. Therefore, I will advice her to notify the insurance company immediately she experiences such changes. Also for all the reviews except for the preparation of statement of advice will not be charged. In the preparation of SOA, the aforementioned charges will be explained. (c) What would you do to ensure that Bess knows the specific costs relating to an ongoing service? Provide her with a transaction summary, performance of assets and a report of investments. (d) Describe (2) activities you regularly undertake to keep up to date and ensure that your work meets the current legal, ethical and regulatory requirements of the finance sector. -This is through maintaining of regulations and supervisions that are sound and that follow treatment of preconditions of security and banking standards. -Carry out public disclosure, regulations across borders and sectors and implementation to improve insurance, securities and banking standards. Reference Klumpes, P., O'brien, C., & Reibel, A. (2009). International Diversity in Measuring the Fair Value of Life Insurance Contracts*. Geneva Papers on Risk & Insurance: Special Issue on Insurance Linked Securities, Asset and, 34(2), 197- 227.  Retrieved June 6, 2011, from ABI/INFORM Global. APPENDICES Appendix I: Personal details Client Spouse/Partner Title Surname Watson - Given and proffered names Bess Bill Home address - - Business address - - Contact phone - - Date of birth - Sex Male * female * Male female Smoker yes * No Yes No Expected retirement age Dependants (children or other) Name Date of Birth Sex School Occupation Mary Female - - Appendix II: Employment Details Income and expenditure Occupation Employment status Self employed * Employee Self-employed Employee Not employed * Pensioner Not-employed Pensioner * Permanent Part-time Permanent Part-time Casual Contractor Casual Contractor Other Other Business status Sole proprietor Partnership Sole proprietor Partnership Private company Trust Private company Trust Notes Employment security is an integral part of the planning process and should be taken into consideration. Any other persons to be contacted eg. Accountant, bank, solicitor, etc.? Income and expenditure Usual monthly income Client Spouse Total tax income * (after tax) $ 3583(with tax) $ *(include salary, wages, rents, investments, pensions, social security etc) Total household income (for both parties) Total $ Monthly expenses Client Spouse/partner Household (eg. Rent, mortgage, food, clothing, electricity/gas/telephone) $185,000 Transport and health (eg. Travel, car repayments, registration, medical fund) $ 7400 Other expenses (eg. Other loan repayments, credit cards, superannuation, insurances, education, entertainment) $ 4600 Total expenses $ 197,000 $ Total household expenses (for both parties) Total $ 197,000 Surplus/shortfall(income less expenditure) Total $ 154,000 Actual savings Total $ Do you expect any significant change in income or expense in the next year? Objectives and current investments Investment objectives Appendix III: Your attitude to risk Place an X on the scale. People make investment decisions based on time, performance of an investment and the risk they are prepared to accept. You should consider that short term losses might be a consequence for aiming higher, longer term returns. The higher the return, the higher the risk Low risk, low return High risk, high return * 1 2 3 4 Your concerns: make each dotted line with a number from 1 to 4 Not concerned: 1 slightly concerned:2 Concerned: 3 very concerned: 4 …2……keep pace with inflation ………4….legal, logical and appropriate tax relief …4……Easy access to your cash ………4…..Income from your investment each year ……4..Easy to manage in progress ……4…Capital growth ……1..Volatility Your investment preferences: 1. In any investment planning, are there any investments you wish to avoid? 2. In any investment panning, are there any investments you would prefer? Asset investments Do you have a will? Yes No Appendix IV: Current investments Investment type Company Purchase date Units held/fixed rate Current value Owner Notes Superannuation, Rollovers and Insurances Superannuation details Estimated retirement value Personal super Employer super Client Spouse/partner Fund name Date of joining fund Type of fund Accumulation pension Defined benefit Lump sum Accumulation pension Defined benefit Lump sum Contribution(eg. 5% of salary By employer By yourself By employer By yourself Current retirement value $ $ Estimated retirement value $ $ Is there provision for you to top up or salary sacrifice? Yes No Yes No Rollovers Customer Spouse/partner Current value of all rollovers Current value of rollovers (made prior to 15/2/90) Benefits paid out in cash since 15/2/90 Date $ Date $ Date $ Date $ Pre 1/7/83 component Post 30/6/83 component Uneducated contributions Post 30/6/94 invalidity component Concessional contributions Appendix V: Insurances: death, permanent disablement and trauma (include cover of all super funds) Life insured Relationship to customer Company Policy number Type of benefit Benefit amount Annual premium Insurances: Income replacement and business overheads (include cover of all super funds) Life insured Relationship to customer Company Policy number Type of benefit Benefit amount Annual premium Net worth, savings and priorities Net Worth Assets Liquid: cash, shares, bonds, etc. Total $ Non-liquid: Business, properties, Home, furniture, car, etc. Total $ Other: Jewellery, antiques, etc. Total $ Total household assets (for both parties) Total $ Liabilities Short term: personal loan, Credit card, Tax liability, Hire purchase leases, etc Total $ Long term: Mortgages, other Total $ Total household liabilities Total $ Net Worth (assets less liabilities) Total $ Do you expect any significant change in assets or liabilities in the next year? Appendix V: Savings Saving goals Amount needed When N/A N/A N/A Appendix VI: Personal priorities Rank personal priorities in order of importance, e.g. 1=highest Rank Details Protect income against sickness or accident N/A N/A Protect family and/or assets in the event of death “ “ Provide against serious illness or trauma “ “ Plan for retirement “ “ Save for short term (deposit for home, overseas holiday) “ “ Save for medium term (early mortgage repayment, children’s education) “ “ Others (describe) “ “ “ “ Appendix VII: Future needs Insurance needs-disability Client Spouse/partner Gross annual income (before tax) N/A N/A Less business expenses “ “ Net annual income (before tax) “ “ Max. allowable annual benefit(75% of net annual income) “ “ Monthly benefit (ie. Divide annual benefit by 12) Less existing insurance Insured monthly benefit shortfall(before tax) Insurance needs-life and retirement Client Spouse/partner Final expenses fund (debts, expenses, legals, medicals, emergencies, funeral fees) $12000 Mortgage discharge $185,000 Education-amount to pay education fees to your children Trauma needs- fund to cover out-of-pocket health care costs (eg. Excess over health insurance, medications, physiotherapy, etc.) Additional expenses of a permanent nature (wheelchairs, home alterations, etc.) Income 1. Income for your spouse/partner 2. Income for your children Retirement income Additional income: income protection only covers 75%, would you need extra? Total funds required $197,000 Less cash available or assets that can be readily cashed Shortfall/surplus $197,000 Acknowledgements The information prokvoded in this Financial Fact Finder is complete and accurate to the best of my knowledge. I undertand that advide provided without the completion of a Financial Fact Finder, or following a partial or inaccurate completion, may not be appropriate to my needs. I acknowledge that the Adviser has provided me with the completed Financial Fact Finder, signed by me. Customer (s) signature (s) Adviser’s name Adviser’s signature Date Appendix VIII: Statement of Advice Statement of Advice Prepared for Bess By Edward Jenner and Simon Hans Authorized representative (No. 4765329) of Goforit Ltd ABN 28732122 Australian financial services licence no. 100344 41Any other Street, Melbourne, 4300 (03) 5554 3098 financialservices@goforit.com.au 7th June 2011 What this document is about Bess you have asked me for advice on an insurance cover that will keep you and Mary financially independent under all circumstances. I have decided to write to you this Statement of Advice (SOA) document containing my advice. My contact details Contact me on: (03) 4657 0109 My email address is: amme@goforit.com.au Postal address: 41 Any other street, Melbourne, 4300 More information on investing For general information on effects of fees and calculation of managed funds in insurance go to www.goforit. au. For further clarification visit Goforit website at www.Goforit.com.au. My advice in Summary I recommend that you use the $ 43,000 in your savings account as follows: $30,000 to pay off your mortgage $13,000 invested in a high interest at CTP insurance Why you need to rely on my advice Through this kind of investment you will be able to clear your mortgage debts and have a saving that will keep you and Mary financially independent. Risks in my advice The value of the investment you are making may go down and not up as quickly as you might anticipate. When such a thing happens, don’t panic. What is not covered in my advice It is important that you understand that in my advice I will not address general tax issues and any adequacy needed after retirement. Commission and fees I will charge you $600 for the preparation of the SOA and out of it I will have my share of $400 and the rest give to the plaintiff. Any other service you will require from me and that requires payment as agreed earlier will be charged. Section 1: Important information about you In preparing this SOA, information about you that I used came from your personal and financial information, objectives, financial knowledge and risk profile. Personal information You are employed as a music teacher and you do some other jobs part time. You have an illness in your family line that causes heart attack and so you need insurance cover. You have a child who is aged 6. Objectives We met for the first time and you told me you needed my advice on how to be financially independent. Financial information Your earnings and spending Your earning per year is $43,000 Your spending greatly exceeds your earning at work in both full time and part time jobs and so you don’t save much. Your owing and owning A car valued at $15,000 and you owe $7,400 on that car A mortgaged house $300,000 and owe $ 185,000 balance. A German violin $6000 An entertainment system $26,000 You owe $4600 on two credit cards Total liabilities $194000 Total assets $64,000 Your risk profile You may invest and fail to get the expected result. However as we had previously discussed, time and risks are involved in this process but in the end you will achieve your goals. Signed…………………………………. Signed………………………………………………. Joe Black / /05 Sue Black / /05 Appendix IX: Checklist Component Verification Personal details * Dependants * Employment, Income and expenditure * Risk valuation * Current investments - Personal super - Employer super - Rollovers - Insurances * Networth - Savings - Personal priorities * Future needs - Insurance cover * Signatories * Bess’ checklist Outline of on-going services Regulations………………………………………………………………1 Implementation methodologies………………………………2 Public disclosure……………………………………………………….3 Supervision……………………………………………………………….4 Read More