FINANCIAL PLANNING PRACTICE MAY 2012 SOLUTIONS

Question 1

Q1a Page 96

Answer

  • Risk
  • Term of investment
  • Liquidity
  • Taxation
  • Inflation

Q1b Page 8

Derivatives are securities whose prices are dependent upon or derived from one or more underlying securities. The derivative itself is merely a contract between two or more parties.

The significance is to hedge against risk of failure of the traditional investment assets

They can also be a tool for speculative purposes.

Q2

Page 31

  1. The right to know the profile of the intermediary whether broker or representative. The intermediary must also produce proof of contractual relationship with and accredited by the insurer concerned.
  2. Contact details of the intermediary
  3. Legal capacity, whether independent or representing an insurer
  4. Relevant experience
  5. shareholding
  6. The right to be advised the impact of the decision being made.
  7. Amount of premium to pay
  8. Whether benefits will depend on performance of other assets
  9. Possible impact of this investment on other policies
  10. Flexibility to change
  11. The right when being advised to replace an existing policy
  12. A client should not be advised to cancel a policy unless it is a replacement policy
  13. The old policy is worse off in terms of benefits
  14. The right to be informed by the insurer confirming issuance of the policy
  15. The name of insurer
  16. The product purchased
  17. Initial expenses if any
  18. Loading if any
  19. The right to cancel the policy
  20. The insured has a right to cancel in writing within 30 days
  21. Has 30 days to propose any changes to the policy

Q3

Some of the benefits of personal financial planning (PFP)

  1. Financial planning helps to bring financial order and discipline to clients.
  2. Pre-defined goals are more likely to be achieved..
  3. Individuals take time to identify key risks surrounding them more especially risks emanating from the external environment.
  4. Awareness of the risk exposures assists clients to be well prepared and therefore remain focused and proactive rather than being reactive to changing circumstances.
  5. The existence of a plan creates a framework for feedback, evaluation and control
  6. Develops an improved awareness of financial choices
  7. Provides an opportunity for an increased commitment to financial goals

The following options are available to an insurer if risk is considered to be relatively high:

a.Reject the policy2 marks

b.Impose extra premium which is referred to as loading 2marks (page 86

c.Approach a reinsurance company 2 marks

Q4

Page 6

-Preference shareholders will be receive their dividend before ordinary shareholders

-Preference shareholders rank ahead of ordinary shareholders in case of a liquidation

-Dividends give the investor a definite fixed income for preference shareholders and would accrue and be carried forward if the company incurred a loss, something that does not apply to an ordinary shareholder

-In liquidation, preference shareholders are given a priority together with creditors

.

-No voting rights for most

-Preference shares cannot be traded on the stock market

-Preference shareholders will not ask for more dividends evenwhere the company has performed extremely well

That is another term for ordinary share holding

SECTION B

Q5

Recommended answer Page 62

a

  • Annuity policy
  • This policy will not require the policy holder to pay monthly premiums
  • Policy holder will choose when to start getting monthly income

b

  • An endowment policy provides both protection (life cover) and investment. It is therefore an excellent way of saving while looking for life cover
  • Most young people are looking for growth of their investment
  • Because an endowment policy can pay out if policyholder survives to maturity, the focus is to get the proceeds upon maturity of the policy
  • If the choice is a pure endowment without life cover, growth of the policy is more rapid

Q6

PAGE 107

  1. An executor has to be appointed and that is costly

#more solutions required#

Q7

Solutions on PAGE 84

Q8

A

  1. Client does not perceive sufficient value
  2. Client does not believe that solution will solve problem
  3. Client raises irrelevant issues due to lack of understanding

B.

  1. Develop needs sufficiently so that customer understands
  2. Explore an important area of concern for the client when asking background questions and questions to ascertain needs.
  3. Objections could be a result of closing for a solution too early
  4. The agent did not pick up clues to clients during the interviews

C.

Explain the characteristics of the product such as rate, cost, term

Avoid using jargon or technical terms which tend to confuse customers

Give a chance to the client to make an informed decision.