Insurance is a means of protecting the loss or costs caused by an event that may or may not happen. Insurance coverage is by a contract in which one party, the insurer, agrees to indemnify or reimburse another, the insured, for loss that occurs under the terms of the contract.

In exchange for payments from the insured, called premiums, the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event.

Life Assurance

As an individual’s death is certain or assured to happen then Life Assurance is the phrase used to cover your full life insurance.

• Life assurance provides a lump sum when you die.
• If you die early your family or beneficiary will collect the lump sum. If you live to a ripe old age the lump sum is still paid on your death and can cover funeral expenses, inheritance taxes, mortgage or other liabilities.
• You can nominate who you want to be the beneficiary of the lump sum but this needs to be in accord with your will.
• Life Assurance can be seen as a long term saving plan.  As your policy will be paid out at some unknown future date it always has a value. So the policy can sometimes be sold for a cash value (and someone else takes up the premiums and benefits) or surrendered for a lump sum.
• Some policies have bonuses   added based on performance of the underlying investments. However the cost to the insurer of some people dying earlier than expected has to be set against contributions and the interest/dividends that money makes for the insurer.
• Premiums will reflect the amount insured and the length of time premiums are likely to be collected. Using life expectancy tables insurers work out how much you will pay and give or take growth due to interest that is the amount they will insure you for – you do not get out more than you put in unless you die early.

Term Life Insurance

This is a useful type of insurance against you dying within a specific time or set number of years. It can be used to cover financial responsibilities like the period before your children finish school or to repay a mortgage if you die during the mortgage period. It can be used to create a capital sum to replace your regular income earnt whilst alive.

If the term is short and you are young and fit the premiums will be cheap – most people will never need to claim and that is taken into account when setting premiums.

If you are just protecting a mortgage or debt you can arrange a diminishing level of Term cover  as the debt is repaid in the normal course of events.

There are occasions when life insurance is available or taken out for special reasons. This explores some of those special events.

Works Pension Schemes

Most pension schemes have life insurance provision for ‘In Service Death’ . If you die whilst still employed you get a lump sum equal to a number of weeks or years wages. Check your contract of employment and or pension handbook.

It is a comparatively cheap benefit for employers to offer as they are covering all staff whilst you can only get cover as a one off.

Travel Insurance

It is no consolation to you if you die on holiday but you may want to cover the cost of repatriation of the body. Most holiday insurance will have a life element contained within the policy. You can also be sold one trip life insurance but be wary the cost can be prohibitive and not worth the effort.

Credit insurance

Some insurance is provided by banks or credit card companies to have your debts repaid if you die. It saves the companies taking the money out of your estate and assets after you have gone.

Friendly Societies & Clubs

Small grants for funeral expenses were often part of the membership of clubs and societies. There are also prepaid funeral cost plans.

A Bereavement Payment is a one-off tax-free lump sum payment of £2,000. You can claim it if you were widowed on or after 9 April 2001. You must claim within twelve months of your husband’s, wife’s or civil partner’s death.

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Joint Life Policies

You can arrange insurance on more than one life. Useful if two people have a joint mortgage or the responsibility for  young children.

Lloyds of London can arrange special insurance via your broker on a host of subjects and risks. This may be useful or appropriate if you engage in dangerous pursuits such as parachuting or motor racing.

Stocks signify you claim ownership to part of a corporation and have the same meaning as shares. More  traditionally stocks referred to government stocks such as long dated bonds. Whearas shares reflected company shares.

However, today the difference between stocks and shares has become less obvious. For example, when people refer to the stockmarket they are primarily thinking about the FTSE-100 or Dow  Jones which trades in company shares and listed PLCs.

A recession is characterised as a period of negative economic growth for two consecutive quarters. In a recession, unemployment will rise, output fall and government borrowing increase.

A depression is a recession much more severe and long lasting. There is no agreed upon definition of a depression. But, generally a depression would have some of the following characteristics.

Decline in output for a prolonged period e.g. greater than 2 years.

A drop in output of 10% or greater.

Unemployment rate touching 20% (rather than the 10% rate associated with recessions)

One popular definition of the difference between recession and depression is:

. “A recession is when your neighbor loses his job; a depression is when you lose yours.”

It was first used in print by Teamsters Union President Dave Beck (1894-1993) It is widely attributed to Henry Trueman who began using it shortly after in 1954.

See also: Definition of Depression

Definition of Gross

• Gross is the total amount exclusive of deductions.
• For example, gross pay, is the total pay before tax deductions

Definition of Net

• Net is the total amount received after subtracting deductions from the gross amount

Difference Between Gross Interest Rates and Net Interest Rates

Gross interest rate is the headline interest advertised by a bank

Net interest rate is the effective interest rate after tax is deducted from the gross rate. It is the rate that will be credited into your account. In the UK, most banks take tax at source.

Difference between Gross Pay and Net Pay

• Gross Pay The headline wage rate.
• Net Pay, this will be your take home pay after income tax and national insurance contributions have been deducted. Other deductions could include union subs and professional indemnity.

Related

• Gross, net and gross AER interest rates

A bond is a type of debt instrument. It is a way for a company or government to raise money by selling, in effect, IOUs.

Bonds work by firms selling a bond for say £1,000. In return the firm agrees to pay back the bond in 10,20 or 30 years time. In the meantime, it will pay interest on this bond of say 5%. The purchaser of the bond, gives the firm £1,000 and in return gets interest payments for the duration of the bond term.

The main difference between a bond and loan is that a bond is highly tradeable. If you buy a bond, there is usually a market where you can trade bonds. This means you can sell the bond, rather than wait to the end of the 30 year period. In practise people buy bonds when they wish to increase their portfolio in that way.

Loans, tend to be agreements between banks and customers. Loans are usually non tradeable and the bank is obliged to see out the term of the loan.

However, instruments such as derivatives and securitisation have made loans more tradeable. Banks are able to pass on the risk of loans to other financial bodies willing to take on the risk.

Related

• Bond Yields and the price of Bonds
• Bond Market and interest rates

There have been some crazy financial conspiracies circulating the internet. Just proving that the internet is a place where anything goes.

1. Financial Crisis started by journalists / democrats who wished to see Barack Obama elected. (think progress)

2. Financial crisis evidence of economic terrorism.

This is patently absurd and and gives the impression the crisis could be precipitated by a few random comments by journalists and oversees terrorist operatives.

In fact the crisis was many years in the making. Starting with economic policies pursued in the Bush, Greenspan era of 2000-2006.

An long boom in houses fuelled by low interest rates and over optimistic analysis of the economy and financial markets. See: Boom and bust in housing markets and subprime crisis for analysis of the long period of policies which led to a boom and bust situation in house prices and mortgage lending.

Once the banks were overloaded with toxic assets and mortgages lenders had no chance of repaying, the underlying fragility of the system meant it was only a matter of time before the markets and banks imploded.

Some have even gone so far as to suggest that the crisis is a result of economic terrorism – with mirky terrorirsts buying and selling to undermine markets. But, this represents only a naive view of the situation. The crisis was based on economic fundamentals not a few foreigners selling shares at the wrong time.

If you are sitting on losses of $600bn, the trigger is almost irrelevant.

• Economic Crisis explained
• What Caused Economic Crisis
• Financial crisis explained

The financial system has taken a real battering with the threat of financial meltdown hanging over markets.

These are reasons for financial meltdown being a real possibility

Credit Crunch – Why banks stopped lending to each other and the impact this had on financial markets and the wider economy

Failure of Lehman Brothers – The failure of $600bn Lehman Brothers pushed the markets closest to bankruptcy that we have ever seen

Financial Crisis explained

Boom and Bust in US housing Market – Why the US property crash, starting in 2006, caused so many problems

Subprime crisis – the problems stemming from the subprime mortgage fiasco in the US was at the heart of many financial problems

• A humorous look at subprime crisis
• Books on credit crisis

Definition of Compound Interest – Compound is defined in the Oxford concise dictionary as ‘….increase, complicate, …debt by partial payments…’ and whilst none of these definitions directly addresses the issue of compound interest you may begin to see where we are coming from.

Compound interest is the effect of ‘interest on interest’ and happens when interest is added to the capital or principal sum so that from that moment on the interest which has been added also itself earns interest. If you borrow £10,000 on a credit card at 1% per month after one month you owe £10,100 but at the end of 2 months £10210. After 10 years with no repayments you would owe over £33000 (not the £22,000 you may expect on simple annual interest of 10 years times 12% =£12000 interest plus original principal) This addition of interest to the principal is called compounding (i.e. interest is compounded).

The Positives about Compound Interest

If you have money on deposit earning regular interest your capital grows reasonably quickly.
To demonstrate if you deposit £14,000 in a retirement fund for 45 years at 10% you will retire with over a million pounds. Do you remember the story of a grain of rice on each chess board square being double the last square until there isn’t enough rice grains in the world to cover the 64th square – well compound interest is similar.

If you understand compound interest you can make better comparisons and judgements.
Some mortgages compound every day some every year – which would you chose? Once a year in arrears for preference but in advance at 12% is better than compounding daily that would compound to 12.75% (excluding repayments).

Compound interest is usually the only game in town so take care out there

The Negative of Compound Interest

The cost is disguised and can run away with your money.
Missing a payment by a day may mean interest falls due to be calculated before the payment is recorded. Time your monthly payments and try to stop them slipping.
Compound interest is designed to help lenders. Credit card monthly repayments are usually set so you are encouraged to keep borrowing and thus keep paying interest. Try eat into the capital owed by repaying interest plus some capital every time.

Compound interest was said to be ‘ once regarded as the worst kind of usury, and was severely condemned by Roman law, as well as the common laws of many other countries’. ‘Albert Einstein, when asked what he considered to be mankind’s greatest invention, replied ‘Compound interest!’’

Related

• Calculating Compound Interest

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