There are three given scenarios, outlining different people, and their specific financial goals. Traditional financial institutions have evolved in their purposes, trying to remain competitive with emerging financial competitors, including those of foreign countries.
In the first scenario, a young professional couple with high debt is seeking to protect each other with long-term insurance and they want to begin investing money. The high debt may likely include student loans, credit card balances, and maybe a mortgage on a home. They should avoid accumulating any additional credit card debt, as this is money borrowed against their future earnings. The couple should try to eliminate debts with higher interest rates first. They should also set up a budget and start to invest ten to twenty percent of their income. Half of the money they are able to save should be accessible in the event of an emergency or disruption of either or both of their incomes, while the other half should go into a long-term investment. The couple is also interested in financial protection in the event that either or both die at a younger than average age.
The least expensive type of insurance is term life. They can select as long a term as they like, but a term policy is a preferred choice over whole life or universal policy. The latter types of policies carry high commission charges over the first year and then decrease over the next two to four years, depending on the company that is selling these types of policies. The premium on term life insurance is relatively inexpensive. The couple can then open a mutual fund supported by systematic withdrawals from their checking or savings account. For this couple’s financial needs, they are going to need to seek the services of a non-deposit type of financial institution (Ebert & Griffin, 2007).
Should the couple decide to invest in a universal or whole life policy, there are some benefits of this type of investment. They will have insurance that pays off in the event of an early death of either. Some policies pay the cash value of the policy in addition to the face value of the insured amount. The couple will learn to set aside money systematically each month (or whatever duration they decide on with in the constraints of the issuing company). They will accumulate a cash value, which they may use as part of their retirement plan. Income used to pay on their policy is tax-deferred until they begin making systematic withdrawals, at which time they may be at a lower tax bracket. Some companies even allow people to borrow money from their policy’s cash value without any penalty for early withdrawal like they normally would on other vehicles of retirement accounts, such as from an IRA account.
Finally, if the couple is looking for other types of insurance, such as automobile, health and dental or any other form, they should carefully compare with major chain insurance companies that might offer them a discount for having multiple policies with them. The insurance agent may wish to sell the couple a life insurance policy that includes a mutual fund. Part of the couple’s payments will pay for the cost of the insurance, leaving the balance invested in a mutual fund. The advantage they will enjoy is the ability to invest in a higher yield account without a minimum balance.
In the second scenario, a university student wants to have a savings in addition to a checking account. The student has an objective of establishing his or her credit. The financial institution best suited is a savings and loan institution or a college-affiliated credit union, if one is available (Ebert & Griffin, 2007). Most savings and loans will allow the savings account to act as a protection on the individual’s checking account in the event of an overdraft. In trying to establish credit for an individual’s first time, he or she should accumulate some money in their savings account. Then the student can then apply for a personal loan using the amount of money saved as collateral. Regular payments over a period helps to establish a person’s credit score. After paying off the first loan, the student may then apply for a similar loan, but the second time can be a non-secured signature loan. By the time the student finishes paying off the second loan, he or she may apply for a bigger loan, perhaps to buy an automobile. The advantages of using the services of a savings and loan include a great way to establish credit, the ease of opening a savings and checking account, and they are a great source for securing mortgage when the student is ready to purchase their first home (Ebert & Griffin, 2007).
The final scenario involves a female businessperson who wants to have a financial institution that is capable of serving her needs over a larger area, regional or anywhere within the United States. She would require the services of a national commercial bank, such as Bank of America, Citigroup, or JPMorgan Chase. The advantages of this type of financial institution include the ability to monitor all accounts that the business owner has. Larger commercial banks specialize in having large amounts of capital at prime or below prime interest rates for businesses to borrow. The commercial bank also offers several other financial services that were previously only available from other types of financial institutions (Ebert & Griffin, 2007).
In conclusion, the globalization of businesses and financial institutions has greatly enhanced the services and financial assistance that various types of financial institutions have to offer. This allows responsible businesses better financial service and better terms on business financial services. Besides better interest rates for investing in and borrowing and ready lines of credit, other costs, such as service fees may be lower or non-existent. Businesses today have greater advantages than were available in previous eras.
Reference:
Ebert, R. & Griffin, R. (2007). Business Essentials (6th Ed.). Upper Saddle River, NJ: Prentice Hall.
