Say what? Finance and insurance terms you never understood (and were too afraid to ask)

Say what?
Finance and insurance terms you never understood (and were too afraid to ask)

Author: Steve Crouse

We’ve all been there: sitting across the table from our well-meaning financial advisor as they discuss our policies, the conversation sprinkled with big words that you’re sure are important, but actually have no idea what they mean!

This is more common than I initially thought, so in the interests of helping clients better navigate their wealth (and of course, understand these all-important terms), I thought I’d unpack them here:


  1. Accidental and disability insurance

As the name implies, this is insurance that covers you should you die or be left disabled as a result of an accident. It’s designed to provide for your, or your family’s, future needs, especially if you are no longer able to work as a result of your disability. This insurance pays out either as a lump sum or as a monthly income.

  1. Ancillary benefits

These are benefits that supplement or support your main insurance benefits. They provide valuable, additional cover – sometimes covering miscellaneous medical expenses not covered by the main benefit – often with little or no additional underwriting needed.

  1. Whole life

This refers to the length of term of a life insurance policy. Some life covers pay out at age 65, and others pay out on the death of the insured. The latter are called whole life policies.

  1. Non-disclosure

When taking out any form of insurance, whether home contents, car, life or medical insurance, you have to be honest in answering your insurer’s questions. This is called full disclosure. Failing to provide full or truthful information is called non-disclosure, and can result in rejected claims.

  1. Third-party liability

This term relates to car insurance, and is also called third party insurance. In the client-insurer relationship, you as the client are the first party and your insurer is the second party. This insurance provides cover against claims by another person (the third party) should you be involved in a car accident and damage their vehicle. This insurance does not cover the costs of any damage to your own vehicle; you are responsible for those costs yourself.

  1. Exclusion

Every insurance policy has conditions attached to it – aspects it does and does not cover. Those conditions, events or circumstances that are not covered are called exclusions.

  1. Excess

This refers to the money you as the client are responsible for paying, over and above your insurance payout, when the cost of the damage is more than the amount covered by your insurance policy. Short-term insurers have a predetermined excess amount for all the different events that you can claim against under your insurance policy.

  1. Ab initio

This Latin term simply means ‘from the start’, and is often used when describing policy terms.


  1. Robo-advisors

A robo-advisor is an online, automated portfolio management service that allows you to quickly and effortlessly set up a customised, diverse portfolio. These services also provide access to wealth management services previously reserved for high-income individuals. They have become incredibly popular, and forecasts are that assets under robo-advisor management will grow to a massive 2.2 trillion dollars in the next 5 years. Check out our own robo-advisor service, Octagon Direct.

  1. Asset classes

Investing involves holding instruments of value in the hope this value increases over time. Investment assets can vary from hard assets, like a property, gold coins, a stamp collection or jewellery, to other less tangible assets, like shares, bonds or cash deposits. Because of this, assets need to be classified according to these different classes. Principally, the less tangible, investment assets are classed into four main classes, namely equities, property, bonds and cash.

  1. Equities

These are the shares of a company that are either listed or unlisted. The shares of a listed or public company may be held by any willing buyer through the stock exchange, or via a unit trust or collective investment. These shares may be traded daily and their value at any point in time will be ascertained by the value of the most recent trade. Equities are also referred to as shares or stock, and represent the most risky asset class, which also brings the best opportunity for higher returns. Equities allow investors to ‘share’ in the profits of the company by way of dividends.

  1. Property

This is a broad asset class that includes both physical property (bricks and mortar) as well as the shares in listed property companies. These companies have their shares listed on the stock exchange, much like regular companies, but the distribution of profits is treated differently from other companies, and is usually referred to as ‘yield’. These distributions tend to be far more certain and more regular than ordinary dividends.

  1. Bonds

These are debt investments in which investors loan money to entities (typically corporate or governmental), which borrow the funds for a defined period of time at a determined interest rate. Lenders (often the investors) lend this money to the borrowers (either the government or a corporate), and earn either a fixed or floating rate of interest for the duration of the bond. At the end of this period, the borrower pays back the lender their initial investment.

  1. Credit rating

In order for investors to ascertain the risk associated with lending money to a bond issuer for a lengthy period of time, and quantify the risk that the borrower may default on either the interest payment or the final settlement over this term, a credit rating agency will assign a risk rating or credit rating to the borrower. The higher the risk that the borrower/issuer of the bond may default, the lower their credit rating score and the higher the interest rate they will have to offer in order to attract the loan in the first place.

  1. Cash

This is the most stable and secure of the asset classes, and broadly represents ‘money in the bank’. Any instrument offered by a bank that carries no risk to the investor can be classed as cash. Importantly, because cash doesn’t pose a risk, whatever the interest rate on cash, it is called the ‘risk-free rate’. This rate is dependent on the prevailing Central Bank or Reserve Bank rate, and is fairly predictable between rate movements by the Central Bank (a hiking or lowering of rates).

  1. Returns (or distributions)

All investments generate growth in at least one of the three main sources of interest, dividends or capital growth (capital gains). Property investments generate rental income, but the jury is still out as to in which classification this falls.

  1. Interest (charged)

Interest is the fee a person pays for the privilege of borrowing money, and is usually expressed as an annual rate. If you borrow money from your brother-in-law and agree to pay him back over a number of years, the interest rate you agree upon is unlikely to change. But when you borrow money from the bank, the rate it charges you is often linked to the prime lending rate. This means the interest you’re charged fluctuates in line with the increases and decreases of the repo rate (the rate at which the SA Reserve Bank lends money to commercial banks).

  1. Dividends

Dividends are the returns on a company’s earnings or profits. When you buy a share in a company, you receive not only a portion of the company in direct relation to your percentage shareholding, but also a proportionate share in the profits the company makes.

  1. Capital growth (or gain)

Capital growth is the appreciation or increase in the price of an asset or investment over time.

  1. Compounding

Compound growth or compound interest is the effect of exponential growth on an investment over time. It’s achieved when an investor reinvests his or her growth and/distributions back into the investment, and earns further growth into the future.

  1. Bulls (and bullish conditions)

A bull is an investor who thinks the market or a specific share or an industry is poised to rise. Investors who take a bull approach purchase assets under the assumption that they can sell them later at a higher price. Bulls are optimistic investors who predict positive market outcomes, and attempt to profit from this upward movement.

  1. Bears (and bearish conditions)

Bears are investors who believe that a particular market or asset is headed downward, and attempt to profit from a decline in prices. Bears are generally pessimistic about the state of a given market. For example, if an investor was bearish on the Standard & Poor’s (S&P) 500, he would attempt to profit from a decline in the broad market index.