Financial Markets and Institutions (2-downloads)

Keogh plans are a retirement savings option for the self-employed. Funds can

be deposited with a depository institution, life insurance company, or securities firm.

The owner of the Keogh is often allowed some discretion as to how the funds will

be invested.

On January 1, 1997, the Small Business Protection Act of 1996 went into effect.

This act created simplified retirement plans with so-called SIMPLE IRAs and 401(k)

plans for businesses with 100 or fewer employees. SIMPLE retirement plans are

becoming significantly more popular, especially among the smallest businesses.

The Future of Pension Funds

We can expect that pension funds will continue their growth and popularity as the

population continues to grow and age. Workers in their early years of employment

often find discussions of retirement investing creeping into their conversations. This

heightened attention to providing for the future will result in an increased number of

pension funds as well as a greater variety of pension fund options to choose among.

We can also expect to see pension funds gain increased power over corporations as

they control increasing amounts of stock.

S U M M A R Y

1. Insurance companies exist because people are risk-

averse and prefer to transfer risk away from them-

selves. Insurance benefits people’s lives by reducing

the size of reserves they would have to maintain to

cover possible loss of life or property.

2. Adverse selection and moral hazard are problems

inherent to the insurance business. Many of the pro-

visions of insurance policies—including deductibles,

application screening, and risk-based premiums—are

aimed at reducing their effects.

3. Insurance is usually divided into two primary types,

life insurance and property and casualty insurance.

Many life insurance products also serve as savings

vehicles. Property and casualty insurance usually has

a much shorter term than most life insurance.

4. Because life insurance liabilities are very predictable,

these insurers are able to invest in long-term assets.

Property and casualty insurance companies must

keep their assets more liquid to pay out on unex-

pected losses.