Professional Documents
Culture Documents
PREFACE
This course contains the study materials for the Certificate Examination in Investment-
Linked Life Insurance. The book may look ominously thick but please bear in mind that the
market out there, both, the product producers and clients market has undergone
tremendous changes in the last 15 years. The sudden deluge of information found
here as compared to the earlier version is to provide a slightly higher level of understanding
amongst agents, so that they can be better prepared when facing a client.
The Chapters in this course are designed in such a way, that a new person will get a clear
picture of what Investment-Linked Life Insurance is all about and also sets a template for
them to follow to a higher level in the future.
It is hoped that the agents will utilise this course effectively and carry out their sales
activities with stronger conviction and heightened confidence.
Study Text
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form by any system, electronic, mechanical, photocopying,
recording or otherwise, without the prior permission of The Malaysian Insurance Institute.
The Malaysian Insurance Institute would like to express our gratitude to Persatuan Insurans
Am Malaysia, the Life Insurance Association of Malaysia and all the various individuals who
contributed in various ways to make the publication of this course book possible.
1 L I F E I NS UR A NC E
1.1 Introduction 1
Self-assessment Questions 3
2 KEY C O NS I D ER A TI ONS I N I NV ES TM E NT
2.1 Introduction 5
2.2 Investment Objectives 5
2.3 Funs Available 8
2.4 Risk Or Security 9
2.5 Investment Horizon 10
2.6 Acessibility Of Funds 10
2.7 Taxation Treatment 11
2.8 Performance Of The Investment 11
2.9 Diversification 11
Self-assessment Questions 12
4 – A W OR LD S C E NA R I O
4.1 Introduction 34
4.2 In The United Kingdom 34
4.3 In The United States Of America 36
4.4 In Singapore 36
4.5 In Malaysia 37
Self-assessment Questions 39
TYP ES OF I NV ES TM E NT - LI NKED
5 LI F E I NS U R A NC E P R OD UC TS
5.1 Introduction 40
5.2 Definitions 42
5.3 Characteristics Of Investment - Linked Insurance Policies 44
5.4 Types Of Investment - Linked Insurance Policies 44
5.5 Loans And Withdrawals Of Investment - Linked Insurance Policies 50
5.6 Risk Base Capital Guidelines 50
Self-assessment Questions 55
6 S TR UC TUR E OF I NV ES TM EN T - LI N KED F UN D S
6.1 Introduction 57
6.2 Accumulation Units 57
6.3 Distribution Units 57
6.4 Types Of Investment - Linked Funds 57
6.5 Risk - Return Profile 59
6.6 Switching 60
Self-assessment Questions 61
B EN EF I TS A ND R I S KS OF I NV ES TI NG I N
8 I NV ES TM E NT - LI NK ED F U ND S
8.1 Introduction 78
8.2 Benefits 78
8.3 Risks Of Investing In Investment - Linked Funds 79
Self-assessment Questions 80
9.1 Introduction 82
9.2 Traditional Guaranteed Without - Profit Life Insurance Products 82
9.3 Traditional With - Profit Life Insurance Products 83
9.4 Investment - Linked Life Insurance Products 85
9.5 Other Comparison - Transparency 86
Self-assessment Questions 87
10 TA XA TI O N A ND LA W COV ER I NG
I NV ES TM E NT - LI NK ED LI F E I NS UR A N C E P R OD UC TS
10.1 Introduction 89
10.2 Taxation Of Investment - Linked Life Insurance 89
10.3 Law Covering Investment - Linked Life Insurance 90
10.4 Other Legal Requirements 95
Self-assessment Questions 96
11 I D ENTI F YI NG A ND ES TA B LI S HI NG C US T OM ER NE ED S
11.1 Introduction 98
11.2 Establishing Relationship With The Client 98
11.3 Gathering All Relevant Financial Data 99
11.4 Establishing Current Financial Position And Goals 99
11.5 Developing Plans And Strategies To Meet The Goals 99
11.6 Discuss Possible Recommendations 100
11.7 Implementation Of The Agreed Recommendations 100
11.8 Monitoring The Portfolio 100
Self-assessment Questions 102
One very interesting fact is that, part of the reason for this growth was the introduction of
Investment-Linked Insurance plans in Malaysia. This plan was first introduced in the late 1990s
and has seen a very steady growth. Bank Negara’s report also shows that, distribution of
annual premiums that has gone into Investment-Linked Insurance policies has gone from
25.7 % in 2005 to 30.6% in 2009.
We have also seen that more and more insurance companies are moving away from selling
their traditional Whole Life and Endowment plans and have included many Investment-
Linked plans in their portfolios. We see this as a positive move. Malaysians are becoming
more discerning and now, they want to make sure that they are in control of the kinds of
investments they choose. The Investment-Linked insurance policies, allows them to do this.
Policyholders are quite happy to buy Investment- Linked policies because they can choose
the amount of coverage needed and still enjoy a sizeable return on their savings.
Policyholders must be told and made aware of one very important fact when they choose
the Investment-Linked policy, that the policy is directly linked to investment performance.
The value of the policy is translated into units in a chosen fund or funds that is/are operated
by the insurer. Sometimes, the insurance company may also channel these funds to an
appointed fund manager to manage these funds. Thus it must be made known to the
policyholder that these funds are exposed to the everyday fluctuations of market forces
and they will and can fluctuate accordingly.
Policyholders must be made aware that the value of the units, directly reflects the values of
the underlying funds. Benefits are therefore expressed in investment at their market value at
the time the benefits are paid. To put it simply, policyholders must be made aware that their
Investment-Linked plan can go to zero or grow at a good rate over time. There is a possibility
that if the funds do badly, they can lose all the premiums paid and also the coverage
provided. It is also important to know that the opposite of this can also take place and they
can reap a good rate of return in the future.
page
The investment fund that is used for the Investment-Linked policy can have a wide range
of investment modes. It also can cover a wide area of investments like equities or stocks,
bonds , fixed interest , foreign funds , real estate, currency and so on. These funds can either
be ‘external unit trusts’ or an ‘internal unitised investment -linked fund’ Please remember
that an internal unitised investment-linked fund is part of the life insurance fund of a life insurance
company. Thus, the policyholders are offered a range of unit-linked funds in which they can
invest.
Investment-Linked Insurance plans are not a new phenomenon in the Insurance industry.
Investment-Linked policies have been around for a long time but it was only introduced in
Malaysia in the late 1990s. For the purpose of this study, we will use the term “Investment-
Linked” to mean the same plans sold in Singapore and also similar to the term “Unit-Linked”
in the United Kingdom and to the term “Variable Life” in the United States.
1. What was the main reason for the steady growth of the Insurance Industry in Malaysia?
a. The liberalisation of regulations by the Ministry of Finance and Bank Negara Malaysia.
b. The introduction of Investment-Linked policies.
c. The efforts by insurance companies to design and offer customer-centric and good plans.
d. The robust growth of the country’s economy.
4. Investment-Linked Insurance policy is named as the following around the world except
5. “... is designed to shift the uncertainties of investment gains or losses to the policy holders...”
The excerpt describes what of the following accurately?
page
Having been through all these economic upheavals, it is quite a challenge to speak about
investments to a client. Clients over the years have become more proficient in investing
and most of them learnt it the hard way after being ‘burnt’. Having these economic
‘disasters’ in the back of the head, we must realise that there is an increasing need for
sound and proper advice. The majority of Malaysian investors are small time investors,
usually investing as retail investors. Most of the time, very little investment research and
analysis is done by them. They usually base their investment decisions on hear say news,
rumours, gossips, ‘tips’ from their friends and early morning coffee shop conversations.
The main aim of this course is to empower the agent to have some basic knowledge of
how, what, when, where and why investments must be done. The agent owes the client a
moral obligation to educate them with some basic sound investment principles, so that
the client will be able to make a sound judgement on investments.
There are some basic fundamental considerations that must be taken into account when
making a decision on investment. The following key considerations must be made known
to the client. A good understanding of these considerations is important before we get into
an investment. The key considerations are as follows;
. 1. Investment Objectives
2. Availability of Funds
3. Risk or Security
4. Investment Horizon
5. Accessibility of Funds
6. Taxation Treatment
7. Performance of the Investment
8. Diversification
The objectives for investing our savings are continuously increasing, yet every single investment
vehicle can be easily categorised according to 3 fundamental characteristics i.e.;
a) Safety.
b) Income.
c) Growth.
a) SAFETY
It is not wrong to say that there is no such thing as a completely safe and secure investment.
We can get close to ultimate safety for our investment through the purchase of Government
issued bonds or sukuk bonds and also from those found in the money market such as Treasury
Bills or Fixed Deposit accounts. (These instruments will be discussed at length in Chapter 3).
These instruments lend a relatively safe investment return but the client has to forego growth
and income stream. The returns from these instruments are quite conservative and at best
would help the client to create a hedge against inflation.
b) INCOME
The safest investments are also the ones that are likely to have the lowest rate of income as
found in Fixed Deposit accounts in banks. If a client wants to see a steady stream of income,
then they would have to place their investments in a portfolio that has a higher risk attached
to it. The client must be told that there is a RISK – RETURN trade off and they must be able to
accept this before venturing into vehicles such as these. As an illustration, the following
graph would be a succinct illustration of the fact;
RISK
BONDS/FD EQUITY/SHARES
RETURNS
c) GROWTH
Some investors seek growth in their investments. This is ideally done when they invest in
growth based investments such as common stocks, commodities and other share based
investment. The objective of the client to be involved in these types of investment is to
realise capital gains and also to hold the stocks for a long time to derive profits from the
growth of the investments. Investors seeking capital gains are likely not those who need a
fixed, ongoing source of investment returns from their portfolio, but rather those who seek
the possibility of longer-term growth.
Whilst the basic objective of every investor can fall into one or more of the 3 categories
discussed above, investors also have secondary objectives that are more close to their
hearts, that are more focussed for specific needs. The specific objectives of the investor can
fall into the following headings;
Depending on the objectives identified above, the person would need to choose between
investing in income producing instruments or growth weighted instruments. It must be made
known to the client, that different types of investments produce different combinations of
income and also the risk factors involved in them.
The agent now has to ascertain, the correct mix of objectives that the client has and the
agent has to also analyse the risk-return factors, to realise the completion of these objectives.
It is by no means an easy task but it is not impossible either. Making sure that the clients are
given a sound understanding of how investments work is the crux of the matter. Identifying
the surplus funds that will be utilised to reach these objectives is what the agent must strive
to do. In doing so, the agent n o t o n l y win s th e co n fide n ce of the clients but he is in a
position to offer proper advice that can be accepted by the clients.
It is important that each client is exposed to the fact, that they would have to do a Cash
Flow and Net Worth analysis, before getting into any investment decisions. These analysis
will then be able to assist the client to make sure that they have enough money to put
aside for investments and that they will be able to follow through with the investments
financial obligation. It will be useless if the client agrees to an investment plan purely
based on the enthusiasm created by the agent and the prospects of making money.
Therefore, having a Cash Flow and Net Worth analysis done is important. For the purpose of
this course, we will not indulge in a detailed method of Cash Flo w and Net Worth
analysis but a simple method can be utilized as illustrated below;
We can save some money even if a major portion of our income goes into servicing
various debts e.g. home loan, personal loan or for that matter Credit Card bills we have
accumulated. As Warren Buffet advises ”you need to first set aside m o n e y f o r
i n v e s t m e n t s b e f o r e thinking about spending it”. You don’t need a million to start
investing. You can start with a humble sum of RM 500 per month and see it grow. Based on
the availability of funds, the client can then decide which investments should be chosen
and invested regularly. If the client can set aside a fixed amount of current income which is
a surplus to his needs, then investment options like investment-linked insurance plans, unit
trust and the like can be considered.
The first thing about learning how to invest in the stock market is to know what kind of
investor risk profile you have. In so doing, you will determine how best to allocate your
savings amongst various asset classes. Not knowing what kind of risk profile you have or
what you are investing in may cost you financially. For example, if an 80 year old is
found to own very aggressive funds, or a single person in their twenties has invested
purely in bonds, shows that a risk profiling exercise has not been done. Not having the
stomach or righ t disposition may make you cut in and out of investments, that is
detrimental to your portfolio and before long, you will find yourself wondering why you
are left with a so little money of what you had initially.
Investing is a way to make your money work for you so that you can take calculated risks
for the promise of a better reward: much better than simply stuffing your money in a
hidden corner somewhere in your house. The more you know about risk and how it can
affect you and your situation, the better off you will be. Bottom-line: there is a law that
states that your returns are directly proportional to the risk you take. I found this definition
of risk to be quite adequate:
The concept of “risk” in investment has to do with volatility or how widely the price of a
stock or mutual fund fluctuates. The wider the fluctuations, the higher the risk. This is
because you stand to make and also lose more money, compared to a fund that doesn’t
fluctuate as wildly.
Risk profiling test and many others like it tend to concentrate on finding out your age,
strength of income, family situation, current financial picture, overall tendencies and
investment disposition. I would say that one other important element in figuring out where
you stand as an investor is, how sophisticated you are and what kind of experience you
have with investing. Ultimately, your overall background and attitude about investing will
affect how you should proceed.
Investment horizon can be defined as; the length of time a sum of money is expected to
be invested. An individual's investment horizon depends on when and how much money
will be needed, and the horizon influences the optimal investment strategy. In general, the
shorter the investor's horizon, the less risk he/she should be willing to accept.
Basically Investment horizon can be defined as the total length of time that an investor
expects to hold a security or a portfolio. The investment horizon is used to determine
the investor's income needs and desired risk exposure, which is then used to aid in
security selection.
We should understand that a client will invest with an objective to make money and he will
need the money to settle a specific event. With this in mind, we can divide the accessibility
of funds into 3 clear components;
a) If a client needs the fund in a short p e r i o d o f time, the client would not want
to place his money in an investment, that will not allow him to unlock it in a time frame
that is short. It would be meaningless for him to place his investments in a long term
investments like real estate or long term bond funds. When he decides to take the
money back, he might not be able to realize the returns expected and at times
might have to pay a penalty for exiting early.
b) The second element is the cost or penalty that the client has to pay if he exits early.
This is important because if the cost is going to be very big then it defeats the
purpose of the investment objectives. Thus it is important to make sure that the
funds can be taken out without having to pay hefty penalties.
As far as Investment-Link insurance is concerned, there is no specific tax laws regarding this
and the Investment-Linked plans enjoy the same tax treatment as the traditional plans.
(Chapter 10 will deal with the tax issues in detail).
These are some of the considerations that must be taken into account when we make an
investment decision.
2.9 DIVERSIFICATION
Diversification in investment is the process of investing across different asset classes and
across different market segments. Diversification is a strategy used by professional fund
managers that has proven effective, in reducing risk without sacrificing returns.
Investors should also try to invest in a range of investment vehicles when they decide
on their investment portfolio.
Diversification can substantially reduce risk with small reductions in return. It involves the
spreading of risks by putting the money under management into several categories of
investments such as shares, bonds, money market instruments and real estate investment
trust(REITs). Diversification can also be achieved by buying shares in different countries and
by choosing different types of shares.
Chapter 3 will discuss these areas in detail and illustrate the various options available in
investments for the clients.
i. The adverse economic conditions, in the last 15 years, have made them be wary
of investments.
ii. The fall of many established financial institutions in the last few years.
iii. The stock market cannot be approached by ordinary people.
iv. Many investors have seen their fortunes dwindling, due to the financial crisis.
a. i,ii,iii only.
b. i,ii,iv only.
c. ii,iii,iv only.
d. i,ii,iii,iv.
a. Ensure that there is a right combination of objectives and make sure proper risk
analysis is done.
b. Show the wide selection of investment for the client to choose from.
c. Motivate the client to borrow money to invest in guaranteed investment vehicles.
d. Ensure that the advice is advantageous to the agent and the insurance company.
The term cash and deposits refers to all liquid instruments that carry little or no risk. The possi-
bility of losing the principal amount invested is very low.
Strictly speaking however, cash cannot be considered as an investment. Cash is, ultimately,
used as a means only to finance investments. The capital value of cash will not increase and
will not generate any additional income. It has no value in itself. It is of value only as a
medium of exchange.
For the purpose of this course however, the definition of cash will include short-term debt
instruments. These cover:-
a) Treasury Bills.
b) Bank accounts.
One of the methods used by the Government to borrow money from its citizens is via the
issuance of Treasury Bills. These are short-term government funding vehicles issued on a
regular basis with repayment normally within a year. The Treasury Bills are issued by Bank
Negara Malaysia to the discount market. They are the safest type of investments and are
considered to be of no risk except if the country is politically unstable.
These are time or fixed deposits placed with banks for fixed periods with fixed interest rates
for that period. Generally, the longer the deposit period, the higher will be the interest rate.
Some of the accounts available are Savings Accounts, Current Accounts, Fixed Deposits,
Investment Accounts, Time Deposits and Offshore Accounts.
The factors that may influence the choice of deposits are as follows;
As all banks in Malaysia are licensed and regulated by Bank Negara Malaysia, there is very
little risk of loss of principal and interest. The Malaysian government has at all times assured
depositors that their money is safe with the banks. A good initiative to further strengthen
the confidence level of depositors, was the setting up of PERBADANAN INSURANS DEPOSIT
MALAYSIA (PIDM).
PIDM is a Government agency established under the Akta Perbadanan Insurans Deposit
Malaysia 2005 to protect you against, the loss of your deposits in the unlikely event of a
bank failure, and promote financial system stability.
Deposit insurance is a system that protects depositors against the loss of their insured deposits,
placed with banks in the unlikely event of a bank failure. It is established by the Government to
enhance the consumer protection framework and promote financial system stability. It is not
related to or managed by general or life insurance companies. Generally, it is a Government
sponsored scheme, although in certain countries it is sponsored by the banks.
The deposit insurance system in Malaysia was launched in September 2005 and is managed
by Perbadanan Insurans Deposit Malaysia (PIDM). PIDM is a Government agency established
under the Akta Perbadanan Insurans Deposit Malaysia 2005.
With the introduction of a deposit insurance system in Malaysia, depositors receive protection
for their deposits under the law. Depositors will know how and when reimbursement of their
deposits will be made in the event of a bank failure.
A group of investment vehicles that offer a fixed periodic return is known as Fixed Income
Securities. It is a security or certificate showing that the investor has lent money to the issuer,
usually a company or a government, in return for fixed interest income and repayment of
principal at maturity. Fixed income securities can be regarded as IOUs issued by companies
or government to raise funds.
Fixed income securities generally stress current income and offer little or no opportunity for
appreciation in value. If there is an active secondary market, they can be bought and sold
at anytime before maturity. This marketability gives the investor the opportunity to realise
capital gains since fixed income securities prices may rise if interest rates fall. However, if the
secondary market is inactive, the investors’ money is locked up for the full life span of the
security.
Government bonds are effectively financial instruments used by the government to borrow
money from the public. Government bonds are the safest types of investments, carrying
almost no default or credit risk, since the government guarantees interest payments and
repayment of the principal. The term and interest rate of government bonds are fixed and
usually issued in multiples of RM 1,000. The investor gets the interest and his capital back on
maturity.
Government bonds are backed by the government. They are considered to be very safe.
The marketability and income for the future is guaranteed. The only disadvantage is in times
of high inflation, capital can be eroded when money is invested in these types of
investments.
Debenture stocks.
Loan stocks.
Convertible stocks.
Debenture stocks are effectively secured loans to a company. The security is either a fixed
charge on the company’s property or some of its assets such as trading stock. If the company
defaults on the loan, the investor can take over the said assets and sell them to get his
money back.
Trustees are appointed on the issue of stocks, to supervise the way the company performs
its obligations concerning the payment of interest and capital. In the event of a default,
the trustees act for the investors.
Like government bonds, debenture stocks pay fixed interest rates for a fixed term at the
end of which the capital is repaid.
The company also has an option to repay the debenture stocks earlier, if it wishes to do so.
Corporate stocks are not as secure as government bonds as the government does not
guarantee them. A company can become insolvent and be unable to pay the interest
due. Hopefully, the charge on property would mean that this could be sold to repay the
capital, b u t a f o r c e d s al e migh t no t r a i s e e n o u g h m o n e y to cover the capital.
Interest rates for corporate bonds tend to be higher than government bonds as the
security is lower.
These are u n s e c u r e d l o a n s t o a c o m p a n y . Both the interest rate and term are fixed.
If the company defaults, the investor has no security and thus is in the same position as all
the other unsecured creditors of the company. The investor may or may not get back his
capital depending on t h e c o m p an y’s pe rfo rm a n ce . Compared to debentures, loan
stocks are much less secure and therefore they carry a higher interest rate.
The difference between convertible stocks and the above two (i.e. debenture and loan
stocks) are that, it can be converted to ordinary shares of a company on a fixed date.
On that date therefore, the investor can convert his investment from a fixed interest loan,
to being a part owner and is entitled to a share of its profits through dividends declared.
The decision to convert depends on whether dividend income and capital appreciation
in share price are better than the fixed interest given.
In general, corporate bonds tend to give a higher return than government bonds. For
some investors, they are also m o r e m a r k e t a b l e a n d can be sold for capital gains.
However, they are more risky than government bonds.
3.5 SHARES
Shares are different from stocks, in that, a shareholder is a part owner of the company. A
company is a separate legal entity, which is to say, that it is owned by all of its shareholders.
The shareholders control the company through the fact, that basically each share carries
one vote at company meetings. The shareholders ca n then decide on major issues and
vote in new directors to run the company if they wish. Shareholders are not liable for the
debts of the company.
Each company maintains a register of each shareholder and each shareholder gets a
share certificate as evidence of ownership.
Companies can be public or private. Generally, private company shares are not listed in
the Stock Exchange and are not available to ordinary investors. Public limited company
shares can be quoted in the Stock Exchange if they meet the Exchange’s requirements.
Shares of listed companies are easy to buy and sell through stockbrokers. In theory, the
shares can be bought and sold on any working day, although on a new issue of shares in
a popular company, there may be more would be buyers than shares available. Equally, if
a company is in trouble, there may be no buyers at all.
The value of a share fluctuates according to the market’s view of the worth of the company.
If a company is doing well, its share prices will tend to rise and if it is doing badly it will tend
to fall.
A share can thus, be a volatile investment. A shareholder must therefore realise that he
could lose all his money in the invested share. In theory, the chances of this happening
should be reduced by investing in shares of large, well established, well managed and
reputable companies, but events like the Asian Financial Crisis in 1998 and the Global
Financial Crisis in 2008 has shown, that this rule of thumb can sometimes be wrong in real
life.
The cost of buying and selling shares include stockbroker’s commission as well as the
difference between buying price and selling price.
a) Ordinary Shares.
b) Preference Shares.
The holder of an ordinary share in a company is a part owner of the company and is
entitled to share in its profits in the form of divide n d s . D ividends are paid out of the
company’s profits as decided by the directors.
There is no certainty that a company will make profits and thus there is no certainty that
there will be a dividend. However, a company’s track record can be inspected to judge
whether profits are likely to be made and dividends paid.
Dividends are usually paid bi-annually, and provide income from the investment to the
shareholders.
An investor will also hope to make a capital gain from the shares by an increase in the
share price, although this is in no way guaranteed. The price of a listed share will fluctuate
from day to day according to the company’s progress and general economic conditions.
Announcements of high profits and dividends will tend to increase the price. Low profits
have the opposite effect.
A shareholder can always realise his investment by selling the shares. This may be easy for
a successful, listed company. Shares are thus a risky investment. An investor could lose all
his money, particularly if he only invests in one company’s shares. A portfolio of shares in
different companies is thus more advisable than h a v in g a ll o n e ’s e g g s in o n e basket.
Dividends on shares are paid net of basic tax rate. Profits that are made via capital gains
are not liable to tax.
Preference shares differ from ordinary shares in that the dividend will never be more than
the fixed rate, even if profits are more than enough to cover it. They are therefore, slightly
more secure than ordinary shares but less profitable.
By investing in shares, the investors participate directly in the future of the company. Shares
also provide good dividends and capital appreciation. They are also very liquid, as shares
can be traded in the open market. However, as mentioned before, shares can be very
risky as the value can go below the price the shares were originally bought for.
Unit trusts are useful vehicles for small private investors. This is true when investors, who do
not have sufficient funds and/or time, to receive the benefit of professional investment
management, access to a diversified range and spread of investments which is not
readily available to them individually. The investment in unit trusts could generate
income in the form of dividends, interest and capital gains.
A unit trust is a pool of funds contributed by many investors kept in trust by a trustee
(usually a bank) and managed by a professional fund manager.
A unit trust is established by a trust deed. This deed enables a trustee to hold the pool of
money and assets in trust on behalf of the investors. Another party, the investment
manager (also called fund manager), manages the pool. The fund manager manages
the portfolio of investments and operates the market for the investments (i.e. administers
the buying and selling of shares in the unit trust itself). The unit trust is essentially a three-way
arrangement among investors, the trustee and the fund manager.
The investments of the unit trusts, though selected and managed by the fund managers,
are legally owned and held by the trustee for the benefit of the investors (who are the
unit-holders). The trustee must ensure that the fund managers adhere to the provisions of
the trust deeds and act accordingly to protect the unit-holders.
It is not necessary to use a stockbroker and sales can be made without the need to find a
purchaser, as would be in the case of shares. The fund manager can create as many new
units as investors require and can cancel units, if new purchases are exceeded by
encashment, i.e. the amount of cash that the units can be converted into.
Unit trusts however have no fixed redemption date. The trusts are open-ended funds and,
if too many i n v e s t o r s c a s h their units, the trust will have to sell the fund’s assets.
The unit trust investments fluctuate in line with the stock market prices and it also
involves up-front charges. Unit trusts should not be seen as a very short-term investments
option.
When investing in Unit Trusts, an investor can choose from an array of unit trusts funds
with different investment objectives. These unit trusts can also be invested in a wide
range of market instruments to provide the diverse appetite of the investor. A unit trust may
aim for high income or a high capital growth, or a combination of both. Some unit
trusts also invest in specific countries or regions.
It is important that the types of unit trusts chosen, match the investment objectives of the
particular investor. All unit trusts are required to clearly state their investment objectives in
their prospectus. Every investor should have this prospectus and read and understand it
before buying into the trust. The types of assets that may be bought by the fund manager
a re a lso spe c if ie d i n t h e o b j ec t iv e s o f th e trus t c o n ta in e d in th e trus t deed.
Examples of unit trusts include those marketed by Amanah Saham Nasional, Public Mutual
Fund, Hwang DBS and a whole lot more.
The advantage in unit trusts is the spread of investments open to unit-holders. In addition,
unit trusts have lower risks when compared to shares. Furthermore, professional investment
services are provided by the fund managers and this minimises paper work to the investing
unit-holders. Income from dividend can also be reinvested. Nowadays, the investor can
utilise a portion of his contribution to the Employees’ Provident Fund (EPF) from account A
to purchase EPF approved unit trusts from the Unit Trusts companies in Malaysia. This
withdrawal can also be done on a regular basis provided all EPF terms and conditions are
met.
The function of the investment trust is similar to that of unit trusts, i.e. to make investment
much simpler, more accessible and more cost effective for small investors.
Investment trusts, like unit trusts, both pool contributions from their investors, and the total
fund is then managed by specialist fund managers, whose function is to buy and sell shares
of the trust to make investment profits.
Those profits increase the value of the fund and the value of each investor’s share, if the
fund increases. If the trusts suffer losses then the investor’s share will be reduced in value and
the price of his units will fall.
The unit prices are recalculated every day and quoted daily in at least one national Bahasa
Malaysia newspaper and one national English newspaper. The price reflects the value of
the underlying investments.
If the Investment Trust has 10 million units and the investments could be sold for RM 20 million,
then the bid price will be RM 2 per unit. There is a spread, generally around 5% between the
bid and offer price, which is effectively a form of charge. There is also an annual
management fee deducted by the fund managers from the income of the trust.
Investment trusts should also not be seen as very short term investments of less than, preferably,
three years. Investment trust generally has a higher risk/reward profile than unit trusts.
These are similar to unit trusts mentioned above, except that investment trusts are more
flexible as investors can borrow to finance their purchases of the investment trusts. This can
be very beneficial to the investment trust holders. However, with the flexibility to borrow
funds to purchase the investment trusts also means that investors are open to greater risk
exposures if the price of investments suddenly goes down.
On the other hand, the price of domestic and commercial/industrial properties generally
depends on the location and types of buildings on the land.
Besides investing in the original form of Real Estate properties i.e. land, building, houses etc,
there is now a new form of real estate investment available to the Malaysian public. It is
known as Real Estate Investment Trust ( REITs).
A new asset class investment option has emerged with potential fair return of investment in
Malaysia. REIT - also known as Real Estate Investment Trust has a similiar concept like unit
trust.It operates in a similiar fashion like unit trust whereby money that goes into this
investment is gathered from all size of investors. REITs based companies will invest,
manage and distribute rental as dividend back to the investors. It is also being trade in
Bursa Kuala Lumpur with ease of buying and selling back like a normal equity.
REITs is not new to the world, in many other developed countries, REITs has been developed
for decades - with steady fixed income as opposed to fixed deposit as an alternative.
It targets long term investor with moderate risk such as insurance companies, pension
funds, unit trust funds and even individual investor. As many investors may not be able to
invest in a huge property portfolio, REITs gain strength from pool of funds gathered from the
investors and is invested into high profile and high value properties for better return.
REIT returns averagely in develop market is around 3-5% depending on its individual performance.
However, REITs in Malaysia are very attractive because, as we are in a so-called last phase
of becoming a developed nation, our nation’s property’s values are still behind many
developed countries in Asia. This emerges as an opportunity with average attractive
yields between 6-8% wh ic h is higher than other major developed countries.
As our nation property’s value is undervalued for decades, there will be a high potential of
asset revaluation that will bring capital growth to the investor. Typical a potential return will
be between 20-30% around a five year period.
A high perfomance reit is like your property fund manager. They will develop new
opportunities, acquire more properties into their portfolios locally and some countries and
jointly develop property projects. This will provide even a higher potential return compared
to those low to moderate risk investment instruments.
Thus, if you are trying to find a good investment tool for your long term retirement plan, do
consider REITs in Malaysia within the next few years. REITs will be attractive with a fair risk to
be tolerated compared to Fixed Deposit. As equities are high risk to some extent, bonds
have relatively moderate returns, investing in property directly will require high capital
investment and also you have to manage all these investment portfolios yourself. REITs will
be a good choice as an alternative asset class for investment.
Properties can provide good capital appreciation and a steady flow of income. They are
therefore, considered low risk investment especially if you have good tenants and good
repayment methods are obtained. By mortgaging the property, capital can also be freed.
However, during economic recession, property could be difficult to be disposed off.
3.9 DERIVATIVES
Instead of buying a security outright, an investor can buy a derivative of the security
instead. Derivatives are financial instruments whose values are linked to the price of underlying
instruments in the cash markets. For example, a stock index future is linked to the
performance of a specified stock market. Stock options and financial futures are two
popular derivative instruments for investors.
3.9.1 OPTIONS
Rather than trading directly in a security, investors can buy a right, not an obligation, to
purchase or sell the security at a future date. This is called an option. Option need not be
exercised, and often will not be worth exercising.
The life of an option may vary but the common duration adopted is three, six and nine
months. Over-the-counter options can also be bought by institutions for longer periods, from
one to five years.
A call option gives the holder of the option the right to buy(or ‘call away’), say, 100 shares
of a particular stock at a specified price, premium, any time, prior to the specified expiration
date.
A put option gives the holder of this option the right to sell (or ‘put away’), say, 100 shares of
a particular stock at a specified price prior to a specified expiration date.
Investors purchasing call options will be hoping that the share price will rise so that when the
option is exercised, the premium plus the fixed price will be less than the value of the shares.
Call options, therefore permit investors to speculate on a rise in the price of the underlying
shares without buying the shares itself.
Investors purchase put options if they expect the share price to fall, because the value of
the put options will rise as the share price declines. Put options allow investors to speculate
on a decline in the share price without selling the shares short.
Sellers of either of these options will want the reverse to happen so the options will not be
exercised and they will profit by the amount of the premium.
By investing in options the investor has the potential to boost profits from share price
movements. However, investing in options is also risky as an investor must be prepared to
lose all his money.
Warrants are similar to that of the call options. A warrant is a corporate-created option to
purchase, within a specified time period, a stated number of shares of the underlying stock
at a specified price.
Warrants, also known as Transferable Subscription Rights (TSR), give the holder of the option
to subscribe the shares in the company
Warrants are seldom issued on their own, but are often issued free and attached to rights
or loan stocks as an added attraction or sweetener allowing the corporate issuer to obtain
a lower interest rate (i.e. financing cost). Warrants can be detached from the loan stock
and sold separately in the securities market. The options attached to the warrants can be
exercised by subscribing for ordinary shares in cash, by exchanging the loan stock or by a
combination of both.
Purchasing warrants is one benefit to investors without a large initial outlay to establish an
exposure to shares. The investor will buy the warrant, pay the exercise price at a later date
and convert the warrant to the underlying share.
By selling the warrants given to him in the first instance, an investor can benefit from the
capital gain. When the price of the underlying shares goes up, the investor may profit by
selling the warrant or exercise it to get the stock.
The disadvantage of the warrants is that on expiry, warrants which are not exercised lose
their value completely. Unlike ordinary shares, there is no chance for price recovery. Once
the warrant has expired, it is worthless. In addition, holders of warrants do not receive
any income in the form of interest or dividends. They also carry no voting privileges.
3.9.3 FUTURES
Physical commodities and financial instruments typically are traded in cash markets. A
cash contract calls for immediate delivery and is used by those who need a commodity
now. Cash contracts cannot be cancelled unless both parties agree. The current cash
prices of commodities and financial instruments can be found daily in such sources as the
business pages of the national newspapers.
There are two types of cash markets:- spot markets and forward markets. Spot markets are
markets for immediate delivery. The spot price refers to the current market price of an item
available for immediate delivery. Forward markets are markets for deferred delivery. The
forward price of an item is the price of an item for deferred delivery.
Forward contracts are centuries old, traceable to at least the ancient Romans and
Greeks. Organised future markets, on the other hand, only go back to the 1860s, with
financial futures being relatively new, dating from the introduction of foreign currency
futures in 1972.
A future contract between two parties (the buyer and the seller) thus set a price today for
an instrument that will be delivered on a specified future date. Stock index futures are
futures contracts, based on a particular share price index, constructed to measure the
overall price movement of a stock market.
The trading of the index futures involves standardised contracts to buy or sell a hypothetical
portfolio of all stocks included in the index at some specified future date, at a price agreed
at the time of the deal.
The buyers agree to take delivery and to make cash payment at expiry date, and the
sellers agree to make delivery at the same time. The settlement of the contracts is made in
cash without the actual delivery of the securities covered by the index. The profit derived
from trading stock index futures is determined by comparing the original contract value
with the contract value at the time of settlement.
Another economic function performed by futures market is price discovery. Because the
price of the futures contract reflects current expectations about the values at some future
date, transactions can establish current prices against later transactions.
An investor may also wish to engage in speculative trading and takes on price fluctuation
risks in order to have a chance at making large gains. However, a clear understanding of
the concept of hedging (which can be briefly described as, assuming of futures positions
opposite to cash positions, in an attempt to minimise the risk of financial loss from adverse
price changes) and the amount of gain or loss that could result from any change in the
price of the index futures contracts is n e c e s s a r y b e f o r e a n i n v e s t or ventures into
investing some of the money in futures contracts.
Only so-called authorized participants (typically, large institutional investors) actually buy
or sell shares of an ETF directly f r o m / to th e fun d manager, and then only in creation
units, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind
with baskets of the underlying securities. Authorized participants may wish to invest in the
ETF shares long-term, but usually act as market makers on the open market, using their
ability to exchange creation units with their underlying securities to provide liquidity of the
ETF shares and help ensure that their intraday market price approximates to the net asset
value of the underlying assets. Other investors, such as individuals using a retail broker,
trade ETF shares on this secondary market.
An ETF combines the valuation feature of a mutual fund or unit investment trust, which can
be bought or sold at the end of each trading day for its net asset value, with the tradability
feature of a closed-end fund, which trades throughout the trading day at prices that may
be more or less than its net asset value. Closed-end funds are not considered to be "ETFs",
even though they are funds and are traded on an exchange. ETFs have been available in
the US since 1993 and in Europe since 1999. ETFs traditionally have been index funds, but in
2008 the U.S. Securities and Exchange Commission began to authorize the creation of
actively managed ETFs.
Types of ETFs
a) Index ETFs
b) Commodity ETFs or ETCs
c) Bond ETFs
d) Currency ETF or ETCs
e) Actively managed ETFs
f) Exchange-traded grantor trusts
g) Leveraged ETF
Sukuk is the Arabic name for financial certificates, commonly referring to the Islamic
equivalent of bonds. Since fixed income, interest bearing bonds are not permissible in
Islam, Sukuk securities are structured to comply with the Islamic law and its investment
principles, which prohibits the charging, or paying of interest. Financial assets that comply
with the Islamic law can be classified in a cco rda n ce with their tradability and
non-tradability in the secondary markets.
The Sukuk is similar to an obligation backed by an asset but is not in anyway a bond
because it is not based on debt. It can be regarded as a commercial paper which gives
the investor a share of ownership in the underlying asset.
The issuer must identify the assets to be sold to investors by transferring it on an ad hoc basis.
Investors enjoy the division of the assets in proportion to their investment and bear the
credit risk of the issuer.
The Sukuk are therefore equity securities which have the following characteristics:
CGF is an investment vehicle offered by certain institutions that guarantees the investor’s
initial capital investment from any losses. When you invest in a CGF, it is guaranteed that
you will not lose any money provided that you don’t redeem your investment before the
maturity date.
a. Debenture Stocks.
b. Loan Stocks.
c. Convertible Stocks.
d. Warrants.
For the purpose of this course, we will see how the Investment-Linked policy has been in
other countries besides Malaysia. We will discuss its presence in The United Kingdom,
United States of America, Singapore and in Malaysia.
The Investment-Linked life insurance business has been transacted in the United Kingdom
for more than 30 years. Over this period there has been considerable evolution in the
design of the products culminating in the current flexible Investment-Linked whole life plans
that, allow the policyowner total flexibility to alter his needs for investment and
protection in accordance to his wishes.
The first Investment-Linked life insurance contract in the United Kingdom was an individual
retirement annuity for the self employed. It was introduced by the London & Manchester
Assurance Company Limited in 1957. Investment was linked to an external unit trust.
By 1960, there were six companies offering Investment-Linked life insurance contracts with
total new annual premiums of under £ 500,000 and virtually no single premiums policies. By
1970 the number of insurers had grown to 91 and new annual premiums totalled £ 25
million with an additional £53 million in single premiums.
The early investment-linked plans were constructed in a similar way to traditional endowment
policies with the objective of providing a saving fund at the end of a specified period e.g.
10, 15, 20 or 25 years.
Life insurance cover was built on a similar basis in order to be comparable with the still
popular endowment with profits. The sum insured usually remained level so that the actual
amount of risk benefit provided was in reality a decreasing term insurance to supplement
the value of the underlying investments.
However, the greater cost of the life cover at the older ages obviously detracted from the
investment values, for those who were primarily interested in the investment aspect and
only regarded the life insurance element, as a necessity to obtain the substantial tax
relief on premiums.
The life cover was still a decreasing term insurance and often the actual term insurance
cover would be extinguished as the investment values surpassed the guaranteed sum
insured. In some cases this could occur as early as 5 years on a 10 year duration policy.
The short term (e.g. 10 years) policies were very much geared to investment and hence
there was little room in the margins to pay high initial commissions – usually about 25% and
rarely more than 40%.
Thus a significant proportion of investment-linked plans both for investment and protection
were (and continued) to be sold for longer terms (20 years and above). However, the life
insurers realised that there was no longer any need to have a fixed maturity date.
By making the policies “open-ended”, the policy owner could cash in their investments at
anytime (usually without surrender penalty after 10 years) and leave the funds with the
insurer for longer than perhaps had been originally intended.
Cash values, at various durations, would be shown in the sales literature when the sales
presentation was geared to a fix term savings concept. For those who required additional
protection, supplementary term insurance or family income benefits would be added to the
basic guaranteed sum insured under the investment-linked life insurance policies.
A new generation of Investment-Linked life insurance products evolved in the mid 1970s. Up
to that time, Investment-Linked life insurance business had an image of being ‘risky’ as there
were few guarantees in the products and in particular there was little to compete with traditional
whole life insurance with guaranteed sum assured.
The first of the new generation of investment-linked life insurance products was really the
Hambro Whole Life Plan introduced in 1977. This was an Investment-Linked whole life plan
whereby the sum insured was guaranteed for a given investment of premium for the first 10
years.
At that point (and at 5 yearly intervals thereafter) an actuarial review of the new policy
would take place. Hambro Life stated that, “as long as the investment growth was at least
7.5% compounded and that the insured mortality did not differ from the then published
mortality tables of the Institute of Actuaries”, they would renew the sum insured/premium
guarantee for a further 5 year period.
Because they were able to dispense with the long term investment and mortality guarantees,
Hambro was able to discount as much as one third off the traditional whole life premium
rate. For the first time the charge for the mortality cost was deducted each year on a
current cost basis by cancelling the required number of investments.
The Hambro Whole Life Plan was itself superseded as the ‘state of the art’ plan two years
later in 1979 by Skandia Life UK. Whereas the Hambro plan had a fixed sum assured per
investment of premiums according to age at entry, the Skandia plan allowed the
policyowner to select whatever sum insured the policyowner required within a given range of
cover.
INVESTMENT-LINKED LIFE INSURANCE PRODUCTS- A WORLD SCENARIO CEILLI 35
INVESTMENT-LINKED LIFE INSURANCE
PRODUCTS- A WORLD SCENARIO 4
4.3 IN THE UNITED STATES OF AMERICA
In the United States of America, investment-linked plans are known as Variable Life
insurance. It was offered to the general public in the US in 1976. This was after the
investment-linked life insurance products had been successfully marketed in The
Netherlands, United Kingdom and Canada.
The marketing of variable life was pioneered by the Equitable Life Assurance Society but
the initial success was quite limited. In 1991, variable life insurance accounted for 8% of the
individual life market and 28% of the individual annuity market. Whole Life, Universal Life
and Term Life made up the balance of the individual life market and fixed annuities
accounted for the balance of the individual annuity market.
Compared to the traditional products, variable life insurance was more affected by
regulations in the US. Apart from state insurance laws and regulations, variable life
contracts are also subject to Federal security laws and are regulated by the Securities and
Exchange Commission. Principally, the securities laws governing variable life insurance are
the Investment Company Act,1940, the Securities Act, 1933 and the Securities Exchange
Act,1934.
The Investment Company Act, 1940 regards entities that investment assets of variable life
insurance policyowners as investment companies. This Act regulates the investment
company’s marriage merit and operation.
The Securities Act, 1933 requires that potential clients be provided with a prospectus that
among others discloses the identity and nature of the insurer’s business, how the premiums
are going to be invested, financial information of the insurer, chargeable fees and
expenses and rights of policyowners.
Under the Securities Exchange Act, 1934, the insurance company or the sales company
must register as a broker-dealer. The Act requires that agents and agency office employees
pass an examination in securities business. Additionally, they must register with the National
Association of Securities Dealers (NASD) and pass an examination.
4.4 IN SINGAPORE
The first single premium investment-linked policy introduced in Singapore was in 1973 by
NTUC Income. In 1992, Prudential joined the investment-linked life insurance market with the
single and regular premium products. This was followed by other life insurance companies
who added investment-linked life insurance business to their portfolio. In the last few years,
sales of investment-linked life insurance business in Singapore have grown significantly.
One of factors which contributed to the expansion in Singapore of the life insurance industry,
including investment-linked life insurance business, was the introduction of the Enhanced
Investment Scheme (EIS) by the Central Provident Fund (CPF) in 1993. This scheme enables
the CPF members who have cash of at least S$50,000 in their ordinary account, to invest 80%
of the excess in one or more of the eligible investment instruments. Life insurance policy is
one of the eligible investment instruments under this scheme.
Among the life insurance policies, only endowment policies were approved by the CPF
Board as eligible investment instrument. This is because of the general focus of endowment
policies on investment returns, unlike whole life or term insurance policies where a substantial
part, if not the whole of the cost, is used to provide death benefits.
4.5 IN MALAYSIA
Investment-Linked life insurance products have been around for the last 25 years since the
introduction of a simplified form of investment-linked life insurance product sold by Syarikat
Takaful Malaysia Sdn Bhd to the public in 1985. Ever since then, the investment-linked
insurance plans have taken a major platform in all major insurance and takaful companies
in Malaysia. In fact, Bank Negara’s report shows that distribution of annual premiums
that has gone into Investment-Linked Insurance policies has gone from 25.7 % in 2005 to
30.6% in 2009. (Premium allocation of RM 1.7 billion in 2005 rose to RM 2.2 billion in 2009).
In July 1997, Berjaya Prudential Assurance B h d became the first traditional insurance
company to launch the investment-linked life insurance product. Since then, most of the
traditional insurance companies in Malaysia have developed and included numerous
Investment-linked life insurance policies in the platforms. In fact most companies also offer
Conventional and Islamic investment-linked life insurance policies to the Malaysian public.
Now it is possible for clients to subscribe to these policies to meet their insurance and
investment objectives, be they for child education planning or asset accumulation or
simply to have a good amount of insurance cover.
The Takaful Investment-Linked Life Insurance policies were developed by the Takaful
(Islamic Insurance) companies not due to financial considerations or consumer demands,
but purely, they were developed as a response to the religious principles and practises of
the Muslims. The premiums received from Takaful policies are invested in stocks and other
assets that comply with the requirement of Islamic law and principles. Investments that do
not conform to Islamic principles i.e. those considered ‘haram’ in Islam, like businesses that
deal with liquor, gambling and whose primary business is interest-based, were left out from
the ‘investment basket’ of Takaful based companies. The conventional Insurance companies
have also taken heed of this and they too have come up with investment-linked policies
that strictly comply with the Syariah laws.
Based on the development in the last 25 years, we can safely say that Takaful based
investment-linked life insurance and conventional Investment-Linked life insurance policies
are here to stay for a very long time and the clients’ appetite for these sorts of plans are
growing steadily. Nowadays it is common to have non-Muslims subscribing to Syariah
based Investment-Linked policies as they have been able to produce good returns yearly.
SELF-ASSESSMENT QUESTIONS
CHAPTER 4
3. The Takaful Investment-Linked Life insurance plan was developed due to;
a. Meeting the market demands and financial demands.
b. The response to the religious principles and practises of the Muslims.
c. The fact that there were no products suitable for Muslims in Malaysia before this.
d. Tap into a vast and very lucrative insurance market.
5. Which of the following acts do not govern the selling of Investment-linked Life insurance in
the United States?
a. Invesment Company Act 1940.
b. The Securities Act 1933.
c. The Security Exchange Act 1934.
d. The Securities Commissions Act 1983.
6. The first Investment-Linked Insurance plan was introduced by which company in Malaysia?
The investment returns under the Investment-Linked life insurance policies are not guaranteed.
They are linked to the performance of an investment fund managed by the life office.
Ownership of the fund is subdivided into units, each of which represents an equal share of
the net asset value of the fund.
The fund invests in assets that fluctuate in value as market prices rise and fall. As the asset
value of the fund falls, so does the un it price. The policies therefore lack the
smoothening process of the traditional with-profit life policies and instead reflect, the
investment performance actually achieved with the policyowners’ money. Different
generations of policyowners receive different results. Some do better than others,
and it is possible to lose money.
Premiums that the policyowners pay is allocated into units at the unit price, prevailing on
e a c h invest m en t d at e. U n i t s are a llo ca te d on each investment date. Units are
allocated at the life office’s selling price (called offer price-discussed under definitions).
When units are cashed to meet death, maturity, surrender claims or expenses, they are
cashed at the life office’s buying price (called bid price). In the case of life funds, the
difference between the offer and bid prices in normal market conditions is 5%-6% of the
offer price. This difference is known as the bid-offer spread.
Under traditional with-profit life policies, each premium is made up of several elements,
one part to provide insurance protection against death, another to cover expenses and
sales cost, and the bulk of the premium to be invested. The premium apportionment of
investment-linked life insurance policies is similar. The fundamental differences, however,
are;
c) investment-linked life insurance policies may or may not be more flexible than the traditional
with-profit life insurance policies.
Unlike traditional with-profit life policies, the peaks and troughs of investment-linked life
insurance policies are not adjusted to provide policyowners with a smoothened rate of
return, as the net benefits and risks of investment returns are immediately passed to the
policyowners.
e) The structure of policy charges and the investment content of the investment linked life
insurance, are more identifiable by the policyowners as they are specified in the
investment-linked life insurance policy document. Policy fees, initial set-up cost, mortality
charges and the amount set aside for investment (and the investment charges) can be
determined by a careful study of the policy document and policy statement.
Under traditional with-profit life policies, the expenses of running a life office and
acquiring business are covered by making certain charges on the policy issued, both
‘up-front’ and regular policy charges. Such charges under traditional with-profit life
policies are not specifically detailed in the policy terms. The policyowner bears some of
these charges directly in relation to his particular policy; others are taken out of the life
fund as a whole.
Policy fee.
Annual fund management fee.
Bid-offer spread.
Reduction in allocation of units- Unallocated premiums.
Initial units.
Mortality charges.
Surrender charges.
5.2.1 POLICY FEE The policy fee payable by the policyowner is the
same as for traditional life insurance policies. It
covers the administrative expenses of setting up the
policy. As the cost of setting up a big or small policy
is almost the same, the life office will normally levy a
uniform policy fee on each policy
5.2.3 OFFER PRICE The offer price is the price at which units under an
investment-linked life insurance policy are offered
for sale by the life office. If the offer price is RM1
and the whole premium amount of say RM 100 is
used to buy units, it will buy 100 units.
5.2.4 BID PRICE The bid price is the price at which the units under the
investment-linked policy life insurance policy are
when the policy matures, or when the policy is
surrendered, or at which time units are cashed out
to pay for charges under the policy. Bid price is
always lower than the offer price at the published
date. Assuming that there are no other charges
levied, 100 units can be claimed for RM 95 if the bid
price is RM 0.95
5.2.6 REDUCTION IN Under this form of charge, the life office does not
ALLOCATION OF UNITS- use all of a policyowner’s premiums to buy investment
UNALLOCATED units. The difference representing the life office’s
PREMIUMS charge to meet marketing expenses and setting-
up expenses of the policy. Thus a policyowner may
find that only, say 60% of each premium is used to
purchase investment units, in say, the first year or
two of the policy contract. Some insurers make nil
allocation to units until their initial charges have
been recouped.
5.2.8 MORTALITY This covers the mortality costs of the policy and is,
CHARGES therefore, dependent on age. It is possible for the
mortality charge to be a recurrent charge (e.g.
monthly). In this event, the mortality cost is funded
by cancellation of units on a regular basis, and the
life company can then allow the policyowner to
vary the sum assured over time.
a. Inve stme n t - l i n k ed lif e in s urance policies can be used for investments, regular
savings and protection. The protection element may take the form of life cover,
total and permanent disability, dread diseases cover, accidental death or personal
accident benefit and personal health insurance.
c. The cash value and protection benefits are determined by the investment perfomance
of the underlying assets and this performance is reflected by the prices of the units in
the investment-linked fund.
d. The protection cost are generally met by explicit charges (i.e. types and level of
charges imposed by the life office are stipulated openly in the policy terms), which
may vary with age and level of cover, and are covered by cancellation of units in
the fund except for single premium plans where they may be met by a flat initial charge.
f. The cash value is normally the value of units allocated to the policyowner, calculated
at bid price.
Although there are numerous variations and types of investment-linked life insurance
policies available in the overseas market, of which the major types will be described
below, the basic types currently being sold in Malaysia are confined to single premium life
insurance plans (where a ‘once-off’ contribution to the policy is made) and the regular
premium life insurance plans (where premiums are paid in more regular intervals). The
following are some of the investment-linked life insurance policies available in Malaysia:-
Single Premium Investment-Linked Whole Life Plan.
Regular Premium Investment-Linked Whole Life Plan.
Investment-Linked Individual Pension Plan.
Investment-Linked Permanent Health Plan.
Investment-Linked Dread Disease Plan.
Investment-Linked Education Plan.
In Malaysia, single premium policies must at least have a minimum premium of RM3, 000
(discussed under 10.3 - Law Covering Investment-linked Life Insurance).
Single premium investment-linked whole life plan was one of the first types of
investment-linked Life insurance policies available. It is simple in design. The amount of
insurance protection is a percentage (usually 125%) of the single premium paid, and is
subject to a minimum amount (in Malaysia this is RM5,000).
The emphasis for single premium investment-linked whole life plan is normally on long
term savings and investment. Thus, the plan only offers nominal life protection
Administration and insurance charges or cost are recovered by imposing policy fees, other
administrative charges and mortality charges. The investment-linked fund would normally
incur an investment management fee of 0.5% to 2% per annum, depending on the type of
fund and the bid - offer spread.
The policyowner has the right to surrender part or whole of the units allocated to him. This is
attractive to investors who want to have easy access to their funds.
The scope of regular premium investment-linked whole life insurance plan is similar to that of
single premium investment-linked whole life. The exception is that instead of the premiums
being paid in a lump sum, the premiums under this plan are paid at regular intervals, either
monthly, quarterly, half yearly or annually.
Premium holidays and top-ups, subject to the life office's administrative rules are usually
allowed. Withdrawals and surrenders are allowed, usually after a few years' premiums
have been paid.
Conventionally, there is usually no life insurance cover in the basic plan other than a return
of investment funds on death. Life cover can be provided by taking up a separate term
insurance policy.
Recent development saw the latest investment-linked individual pension plans being
launched with the life insurance cover being funded by cancellation of investments on
the pension plan.
Such plans are popular overseas as there are tax advantages for employees' own
contributions to these plans. The governments concerned want to encourage savings by
giving tax incentives.
Some life offices have created other types of investment-linked plans. Instead of providing
the usual death coverage, they offer other forms of coverage such as permanent health
and dread disease/living insurance plans.
A new investment-linked life insurance product which incorporates long term disability
i n c om e ben ef it s is n o w av ailable in the overseas market. This product is priced very
competitively when compared to traditional with-profit life insurance products, sometimes
by as much as 25% off the costs of traditional with-profit life insurance products in strong
economic environment.
The product design of this investment-linked permanent health insurance also has the
advantage of offering cash value despite the competitive price. This new product has
taken the UK market by storm. Within 12 months of launch, Allied Dunbar's product has
captured an estimated 34% of the entire individual permanent health insurance (PHI) market.
The first universal life long term disability plans are now beginning to appear in the USA and
their design followed that of the UK version.
One of the most successful innovations in investment-linked life insurance product design in
the UK was Living Assurance by Abbey Life Company. It is a life insurance policy which
advances the whole of the face amount in the event of the diagnosis of a heart attack,
stroke, coronary artery by-pass, end stage renal failure or total permanent disablement. The
risk cost of the dread diseases cover is reviewed on a regular basis and improved product
benefits or premium are passed to the policyowner in the event of better than expected
claims or investment.
Parents are always worried and concerned about their children’s education in the future.
With this in mind and also to capitalise on the tax relief of RM 3,000, companies have also
designed Investment-linked insurance plans solely to satisfy the educational needs of the
policyowner’s children. These plans have also received wide acceptance and is one of the
main selling policies in almost all insurance companies in Malaysia.
An investment-linked takaful is a family takaful plan that combines investment and takaful
cover. Your contribution will provide takaful cover, which includes death and disability
benefits, and part of the contributions will be invested in a variety of Shariah-approved
investment funds of your choice. As a participant, you can decide on the allocation of
your contribution towards protection and investment.
The investment fund is divided into units of equal value to derive at the investment-linked
unit price. This unit price is published daily in the newspapers for you to track the value of
your investments.
Different from the investment-linked takaful, insurance companies also offer investment-
linked product for Shar iah - ap p r o v ed Se curitie s Funds, whereby the investments are
invested in Shariah-approved investment instruments whilst the insurance cover does not
conform to the Shariah requirement.
The takaful operator acts as a manager to oversee the management of the investment
fund. In return, the takaful operator receives a fee (ujrah) for its service.
You are given the flexibility to choose your own level of protection and investment.
You can vary the amount of your contribution according to your changing financial
circumstances.
You can switch your current investment fund to other types of investment funds.
You can redeem part of your investment-linked units at any point of time.
You can choose from a variety of investment funds (equities, bonds or other financial
instruments) to invest in.
Your contributions usually provide takaful coverage for death and disability. You can
extend the basic cover by way of additional contributions to also include personal accident
and critical illnesses.
You are given a choice of investing in various investment funds. The investment-linked unit
price fluctuates according to the value of its investment fund. When the investment-linked
unit price falls, the value of your investment will also reduce and vice versa. You may realise
a gain or loss when you sell your units. It is important that you select an investment fund that
reflects the level of risk that you are comfortable with, as the investment risk will be borne
solely by you. Past performance of the investment-linked fund may not be a reliable guide
to future performance.
48 CEILLI TYPES OF INVESTMENT-LINKED LIFE INSURANCE PRODUCTS
TYPES OF INVESTMENT-LINKED
5 LIFE INSURANCE PRODUCTS
Fees and charges
The takaful operator may impose fees and charges for their services such as fund management
fee, service and surrender charges. The fund management fee is charged annually and
calculated as a percentage of the value of the investment fund. The service charge is to
cover the costs in administering your investment-linked takaful. The surrender charge will
only be applicable if the plan is surrendered before its maturity.
Fund switching
Should you feel that you have made the wrong choice or you would like to change the
profile of your investment portfolio, you are allowed to switch your unit linked-fund from one
investment fund to another. Most companies allow one switch per year without charging
any switching fee. For additional switches, a small fee may be imposed.
Regular contributions investment-linked takaful may not accumulate adequate cash value
during the early certificate years. This means that if the certificate is terminated during the
early period, you may not get back any investment value.
You will be provided with two prices: the offer price for selling units and the bid price for
buying them back, much like unit trusts. The difference between the offer and bid prices is
called the bid/offer spread and is usually expressed as a percentage of the price, usually
around 5%.
Cooling period
There is a 15-day cooling-off period for you to decide whether you wish to continue with the
investment-linked takaful after you have signed for it. If you decide to cancel your plan
within this period, the takaful operator will refund the investment-linked units and the
tabarru’ contributions less medical fees and underwriting expenses incurred in assessing the
risk. The value of the investment-linked units refunded would be based on the price in
accordance with the certificate.
Annual statement
You should receive at least an annual statement on the status of your investment-linked
takaful, showing all transactions or charges during the period.
From the above notes you will see that the mechanisms involved in Takaful base
Investment-Linked Products and conventional Investment-Linked Products do not differ
much in shape but the main difference is that the Takaful products are strictly governed by
Syariah law and these principles are more apparent in these products.
Policyowners may request for a partial surrender of the policy and the withdrawal amount
will be met by cashing the sufficient units at the bid price to meet the policyowner's requests.
To understand this area better, please refer to the paper that was published by Bank Negara Malaysia
on the related topic. This is an important article and a good understanding of this is vital for agents.
Excerpt taken from Bank Negara Malaysia’s :-
Under RBC, capital adequacy requirements are more granular and risk-sensitive
compared to the previous solvency regime which did not differentiate between the nature
and sources of risk. For example, insurers whose asset portfolios are concentrated in
high-risk assets or assets that are inadequately matched with the corresponding liabilities
will be required to hold more capital under RBC compared to the previous solvency
regime. Similarly, insurers who underwrite volatile lines of business or are highly concentrated
in a single line of business will be required to hold more capital than insurers with diversified
portfolios of relatively stable lines of business. The new solvency measure is hence a
better reflection of financial strength and has resulted in greater differentiation between
insurers with varying risk profiles. The new capital adequacy requirements are also
based on explicit capital charges for market, credit, insurance and operational risks,
thereby enhancing transparency and improving insurer’s ability to identify, measure and
manage the risks inherent in the insurance business. This will enable insurers to respond to
emerging risks in a more pre-emptive manner.
With the introduction of RBC, insurers with capital resources that commensurate with
their risk profiles will have higher Capital Adequacy Ratios (CAR), thus allowing for the more
efficient deployment of any ‘excess’ capital towards value generating activities. A
number of insurers with inadequate capital and exhibiting low CAR under RBC have
undertaken remedial actions, and are in the process of reducing the overall level of risk
exposure or injecting additional capital. Throughout the parallel run, the Bank has required
these insurers to submit c ap it al ma n a g e m e n t pla n s with s pe cific milestones on
strategies and action plans to improve their capital positions. These milestones and action
plans are closely monitored to ensure an orderly transition to the RBC regime.
To achieve its objectives, RBC is supported by a new set of valuation rules, requiring insurance
liabilities and the related assets to be valued on a realistic basis, using market values
or market value proxies, which reflect the prevailing conditions in the business and
economic environment. The implicit margins that existed in the old valuation rules for
insurance liabilities have been replaced with explicit margins for adverse deviations, which
are now based on the actual experience of each individual insurer. For example, general
insurers are now required to ensure that reserves are sufficient to meet expected claims
based on the actual volatility of the claim patterns observed in the individual portfolios.
Similarly, life insurers must hold reserves based on actual experience of mortality, morbidity,
expenses, and persistency, instead of using a standardised mortality table with a fixed
margin for prudence. In addition, insurers who underwrite innovative products with financial
guarantees must hold additional reserves to ensure that those guarantees can be met
even in adverse market conditions.
The introduction of RBC has also provided the insurers’ management teams with an
additional quantitative tool to analyse and monitor the risks inherent in insurance activities.
This shift of focus t o w a r d s r i s k a n d i ts re l a t i o n s h i p w i t h capital requirements has
enhanced overall risk awareness and improved the quality of operational risk management
and corporate governance. Many insurers are enhancing operations to improve their risk
profiles, for example, by improving the quality of risk selection and underwriting, and
by reducing volatility in loss e xp e r ie n ce th ro ugh be tte r claims m a n a g ement. Life
insurers are also placing greater emphasis on product design and pricing, particularly
to enhance the capital efficiency of their product range.
Another positive development in the insurance industry arising from the introduction of
R B C is the e n h ancement of insurers’ technical expertise. The increased granularity and
complexity of RBC computations have inevitably increased the demand for technical expertise,
especially in the areas of realistic valuation of assets and liabilities, stress testing and the
calculations for the various components within RBC. For example, insurers without access to
in-house actuarial expertise have engaged external consultants to assist in the technical
aspects of the RBC requirements.
Greater investment flexibility is accorded to insurers under the Framework to allow better
management of assets appropriate with the nature and profile of insurer’s liabilities.
The oversight of and accountability for, the investment of insurance funds rests ultimately
with the board of directors. To ensure proper investment of insurance funds, insurers must
put in place an investment and risk management policy that is in line with the risk appetite
set by the board of directors for the insurer. The investment and risk management policy
should be approved and reviewed regularly by the board of directors and cover overall
investment strategy and proper risk management systems, including monitoring and
control mechanisms.
The policy on overall investment strategy should cover, at least, the following elements :-
i. the investment objectives, both at company and fund-specific levels;
ii. the risk and liability profile of the insurer.
iii. the strategic asset allocation, i.e. the long-term asset mix for the main investment
categories and their respective limits;
iv. the extent to which the holding of certain types of assets is restricted or disallowed, e.g.
illiquid or highly volatile assets; and
v. an overall policy on the usage of derivatives and structured products.
The risk management systems must cover the risks associated with investment activities that
may affect the coverage of insurance liabilities and capital positions. The main risks include
market, credit and liquidity risks.
As part of good risk management practices and to ensure proper monitoring and control
of the investments, insurers are also required :-
i. To establish adequate internal controls to ensure that assets are managed in
accordance with approved investment policies, and in compliance with legal,
accounting and relevant risk management requirements. These controls should
ensure that investment procedures are documented and subject to effective
oversight. There should be in place appropriate segregation of responsibilities for
measuring, monitoring, settling and controlling asset transactions, from the front office
functions;
TYPES OF INVESTMENT-LINKED LIFE INSURANCE PRODUCTS CEILLI 53
TYPES OF INVESTMENT-LINKED
LIFE INSURANCE PRODUCTS 5
ii. To have in place rigorous audit procedures that include full coverage of the
investment activities to ensure timely identification of internal control weaknesses
and operating system deficiencies. If the audit is performed internally, it should be
independent of the function being reviewed;
iii. To install effective procedures for monitoring and managing the asset-liability position
to ensure that the investment activities and asset positions are appropriate in relation
to the liability and risk profiles;
iv. To put in place suitable plans to mitigate the effects arising from deteriorating market
conditions;
v. To undertake regular stress testing for a range of market scenarios and changing
investment and operating conditions in order to assess the appropriateness of asset
allocation limits; and
vi. To ensure the key staff involved in investment activities have the appropriate levels of
skills, experience, expertise and integrity.
Senior Management is responsible for setting, managing and reviewing the investment
policies of the insurer. In the case of a participating life fund, Senior Management
should ensure that the investment policy is consistent with the bonus and/or dividend
distribution policy of the insurer. Senior Management is also responsible to ensure
the proper implementation of investment policies approved by the board of
directors, and timely and regular reporting to the board of directors of the insurer’s
investment activities.
SELF-ASSESSMENT QUESTIONS
CHAPTER 5
a. All the premiums paid are invested into providing investment returns.
b. All the premiums paid are invested into providing coverage.
c. A portion of the premiums are used to smoothen out the ‘highs and lows’ of market fluctuation.
d. A portion of the premiums are used to provide cover whilst the major portion is used for
investments.
2. What are the fees and charges that are levied on an Investment-linked product?
i. Policy Fee, Management Fee, Buying Price, Surrender Charges.
ii. Unallocated Premiums, Selling Price, Withdrawal Charges, Free look Charges.
iii. Bid Price, Offer Price, Mortality Charges, Initial Units.
iv. Allocated Premium, Withdrawal Charges, Mortality Charges, Policy Fee.
a. i,ii only.
b. i,iii only.
c. i,ii,iii only.
d. ii,iii,iv only.
a. A Government Bond issue that is for the development of housing and basic amenities
for the people who are living in the interiors of Sabah and Sarawak.
b. A C o r p o r a t e B o n d is s u ed by a company that wants to expand its business in
livestock farming in Indo China and China.
c. A company that mainly deals with Sports betting and games of chance.
d. A company that has got a mixed business interest in food and beverages of dubious nature.
a. This product was solely created to satisfy the needs of all Muslims in Malaysia so as to
provide a savings and protection program.
b. Conventional insurance companies also provide takaful cover to the Malaysian
public.
c. Due to the importance placed in Syariah compliance, Investment-Linked Takaful
is generally unpopular and is only bought by religious people.
d. Takaful products do not have the kind of flexibility that other Investment-linked
products have.
6.1 INTRODUCTION
Premiums from investment-linked life insurance policies are invested in the investment-linked
funds according to written instruction of policyowners.
The investment income of these funds is ploughed back into the fund. Therefore, the unit
prices will increase over the long term.
Instead of ploughing the investment income into the fund, it is used to purchase additional
units to be distributed to the policyowner. The price of the units remains unchanged but
the policyowner gets more units.
Cash Funds.
Equity Funds.
Bond Funds.
Property Funds.
Specialised Funds.
Managed Funds.
Balanced Funds.
Equity funds invests in equity assets such as shares, stocks etc. Equity assets are inherently
higher risk in nature. Prices of equity shares are volatile. Investors who buy equity assets
usually aim for capital appreciation. During a market crash, equity assets are usually the
first to depreciate in high amounts. But the magnitude of the change in unit prices will
depend on the quality of the equities held.
These funds invest in properties, such as real estates and property shares. Normally only
large property funds invest directly in real estates.
Property funds are generally considered to be safer than equity funds, but have lower liquidity.
Properties, especially real estates, are illiquid assets. It is not always possible to quickly sell a
property when policyowners redeem their units. As a result, property funds usually have a
provision which allows the fund manager to defer redemption of units (except for death
and disability claims) for typically up to 12 months.
These funds are normally segmented based on geographical regions or particular industries.
Specialised funds that are restricted to investment in a particular country only include such
examples as the China Fund and the US Fund.
For industry specialised funds, investment are put in specialised sectors such as commodities,
mining, plantation, public utilities, etc.
It is important to take note of the currency risk when investing in a specialised fund invested
overseas, particularly in times of volatile currency and financial markets.
These funds invest in a wide variety of assets such as equities, bonds, properties, cash, etc.
and the asset allocation depends on the fund managers' views of the future prospects of
the financial markets involved.
The funds invest in fixed proportion of specified assets. For example, 70% of the funds are in
equities and 30% in bonds.
The risk-return profiles of some types of investment-linked funds are shown for comparison
between returns of funds in relation to the levels of risk involved.
Risk
Fund
Cash Funds
Returns
The risk-return graph above shows that higher return normally comes with higher risk. At the
top end of the graph are the equity funds. The relatively riskless cash funds sit at the bottom
end.
If a life insurance company sells investment-linked life insurance policies and it offers more
than one investment-linked fund to its policyowners, it usually provides a switching facility
which allows a policyowner to switch part or all of his investment from one fund to another
fund.
The switching facility is very useful for the purpose of financial planning. For example, a
policyowner can change the asset allocation of his investment between the funds when his
investment needs change as he goes through the life cycle. Assuming that he has an
"aggressive investor" profile, based on a study of his risk profile, he may invest 100% of his
premiums in an equity fund when he starts out in his 30s but he may shift his investment
gradually to 30% in equity fund and 70% in bond fund as he reaches retirement age.
SELF-ASSESSMENT QUESTIONS
CHAPTER 6
i. Equity funds.
ii. Derivatives and Futures fund.
iii. Government Bond fund.
iv. Cash fund.
v. Balanced fund.
a. iv,iii,i,v,ii.
b. v,i,ii,iii,iv.
c. iv,v,i,ii,iii.
d. iv,iii,v,i,ii.
a. Funds that mainly invest in cash instruments like fixed deposits, treasury bills,
government bonds.
b. Funds that invest in overseas properties, REITs and growth stocks.
c. Funds that invest in fixed income funds, balanced funds and Sukuk Bonds.
d. Funds that invest in equities market both locally and overseas.
3. Funds that basically invest in government, corporate and fixed income instruments seeking
income producing characteristics are known as :-
a. Balanced fund.
b. Cash fund.
c. Bond fund
d. Specialised fund.
a. i, ii, iv.
b. ii,iii,iv.
c. i,ii,iii.
d. i,iii,iv.
6. Chee Seng wants to have a specific amount of money in 10 years. He is not averse to risk.
He wants your suggestion. Where can he put his money?
a. i,ii,iii.
b. i,ii.
c. i,iii,iv.
d. iii,iv.
For investment-linked life insurance products, the insurance companies offer policyowners
a range of investment-linked funds in which they can invest. The fund may invest either in a
range of assets, similar to a traditional with-profit life fund, or in a more specialised and
specifically defined range of investments, such as property or Malaysian equities or fixed
income securities .
Instead of looking at the fund as a whole when considering how a policyowner might
benefit from that investment, this investment-linked fund is nominally divided into a number
of units, in a similar way to the ownership and value of a company being divided into a
number of shares.
In our example, let us say that the number of units currently in existence is 100,000 units.
The value of each unit can easily be calculated by dividing the value of the total fund
by the number of units in existence - thus giving us value for this fund of RM10 per unit (i.e.
RM1 million divided by 100,000 units).
The holders of these units will either profit or suffer lose from the rise or fall in the value of
the investments held by this equity fund. If the value of the investments increases the value
of the fund to, say, RM1.5 million then, if there are still 100,000 units in existence, the value
of each of these units will have increased from RM10 to RM15 (i.e. RM1.5 million divided by
100,000 units).
Under traditional with-profit life insurance policies, the life fund maintains a reserve to help
level out the short-term fluctuations in the value of the life fund's investments. Maintaining
a reserve could mean either that policyowner does not receive the full value in a year of
high investment gains (some of the profits being transferred to the reserve), or does not
suffer in a year of poor investment conditions (money being drawn from reserve to subsidise
the bonus).
No such reserve is held for investment-linked life insurance policies, and so the investment-
linked policyowners take the full impact of the changes in investment conditions - the value
of their units being directly related to the value of the underlying investments held in the fund.
A traditional with-profit life insurance policy can never reduce in value, provided that the life
office is solvent, as the reversionary bonuses are added to the guaranteed sum assured,
and can then, never be taken away.
In contrast, the value of an investment-linked life insurance policy will fluctuate depending
on the value of the units the policy holds. If the value of those units falls then the underlying
value of the policy will also fall.
An investor in a traditional with-profit life insurance policy will have their investments held,
usually, in a wide spread of assets chosen by the insurer. An investor in an investment-linked
life insurance policy can choose a particular investment area which he believes can offer
good value at that time (although, for the majority of investment-linked life insurance policy-
owners who may not want this responsibility, a managed fund is usually available, which
invests in a spread of assets). An investment-linked life insurance policyowner will usually be
allowed to switch his investment between funds if he believes greater opportunities are
available, in another fund at a particular time.
Turning to the actual mechanics of a policy invested in the unitised funds, you should
understand how premiums are used to build up the value of the policy, so that you can
make a comparison with the increasing value of a traditional with-profit life insurance
policy, as bonuses are added.
Instead, each of the policyowner's premium will be used to purchase units, the number of
units purchased being calculated as the amount of the premium divided by the price of
each unit. Thus for a premium of RM100 and buying units with current value of RM2 per unit,
the number of units that can be purchased will be 50 (i.e. RM100 divided by RM2).
Purchases of units can only be made from the fund itself, which will then create new units
and add the investment monies to the value of the fund.
Over a long period of years, the value of the policy should rise considerably as the number
of units increase, with every premium invested, and also with the increase in the value of
each unit. In the short term, however, the value of the policy can decrease if the fund's
investments fall in value.
The units purchased are invested in either fixed income securities or equities so that the
value of the units will increase. At any time, the policyowner may top-up the policy. The
policyowner may also sell some or all of his units at any time. These are called withdrawals and
surrenders respectively.
7.3 TOP-UPS
PoIicyowners are normally allowed to top-up their policies at any time, subject to a minimum
amount. To top-up a policy, the policyowner pays further single premium at the time of top
up and these premiums will be used in full (after deducting charges for top-ups), to purchase
additional units of the investment-linked fund, which will be added to the existing units
in the policyowner's account.
For ease of understanding, we will concentrate on the tabulations for single premium
investment-linked life insurance policies in this text.
For single pricing method of single premium policies, there is only one price quoted whether
the policyowner is buying or selling his units.
Under the dual pricing method of single premium policies, the policyowner buys the units at
the offer price and sells the units at the bid price. The bid price is always lower than the offer
price. The difference in the bid and offer prices is called the bid-offer spread.
(Discussed under Chapter 5 - Definitions).
The charges that are normally deducted for either method are the policy fee and the
administrative and mortality charges.
In the cases presented below, we have assumed a policy fee of RMI00 and mortality
charge of 1%. (Please note that mortality charge depends on the age of the life assured
and it differs from company to company).
Say a policyowner pays a premium of RM 4,000. The price per unit of investment at the
time of purchase is RM 1. If the insurance company deducts a charge of 5%, then to
calculate the number of units that can be bought, the insurance company must :-
firstly, receive the amount of premium allocated by the policyowner to buy the
investment,
secondly, deduct the charges imposed by by the company from the amount of the
premium allocated by the policyowner to buy the investment,
lastly, divide the balance premium amount, after the deduction of charges, by the
unit price.
Below is an example of how Single Pricing Methods is done as a guide to the agents.
Amount of premium allocated to buying of units is RM 4,000
5% charge to be deducted
= RM 4,000 x 5% = RM 200
Suppose that offer price is RM 1.00 and the bid offer spread is 5% and the amount of
premium allocated to buying of units is RM 4,000.
Amount of premium allocated to buying of units is RM 4,000. Number of units that can be
purchased
= RM 4,000 ÷ RM 1 = 4,000 units.
If the policyowner cashes in or claims under the policy, he will receive RM 3,800
(i.e. 4,000 units x RM 0.95).
If there was an increase in the value of the offer price to RM 1.20 per unit.
If the policyowner cashes in or claims under the policy, he will receive RM 4,560
(i.e, 4,000 units x RM 1.14).
The cash value under single pricing method is obtained by multiplying the number of units
with the unit price and deducting the mortality charge and the policy fee.
Using the example above, the number of units is 3,800, the unit price is RM 1, the mortality
charge is 1% and the policy fee is RM 100.
Cash value = (Number of units x Unit price) - (Mortality charge + Policy fee)
= (3,800 units x RM 1.00) - ([3,800 units x RM 1.00 x 1%] + RM 100)
= RM 3,800 - (RM 38 + RM 100) = RM 3,800 - RM 138
= RM 3,662
The cash value under dual pricing method is obtained by multiplying the number of units
with the bid price and deducting the mortality charge and the policy fee.
Using the above example, the number of units is 4,000, the bid price is RM 0.95, the mortality
charge is 1% and the policy fee is RM 100.
Cash value = (Number of units x Bid price) - (Mortality charge + Policy fee)
= (4,000 units x RM 0.95) - ([4,000 units x RM 0.95 x 1%] + RM 100)
= RM 3,800 - (RM 38 + RM 100)
= RM 3,800 - RM 138
= RM 3,662
The formula for Annual yield is (RGP)l/n -1, where n is the number of years.
Under the single pricing method, still using the example above, suppose the unit price
after 10 years is RM 1.97.
The Ending value of investment
= (Number of units x Unit price) - (Mortality charge + Policy fee)
= (3,800 units x RM 1.97) - ([3,800 units x RM 1.97 x 1%] + RM 100)
= RM 7,486 - (RM 74.86 + RM 100) = RM 7,486 - RM 174.86
= RM 7,311.14
RM 7,311.14
RM 4,000.00 = RM 1.828
Under the dual pricing method, and continue using the example above, suppose the
offer price after 10 years is RM 1.97.
RM 7,311.14
= RM 4,000 = RM 1.828
As an example, suppose the unit price (for single pricing) or bid price (for dual pricing) at
time = RM 2, if a policyowner withdraws 500 units, he will receive :-
On the other hand, if the policyowner withdraws RM3,000 then the number of units that will
be cancelled is :-
The first type of death benefitt relates to the value of the units in the policyowner's account
plus the sum assured covered.
..
.. .. .. .. .. .. .. .. .. .. .. .. .. ……….. Death Benefit
.. .. .. .. .. .. .. .. .. .. .. .. ..
.. .. .. .. .. .. .. .. .. .. .. ..
--
----------- Value of units
-- -- -- -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
________ Death Cover
Death benefit for single pricing method = (number of units x unit price) plus sum assured
covered.
Death benefit for dual pricing method = (number of units x bid price) plus sum assured
covered.
Using the example above, under the single pricing method, suppose the sum assured is
RM 5,000, and the unit price at the time of death is RM 1.22.
Using the example above, under the dual pricing method, suppose the sum assured is
RM 5,000, and the offer price is RM 1.22, then the bid price is RM 1.22 x (100% - 5%) =
RM 1.22 x 95% = RM 1.159.
The second type of death benefit relates to either the value of the units or the death
cover, whichever is higher. In the graph shown below, the death benefit equals the death
cover before time t and equals the value of units after time t.
Under this type, using the examples and calculations above, the value of the units will be
RM 4,636 for both single pricing method and dual pricing method. As the amount of death
cover is the higher of the unit value and death cover, the death benefit will be RM 5,000.
b. The policyowner may surrender all his units or partially surrender his units. A partial
surrender is known as a withdrawal.
c. The policyowner may vary the sum assured of his policy without changing the level of
his regular premiums. Increasing in sum assured would normally require further medical
Under writing. The higher the level of coverage, the more the mortality charges and the
lower the cash values. The converse is also true.
d. The policyholder may also increase or reduce the level of his regular premium
subject to certain constraints.
SCENARIO 1.
Tan Chor Seong is a fresh graduate. He has just landed himself a job as an engineer in K.L.
He is 25 years old and is single. He earns a take home salary of RM 3,000.00. He lives with his
parents in P.Jaya and his parents are still working. His only liability is his PTPTN that he took
while in University. After having done a simple cash flow analysis, you as the agent, have
identified that he can save RM 900.00 a month. He is planning to buy a new car and also
set up a savings plan. His car instalments and car usage per month will take away RM 700.00
a month. He has approached you to work out a plan for him.
a) Tan wants to create a savings of RM 30,000 in 10 years to start a consultancy with a friend.
No Income RM Expenses RM
1 Salary 3,000.00 Travelling Cost 300.00
2 Food 300.00
3 Clothes and Accessories 200.00
4 Hand Phone Bill 150.00
5 PTPTN Loan 350.00
6 Parents 250.00
7 Night Out with Friends 250.00
8 Miscellaneous Expenses 300.00
TOTAL 3,000.00 TOTAL 2,100.00
a) Tan cannot afford to buy a brand new car right now as it will take away at least
RM 700.00 by way of instalment payments, road tax, insurance, fuel, toll, parking and
maintenanc e c o s t . It would be prudent to advise him to buy a fairly new and good
s e c o n d h a n d c ar to cut his expenses from his expected RM 700.00 to RM 450.00
a month.
b) He will have to get himself covered for the following areas of concern :-
i) Medical Card.
ii) Comprehensive Personal Accident Cover.
iii) 36 Dread Diseases Cover.
iv) Death and Total Permanent Disability Cover.
v) Waiver of Riders Cover.
vi) Make sure that there is enough money left in the policy to create the desired
amount in 10 years.
d) Based on these inputs, the agent can suggest an Investment-Linked Plan for Tan.
e) Please bear in mind that the total premium o utla y pe r month cannot exceed
RM 300.00 and Tan will have to make regular top-ups every year as his salary increases.
SCENARIO 2.
1) They would like to set up an education fund for each of their children. They want their
children to study locally.
2) They would like to have a good insurance cover, to cover areas like Death, Total
and Permanent Disability.
3) Medical cards for their children.
No Income RM Expenses RM
4 Others (i.e. pro -rated yearly 1,000.00 Clothes and Accessories 250.00
bonus and incenves)
10 Maid 450.00
11 Housing Loan 600.00
12 House Ulies and Maintenance 350.00
13 Tuion for Kids 200.00
14 ASM/ASB (Both) 800.00
15 Miscellaneous Expenses 500.00
TOTAL 8,500.00 TOTAL 7,500.00
a) A medical card and an education Investment Linked Policy for each of his
children. It would be advisable, if it is taken under both of them to maximise the tax
relief that is given for medical and education premium payments by IRB. (i.e. up to
RM3000 per person).
b) Suggest a 36 Dread Disease rider be included in an Investment-Linked policy for
every one w i t h p r em ium waivers. Please ensure that the policy should concentrate
on the coverage part as both Alimudin and his wife will need a good cover to offset the
liabilities that they have.
d) A higher premium will be allocated to the older children as they do not have the
luxury of time as the youngest child.
Based on the information above, you will be able to make a recommendation to the two
clients.
CHAPTER 7
1. A policy holder has invested RM 5,000 as premiums. If the price of the unit is RM 1 per
unit and the company deducts a charge of 5%, how many units will he have bought in a
Single Pricing Method?
a. 4,500 units.
b. 4,750 units.
c. 4,250 units.
d. 5,000 units.
2. How many units would he have accumulated to date on a dual pricing method?
a. 28,500 units.
b. 29,850 units.
c. 21,850 units.
d. 27,500 units.
3. Samy wants to cash in the policy to use the funds to pay for his child’s college fee. If the
Offer price is RM 1.25, how much will Samy get from the policy?
a. RM 41,250.
b. RM 42,750.
c. RM 32,775.
d. RM 32,700.
4. Top-ups are allowed in Investment-linked policies. What happens to the total premium paid under
the top-up?
a. The company converts the total top-up premium and accumulates it into the existing
account.
b. The company opens a new account and deposits the converted top-up units into this
account.
c. The company deposits the top-up premium into the existing account and levies
all charges as per the original policy.
d. The company will use the top-up premium minus the top-up charges and deposit
the units into the policyowner’s account.
i. Upon a Death claim being submitted, the company will pay only the claim based on the total
unit accumulation multiplied by the offer price.
ii. Upon a Death claim being submitted, the company will pay the face amount of the initial
death coverage irrespective of unit accumulations.
iii. Upon a Death claim being submitted, the company will pay the unit value plus the sum assured.
iv. Upon a death claim being submitted, the company will pay only the unit value plus the sum
assured and any top-up amounts separately.
a. i,ii,iii.
b. i,ii,iv.
c. i,iii,iv.
d. i,ii,iii,iv.
6. In a Regular premium Investment-linked policy, the policy holder can do the following EXCEPT;
8.2 BENEFITS
8.2.2 FLEXIBILITY
Investment-linked products have simple product design with clear structure that caters
separately for investment (unit-driven) and insurance protection (charge-based).
As a result, a policyowner can easily change the level of his premium payment, take
premium holidays, add single premium top-ups, make withdrawals, change the level of
sum assured and switch his investment between funds.
Traditional with-profit life insurance products are sum assured driven and they are very
inflexible to allow major changes in product features. For example,
a change of plan from a whole life insurance policy to an endowment policy involves
complicated calculations.
traditional life insurance policy does not allow policyowners the option of choice of
investment portfolio.
8.2.3 EXPERTISE
Investment-linked funds are managed by professional fund managers who have the investment
expertise to invest the fund to achieve high return over the long term in, accordance with
the investment objectives.
An ordinary policyowner does not normally have good knowledge of financial markets to
invest his money wisely.
8.2.4 ACCESS
A policyowner can gain access to well diversified investment-linked funds managed by
professional investment managers with proven track records, simply by buying an
investment-linked life insurance policy with an initial investment, at as low as RM 4,000.
8.2.5 ADMINISTRATION
The policyowner is relieved of the day-to-day administration of his investments, which can
be a complicated affair. He just has to keep track of his investment through the unit
statements provided regularly by the insurance company and the unit price published in
financial pages of major newspapers.
The sum assured is always guaranteed but the value of units is not guaranteed because it
is directly linked to investment performance of the underlying assets of the fund.
In times of volatile stock market, the cash and maturity values of an investment-linked life
insurance policy (with units invested in an equity fund) will rise and fall drastically. It shows
that the potentially higher return of equity fund comes with greater risk.
Investment-linked life insurance policies (especially those risks which are fully invested in
units of equity funds) are only suitable for a policyowner who can tolerate the risks of short
term fluctuations in his cash value. The policyowner can, however, expect to achieve
higher return than the traditional product over the long term.
These investment-linked life insurance policies (with high equity investment) are not
suitable for a policyowner who are risk averse and wants to have life insurance policy with
high protection together with guaranteed cash and maturity values. In this case, it is better
that the policyowner buys a traditional non-participating product to meet his insurance
needs.
8.3.2 CHARGES
The administration fee, insurance charge, fund management fee etc, of an investment
-linked life insurance policy are usually not guaranteed. They are subject to regular review
and they can be changed by the insurance company after giving a written notice over a
specific period e.g. 3 months.
a. Client is expected to monitor and switch the funds on his own all the time the policy
is in force.
b. The burden of fund management is borne by the company’s professional management
team and does not burden the client.
c. Client has the option to instruct the fund managers to follow his investment outlook and
strategies.
d. Client has the option to make decisions on how the company must invest his money
totally.
a. i,ii only.
b. ii,iv only.
c. i,iii only.
d. iii,iv only.
a. i,iii only.
b. i,ii only.
c. ii,iv only.
d. iii,iv only.
When comparing investment-linked life insurance products with traditional life insurance
products (i.e. term, whole life and endowment), the following criteria are used :-
Premium Computation
Death Benefit
Surrender Value
Option To Top-up
These traditional life insurance products guarantee a fixed rate of return. Examples are
temporary (or term) assurance and non-participating whole life and endowment.
Under term insurance, a payment is made when the insured dies within the term or period
of assurance. Under an endowment policy, payment is made when the policy matures or
when the insured dies within the term of assurance. Whole life policies are similar to
endowment policies except that in most cases 'whole life' is defined to be 80, 90 or 100
years. Under such traditional without-profit life insurance products, the amount payable
does not depend on the investment performance of the company, as it is fixed at the
inception of the policy. Therefore, there are no investment risks for these products except
the risk of insolvency of the life insurance company.
Under a traditional without-profit life insurance policy, the premium is determined and
fixed at inception and is stated in the policy. Once the contract has been made, the life
company may not alter the terms and conditions without the agreement of the policyowner.
Under traditional without-profit life insurance products; the death benefit (i.e. the sum
assured) is determined and fixed at inception and is stated in the policy. As in the case
with premium, once the contract has been made, the life company may not alter the
terms and conditions without the agreement of the policyowner.
Other than term insurance of more than 20 years, no payment is made when a term
insurance policy is surrendered. Under e ndowment and whole life policies, as these
policies earn interests which build-up cash values, an amount is payable at the surrender
of the policies, called the surrender value.
Some life companies offer policies where the sum assured can be increased each year by
a set percentage (often ten per cent) of the original sum assured. Other companies offer
short-term policies that can be renewed at the end of the term for a higher amount. For
example, the holder of a five-year level term insurance may have the right at the end
of the five years to effect a new policy for a sum assured of up to 50 per cent more than
the original policy.
Traditional with-profit life insurance products are similar to the without-profit life insurance
products except 'profits' are added to the sum assured. Examples of with-profit products
are with-profit whole life and with-profit endowment insurances.
Every year the life office will carry out a valuation of the assets and liabilities of its life fund.
This will normally reveal a surplus, part of which can be allocated to the with-profit
policyowners in the form of an addition to the sum assured. This additional amount is
called a bonus. However, the allocations are not directly linked to the life office's investment
performance. The reason is that the life office has already smoothen the peaks and troughs of
investment returns, and pass these smoothened returns as bonuses to the policyowners.
The life office is able to smooth these returns by contributing into reserves in good investment
years, and drawing from reserves in bad investment years.
Reversionary bonus can either be simple (based purely on the original sum assured) or
compound (based on the sum assured plus previous bonuses). Once allocated, reversionary
bonuses cannot be removed or reduced. Reversionary bonus under a policy is paid at the
time of death under the life policy or on maturity of the policy.
Terminal bonus is different in concept. Terminal bonus is only payable on policies resulting
in claims either by maturity or death. It is not payable on surrender. It is usually expressed as
a percentage of the total bonuses and will vary in accordance with the performance of
the underlying assets of the life fund.
Future bonuses are never guaranteed. They can be reduced if the life insurance company
cannot afford to sustain its bonus rates. This is the distinctive difference between with-profit
and guaranteed products.
As with the traditional without-profit life insurance policy, the premium for a with-profit
policy is determined and fixed at inception. It is based on the sum assured and the
expected bonuses payable. Similar to the without-profit policies, once the contract has
been made, the life office may not alter the terms and conditions without the agreement
of the policyowner.
Under traditional with-profit whole life insurance policies, the death benefit is a fixed sum
assured plus whatever bonuses accumulated up to the date of death and less whatever
outstanding policy loan(s) and automatic premium loan(s), inclusive of interests. Only the
sum assured is guaranteed at the outset. These policies are almost the same as non-profit
policies; the only difference is that the amount payable on death of the without-profit
whole life insurance policies has no inclusion of bonuses.
In the case of a with-profit endowment policy, the death benefit is the same as with the
with profit whole life insurance except that it has a maturity benefit. The maturity benefit is
the fixed sum assured plus whatever bonuses, reversionary and terminal, accumulated up
to the date of policy maturity and less whatever outstanding policy loan(s) and automatic
premium loan(s), inclusive of interests
Very few with-profit policies allow the option to top-up. If they do, it is similar to the without-
profit policies.
The benefits under investment-linked life insurance products are wholly or partly determined
by reference to the value of, or the income from, property of any description or by reference
to the fluctuations in, or in an index of, the value of property of any description.
Investment-linked life insurance products, as mentioned earlier, refer to policies where the
policy values vary according to the values of the underlying assets that the policies are
tied to at the time. Therefore, the investment returns and risks of these products are directly
transferred to the policyowners. The policyowners enjoy the entire investment reward,
nett of charges and bear all the risks.
A fund that invests solely in fixed income securities can reasonably be assured of a capital
guarantee but the prospective rate of return is modest. On the other hand, a fund that
invests solely in equities will have greater volatility, but the potential return is high.
As mentioned earlier, the premium charged and the benefit under t raditional life
insurance policy are stated in the policy at its inception. The premium is fixed based on
the specified sum assured. Thus traditional life insurance policies are sum-assured driven.
On the other hand, investment-linked life insurance policies are account driven, in that the
investment-linked life insurance policyowners have the flexibility in changing their premium
payments, take premium holidays and add single premium top-ups. The life office may
also retain the right to vary some of the charges made under the policies. For example,
there may be a monthly policy charge which is expected to increase in line with inflation.
In its initial pricing exercise, the life office will make certain assumptions about future
conditions and the changes it expects to make in its charges. If future experience differ
from what it had assumed when the product was priced, the life office may depart from its
intended policy towards varying charges. Thus there is an initial pricing exercise and an on
going review, comparing actual experience with what had been assumed.
For single premium investment-linked life insurance policy, little protection is provided and
the death benefit is either one of the following, depending on the company's policy :-
a. the minimum s u m assured or the value of the units in the fund at the bid price
which ever is higher; or
b. the minimum sum assured plus the value of the units in the fund at the bid price.
In a single premium investment-linked life insurance policy, the insured bears the investment
risk only if the benefit rises above the minimum death benefit.
a. the sum assured (chosen by the life assured) or the value of the units in the fund at
the bid price whichever is higher; or
b. the sum assured (chosen by the life assured) plus the value of the units in the fund
at the bid price.
For a single pricing policy, the value of the units is the market price multiply by the units
minus any charges. For a dual pricing policy, the value of the units is the bid price multiply
by the number of units.
a. For a single pricing policy, it is the market price multiply by the number of the units;
b. For a dual pricing policy, it is the bid price multiply by the number of the units.
Most investment-linked life insurance policies allow policyowners to buy additional number
of units without taking out a new policy.
SELF-ASSESSMENT QUESTIONS
CHAPTER 9
2. Samantha wants to protect herself from some personal loans and credit card balances
if she should die or be disabled. She is also tight for money and is worried about paying
too much in premium payments. She seeks your advice on how to protect this area.
What will be your advice?
3. In a traditional life insurance policy, the client enjoys the following EXCEPT;
a. The client is assured of being shielded by the vagaries of the stock market by the
company’s smoothening process.
b. The client can expect his returns on death or disability to be the accumulation of
basic sum assured and addition of bonuses declared by the company.
c. The client can choose to determine the level of protection needed and the amount of
premium that he needs to pay.
d. The client can pledge his policy as collateral in protecting a housing loan obligation.
4. Marcus argues that a person should buy a short, term life insurance policy, and invest the
rest on his own in any or all possible investment vehicles. Do you agree with him?
a. Yes. It is wise for a person to do so as they are quite proficient in the workings of the
invesment markets.
b. No. It would be disastrous as the person will not be able to handle the portfolio as it
is a very difficult thing to do alone.
c. No. The short, term life insurance policy, will not be able to cover his liabilities over a
long period of time as we do not know what will happen to us when.
d. Yes. This is an intelligent way of doing personal financial planning and it is being practised
by all successful people.
6. What is the criteria used to compare traditional life insurance and investment-linked
policies?
i. Investment returns and Risks.
ii. Premium Computation.
iii. Death Benefit.
iv. Surrender Value.
a. i,ii,iii.
b. ii,iii,iv.
c. i,ii,iv.
d. i,ii,iii,iv.
10.1 INTRODUCTION
Investment-linked insurance products are basically life insurance products. Thus, the tax
aspects of an investment-linked life insurance policy are treated in the same manner as
other forms of life insurance policies.
As with taxation, the business of investment-linked life insurance is regulated by the laws
that govern the other forms of life insurance business such as the Insurance Act, 1996 and
its Regulations, the Companies Act, 1965, the Contracts Act, 1950 and legal provisions
governing the common law of agency.
Funds that are collected by insurance companies in the form of premiums are made to
work by being invested in various investment vehicles that will produce sufficient income
to meet the obligations of the insurance company towards its policyowners. The law of the
country may require insurance companies to adopt a particular investment strategy so
that the companies solvency and their ability to meet policyowner's claims are not affected.
The premium relief is allowable when the life insurance or deferred annuity is :-
Premiums paid by the policyowners are, therefore, deductible against income for the
purpose of income tax. The total relief allowable for all insurance premiums on the life of an
individual or his/her spouse and on contribution to approved provident funds (e.g. to EPF) in
a basis year is RM6,000. Effective from the year of assessment 1997, the sum of relief allowable in
respect of payment of life insurance premiums for a life insurance policy is no longer
subjected to the limit of 7% of the capital sum insured of the respective policy. In the case
of separate assessments for married couples, the total relief is the same.
Under the 1996 Budget, an extra tax deduction of RM 3,000 under Section 49(1B) of the
Income Tax Act, 1967 was announced which can be used for education and medical insurance
premiums. This is in addition to the normal tax deduction of RM 6,000 mentioned above.
Insurance companies are, however, taxed at lower rates. The chargeable income and
realised capital gains of a life fund is taxed at 8%. Thus the proceeds distributed to
policyowners of investment-linked life insurance policies are tax-free in the hands of the
policyowners since the s u r p lu s e s g e nerated from writing the investment-linked life
insurance products are already taxed at the life insurance company level.
In addition, capital gains are not taxed in Malaysia with the exception of real property.
Therefore, disposal of units in an investment-linked life insurance should not attract tax as
they are capital receipts.
Income can accrue into a policy but there is no constructive receipt unless distributed.
When a policy matures, or when it is paid upon the occurrence of an insured event or
when it is cancelled or surrendered, it becomes a capital receipt. It is not income in nature.
As long as there is no capital gains tax in Malaysia, there should be no tax consequences
upon disposal of a life insurance policy or an investment-linked life insurance policy in the
hands of the policyowners.
By ensuring that the insurer is financially solvent and able to meet its obligations
to its policyowners and claimants.
By encouraging the insurance industry to take an active part in the economic development
of the country.
The Insurance Act, 1996 sets out the broad standards and policies, leaving the detailed
requirements to be prescribed by regulations (such as the Insurance Regulations, 1996) or
specified by way of guidelines, circulars and codes of good business practice.
Section 7(2)(b) of the Insurance Act, 1996 defines 'Investment-linked insurance business'
to mean the effecting and carrying out of a contract of insurance on human life or annuity
where the benefits are, wholly or partly, to be determined by reference to the value of, or
the income from, property of any description or by reference to fluctuations in, or in an
index of, the value of property of any description.
Section 7(l)(b) of the Act p r ovides that except with the prior written approval of Bank
Negara Malaysia (BNM) and subject to such conditions as the authority may specify, no
licensed insurer shall carry on investment-linked life insurance business.
BNM requires an insurer who intends to market investment-linked life insurance business to
submit a detailed business plan to enable BNM to assess the expertise and technical
capability of the insurer to market and manage such business in an efficient and sound
manner.
Insurers are required to maintain separate funds in respect of each investment-linked fund.
The assets of each investment-linked fund must be kept separate from all other assets of
the insurer and each fund must have sufficient assets to meet its liabilities.
BNM's circular JPI: 1/1997 on “Specification of Assets for the Purpose of a Licensed Insurers
Margin of Solvency” which specifies the class or description of assets of a licensed insurer
and the extent of a class of assets or description of assets that may be taken into account
for the purpose of a licensed insurer's margin of solvency is not applicable to the
investment-linked funds, in view of the nature of the business that investment-linked funds
could be invested 100% in equities. The investment-linked funds are, however, subject to
the following general restrictions, to reduce the risk exposure to any one company :-
i. Investments in securities in anyone investee should not exceed 5% of the paid up capital
of the investee c o m p an y o r n o t m o re than 5% of the total value of the assets of
the fund whichever is lower; and
As the amount of cash value and death benefits for investment-linked life insurance
policies are based on the value of the underlying assets of the investment-linked fund, the
assets of an investment-linked fund must be valued frequently to provide policyowners
with more accurate unit prices and benefits. The valuation of investments at market value
will enable the appreciation or depreciation in values to be immediately reflected in the
unit prices and, hence, in the policyowner's benefits.
In accordance with the requirements of the Insurance Act, 1996, an annual actuarial
valuation certifying the level of reserves for cash values, death claims, administrative
expenses and other benefit payments of the investment-linked fund must be done by the
insurer's appointed actuary and submitted to BNM within three (3) months of the end of
the financial year. The appointed actuary will be responsible to ensure that the obligations
to policyowners are adequately reflected in the actuarial valuation.
The policyowner of an investment-linked life insurance policy must be at least 18 years old.
There is no restriction on the age of the life assured. Although Section 153(2) of the Act
provides that a minor who has attained the age of 16 years may effect a life policy, a
higher age requirement is imposed for investment-linked life insurance business in view of
the need to confine the sale of such policies to individuals who are mature enough to
make an evaluation of the investment risks involved and make sound investment decisions.
Investment-linked life insurance policies must have a free-look provision of at least 15 days.
A policyowner within 15 days after delivery of the investment-linked life insurance policy
may return the policy to the insurer and shall be immediately refunded any premium paid
in respect of the policy.
Investment-linked life insurance policies must have a minimum death benefit of RM 5,000
or 125% of the single premium whichever is higher. The minimum death benefit will ensure
that investment-linked life insurance policies will be distinguished from other unit trusts
products where there is no compulsion to have additional life coverage.
Single premium policies must at least have a minimum premium of RM 3,000. This is to
ensure a meaningful level of investment outlay for the benefit of the policyowners.
10.3.1.11 Intermediation
The investment-linked life insurance products should only be marketed by agents specifically
trained and equipped with the product knowledge. The basic qualification would be the
MIl Certificate Examination in Investment-linked Life Insurance. It is vital that agents who
market these products have the necessary competence and expertise to be able to
provide professional advice on the product to policyowners, due to the technical nature
of theses products.
To ensure adequate disclosure and transparency of policies, all sales materials and policy
forms for investment-linked life insurance policies must contain the following information :-
i. A general description of the investment policy and objective of the fund and the manner
in which investment income will be distributed to policyowners;
ii. Policy benefits will be b as e d on the performance of the funds and the factors
affecting the policy benefits. Wherever possible, provide hypothetical illustrations to
guide policyowners on the policy benefits;
iv. A maximum amount of initial charge, management fee, mortality cost and any
other charges to be borne by policyowners must be stated;
v. The basis of computation of a ll policy benefits, bid and offer prices of the units,
units allocation and the procedure for creating and cancelling of units must be
stated;
vi. The basis and frequency of valuation of assets underlying the fund;
viii. A statement of the investment performance of the fund for the past 5 years where
available;
ix. A prominently placed and clearly worded warning that the value of policy may
rise or fall, the results shown are for illustrations only, the assumptions used for
illustrations are hypothetical, and the performance of the fund is not guaranteed;
x. Any other information that BNM may from time to time deem necessary.
B. Statement to Policyowners
i. The number and value of units held at end of the previous statement period;
ii. The number and value of units bought/sold during the statement period;
iii. The number and value of units at the end of the statement period;
vi. The current death benefit and surrender value at the end of the current period;
vii. The amount of outstanding loans, if any, at the end of the statement period; and
viii. Any other information that BNM may from time to time deem necessary.
The report to policyowners on the performance of the investment-linked fund must include
the following information :-
ii. Trend analysis of not less than five (5) years, where available, on the net investment return
of the fund;
iii. Composition and list of investments held by the fund as of reporting date;
iv. Any charges levied against the fund during the year;
vi. Any other information that BNM may from time to time deem necessary.
Investment-linked life insurance business is not only subject to the Insurance Act, 1996 and
Regulations but also to special legal principles that are embodied in insurance contracts
such as insurable interest, utmost good faith, indemnity, proximate cause, as well as to
laws pertaining to the formation of contracts, to agencies and to companies which are
applied similarly to other classes of life insurance.
Readers should refer to the MIl study text on the Pre-Contract Examination for Insurance
Agents for details on these subjects.
CHAPTER 10
1. The Government has allowed insurance premiums paid as relief to a certain extend because :-
a. The Government feels that by giving this relief, all Malaysians will be able to
purchase insurance easily.
b. The Government is giving this relief to encourage national thrift and promote
individual financial independence.
c. The Government feels that the tax that they will collect if the relief is not given
is considerably low and insignificant.
d. The Government is allowing this relief to make sure it is popular.
2. Salim and Siti are two self employed people. They do not contribute to EPF and have two
young children. They would like to maximise their tax relief from insurance. What is the maximum
relief that they can claim ?
3. “In Malaysia, the regulation of insurance business is achieved through the administrtion
and its enforcement of the Insurance Act, 1996 and Regulations. The enforcement of
the Act is carried out by the Governor who shall perform the functions of Bank Negara
Malaysia on its behalf.”
The main purposes of regulation include :-
i. The protection of public interest.
ii. The protection of the Government’s interest.
iii. The promotion of fairness and equity.
iv. Playing a developmental role.
a. i,ii,iii,iv.
b. i,ii,iii.
c. i,iii,iv.
d. i,ii,iii,iv.
6. All sales materials and policy forms for investment-linked life insurance policies
must contain the following information;
a. Policy benefits will be based on the performance of the funds and the factors
affecting the policy benefits. Wherever possible, provide hypothetical illustrations to
guide policyowners on the policy benefits.
b. The number and value of units held at e end of the previous statement period.
c. Charges e.g. initial charge, management fee, mortality and riders costs, etc,
incurred during the statement period.
d. Any other information that BNM may from time to time deem necessary.
In the wake of the changing financial scenarios and also the major changes that has
happened in the regional and global financial landscape, the man on the street is more
worried, now than ever before, about getting into any investment portfolio. To him, the
financial terms and jargons are confusing and he also doesn’t have the adequate knowledge, of
how different financial market mechanisms work. Even though there is a heightened level
of financial knowledge nowadays, compared to 15 years ago, the man on the street is still
very wary of investments.
This is where the challenge sets in for an agent. Identifying and establishing a customer’s
needs involves an agent applying the relevant knowledge and understanding, not only of
the technical aspects of life insurance coverage and scope, but also the practice of giving
financial advice in order to meet the customer’s needs.
Agents have to begin this process by establishing a relationship with the client. The agent
has to convince the client that he is in a position to assist the client to fulfil his financial
goals. This is an important step. The agent can employ the various methods that are
taught by their managers of the insurance companies as to how to go about establishing
relationship with the client. It is important that this step is done properly because this is
where the agent will be able to do a p r e l i minary screening of the client’s financial
objectives and goals.
The next step is to gather all relevant data that will assist the agent to do an analysis of what is
needed in planning for the client. The agent has to conduct a thorough “fact-find” exercise and
obtain all relevant data to help him move to the next step.
All Insurance companies have made it mandatory for agents to fill up the Customer Fact Find Form
(CFF) before submitting the new business proposal. The CFF is an important document and it helps
the agent to do the necessary groundwork to ascertain the client’s financial situation and also to
establish the client’s needs. It is sad to note that the CFF is not fully utilised by present agents in the
field and the real impact of the CFF is not truly realised. It is important that all agents understand the
importance of the CFF and doing a thorough job will assist them to obtain all relevant information
about the customer before making recommendations.
It also allows the agent to build a clear understanding of the customer’s present situation and help
him formulate recommendations to achieve the customer’s financial goals and objectives. The CFF
addresses the following areas;
After having gathered the relevant data, the agent will have to analyse these data and come up with
an analysis that will help establish the client’s current financial position and also his future goals. This is
important because this will allow the agent to come up with a blue print that will finally be recommended
to the client and put in motion.
In this step, the agent has to develop the pertinent plans that will help the client to realise
his goals. The analysis will give birth to recommendations that will satisfy the client’s need in
areas like;
The list above is not exhaustive but these are the main areas that most of us worry
about. Developing a constructive plan to meet the client’s need is important and this
has to be done earnestly.
In this step, the agent must have a very detailed and involving discussion with the client.
The agent must be able to mitigate any questions that will arise as to why a particular
strategy has been recommended. After having discussed it thoroughly, the agent will
have to make some changes to the recommendations, if any, and then move on to the
next step of implementing it.
Now that the client has agreed to the recommendations, the agent will now put into
effect all the recommendations that have been agreed to. Please make sure that the
implementation is done as per the discussion and any changes to the amount of cover
or premiums must be communicated to the client before it is put through.
Agents must commit themselves to do a policy review on a half yearly basis or yearly
basis. Ad hoc reviews can also be done if there is a special need from the client or if there
is a major change that might have happened to the client’s investment account.
It is good to do these regular reviews as this will also be an avenue for the agent to obtain
quality referrals from the clients to further expand their life business. It also allows the agent
to be in a place to do cross selling of other insurance related products whilst conducting
these reviews.
CHAPTER 11
5. Indran is a very satisfied insurance client. He is happy with his agent and the plans that
have been offered to him. His agent has done a lot for him. Indran will definitely do the
following EXCEPT;
a. Recommend that his agent be given a letter of commendation and an award
from the company.
b. Speak highly about the level of commitment and service given to him by his agent.
c. Keep his agent as a very well guarded secret.
d. Help him in prospecting and referring his friends to the agent.
6. Why is important for agents to establish a good relationship with their clients?
a. To ensure that the client is well taken care of and, will assist him in providing add on
business and quality referrals.
b. To establish himself as a very good agent in the eyes of the company.
c. To be able to attract more people to join him in carrying out insurance business.
d. To ensure that no other agents will approach his client to sell life insurance products.
In this chapter, we shall look into the basic considerations which form a prerequisite to the
process of marketing investment-linked life insurance and the need for self-regulation in
conducting investment-linked life insurance business in Malaysia.
12.2 MARKETING
Customers who have purchased p olicies from such an organisation usually ended
buying policies which they do not understand, meet their needs, nor could they afford.
Owing to changes in the market environment, many insurance companies have become
market oriented. In market-oriented insurance companies, the role of the sales and marketing
department is to determine the needs of customers and satisfying these needs by
developing and distributing appropriate policies.
• Market identification
This involves the selection of segments of the market which have needs that can be
met by the prod u c t s t h a t c a n b e dev e lo pe d o r h a ve been developed by the
insurance company. A market segment is a group of customers with similar needs.
• Product development
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This involves the identification and selection of suitable channels for distributing
the policies to customers. The channels of distribution used by insurance companies
may include agents, brokers, salaried employees, mass mailing, vending machines,
banks, credit card companies, discount card companies, etc.
• Promotion
This involves the identification and selection of suitable promotional activities including
advertising, sales promotion and personal selling which will support distribution.
Insurance agents are frequently involved with some aspects of marketing of insurance
products. Agents can influence the product design because their views are often sought
by insurers before the insurers embark on the development of new policies.
More significantly, agents constitute the most important channel of distribution. While the
other marketing factors, such as marketing plan, market identification, product development,
pricing and promotion, may affect how much insurance is sold, the agents are the main
force behind most insurance sales.
The success of an insurance company's marketing efforts therefore depends on the extent
to which its agents are market-oriented. In other words, to ensure success in its marketing
efforts, a market-oriented insurance company must be complemented with a
market-oriented agency force.
Since an insurance agent distributes policies mainly through personal selling, the objective
of satisfying customer's requirements profitably can be achieved through the use of sales
plan, where sales goals, strategies and objectives are coordinated with market analysis,
segmentation and targeting.
A sales plan is important because it allows an insurance agent to perform the function of
planning and controlling. When an insurance agent is involved in planning, he is establishing
a goal for the agency and the ways to achieve it.
A sales plan is equally important for controlling, that is measuring results against the plan
and making necessary changes. A sales plan includes the following :-
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Sales goal.
Objectives - these can be in terms of target market.
Sales strategy.
Implementation and control.
Product knowledge.
Market knowledge.
Selling techniques.
Knowledge of buying process.
Knowledge of selling process.
Selling techniques.
Problem recognition
At this stage, the consumer becom aware of the threat of risks or a poten opportunity
and feels the need for product to protect him from financial difficulties or to satisfy his
needs.
Information search
When the need has b ee n p e rceived, consumer searches for information
shops around. The intensity of these efforts depends on factors such as :-
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Other factors which have influence on the consumer buying decision are ;
Purchase
After evaluating the alternative products based on criteria and factors set by the
c o n s u m e r h i m s e l f , w h i c h are o fte n in flue n ce d by personal public and
ma rk e ter -dominated sources, the consumer makes the decision to purchase one
of the alternative products.
Post-purchase evaluation
After the purchase has been made, the buyer begins to evaluate his purchase.
The a g e nt w h o d eliv e r s a p o licy pro m ptly k e e p s in contact with his customers,
and provides important information of risk evaluation will have a better chance of
securing the loyalty of his customer at the time of renewal.
An agent is sometimes supplied with a list of prospects. At other times, potential customers
must be discovered by the agent himself. The names of prospects can come from
many sources including;
i. Current and past customers.
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vi. Enquiries from internet home pages.
The sales presentation is the promotional message an insurance agent delivers to a prospect
to explain, stimulate interest in, and motivate the prospect to purchase the
product(s) recommended in the proposal. It may be informal or highly structured.
Many agents use visual aids (brochures, charts or graphs) in their presentations. The
presentation should be flexible so that it can be adapted to various situations.
It is important, however, to note that Section 150(4) of the Insurance Act, 1996
provides that insurance agents must use sales brochures or sales illustration that is
authorised by the insurer. Sales materials/illustrations must also contain the information
discussed in 10.3.1.12
An insurance agent must first gain the attention of the potential customer. After gaining
the prospect's attention, the sales presentation must develop the prospect's interest.
Product samples or models are effective in doing this. After creating an interest in the
prospect, the agent must create a desire for the product which would satisfy the
prospect's need.
Handling objections
The success of the sales interview hinges on the effectiveness of insurance agent's skill
in handling objections. The prospect may want time to think the idea over, or may not
agree with the price. The quality of the product may also be questioned. The agent
must learn how to answer questions and handle objections in a manner which helps to
pave the way for successful completion of the interview.
At some point, the prospect will reach decision whether to buy or not to buy. If the
presentation is successful, the sale will be made. Sales are not always closed at the
end of the first presentation. If more meetings are required, insurance agent should try
to set a date for a follow-up interview.
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The successful sale of an insurance contract does not free the agent from further interaction
with his customers. In fact, insurance contracts require an insurance agent to provide
af ter-sa le s s er v ic e s o n a c ontinuous basis. The follow-up stage helps ensure that the
c u stomers re m ain s at is f i ed with the purchase. After-sales calls on customers also help
reduce the customer’s cognitive dissonance. Cognitive dissonance a psychological state
in which customers feel u n c e r t ai n a n d o fte n que s tio n whether they should have
purchased a product at all, or whether they should have purchased an alternative brand
or another product rather than the one they actually bought. In the after-sales calls, the
agent can reinforce the customers' original decision to buy the product.
Most insurance companies h ave rules and regulations covering activities that must be
completed between the time a policy is sold and time the policy is issued. These activities
may include the companies assigning their agents specific responsibilities such as;
a. Making sure that the application is complete and that all the proposer's answers have
been recorded accurately clearly;
The delivery of a policy is also an important aspect of providing after-sales services. Delivery
of a policy gives the agent an opportunity to perform the following :-
Dispel the custome r ' s c o gnitive dissona nce by reassuring the policyowner and other
family members about their decision to buy the policy;
P rovid e a basis for future sales by reminding the policyowner about any currently
unmet or future financial needs or expectations;
Encourage the policyowner to call the agent if the policyowner has any problems
or questions that need to be answered;
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12.3 ETHICS AND CONDUCT
An important aspect of professionalism that makes for success of, an insurance agent and
also (sa d to s ay ) exp o s es t hose that fail to maintain their professional standards, is the
ethical aspect of the job that is done.
Rules for the conduct of the business and for setting competency standards are required
to ensure that the highest standards required, especially in handling investment-linked life
insurance business where customers need the confidence that their advisor is professional
in managing their financial choices, are present.
Choices of advice can affect the quality of service that is received by the customer. An
insurance agent may not actually break specific rules, yet some advice may be less than
ideal for the customer. Thus the insurance agent must decide how meticulous he will be in
going beyond the specific rules in establishing and maintaining a set of personal ethics
and conduct.
b. Complying with the Law and with the Best Principles and Practice relating to Financial Advice
c. Behaving in a Professional and Honourable Manner towards Those with Whom the
Insurance Agent is in Contact in Business
' C ondu c t ' means every aspect of what a person does and how the person does
it. 'Honourable' means to act always in a manner that a person can be proud of in the
future whenever the incident reoccurs to in the person's memory. It is not a matter of
conforming to probably outdated codes on dress or social niceties.
In each business there are codes of practice, rules, prescribed and recommended
guidance notes, etc. Each of these have a good intention behind them, and must be
followed even where they appear bureaucratic or limiting to the free enterprising spirit.
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Besides the Guidelines provided by the regulatory authority, Bank Negara Malaysia, see
Chapter 10 of this study text, there is currently no other special code of conduct or ethics set
specifically for the transaction of investment-linked life insurance business. The guidelines
formulated by the Life Insurance Association of Malaysia (LIAM) generally for self-regulating
the life insurance business would apply to the investment-linked life insurance business until
such time when a more specific code is provided. The LIAM's guidelines are provided under
the following headings :-
Statement of Philosophy.
Coverage.
Monitoring Devices.
Code of Conduct.
ii. It is a business based on trust and honesty, requiring a high degree of responsibility and
professionalism.
iii. The confidence of policyowners and members of the public in the integrity and
honesty of life insurers shall be safeguarded and enhanced.
iv. Life insurers shall at all times see that their business is soundly managed to ensure the
safety of policyowners' savings and the credibility of their companies.Life insurers shall
maintain a policy of efficient and prompt service to policyowners and, to assist and
advise them where necessary, with the aim of promoting goodwill.
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In pursuance of the above objectives a nd philosophy, the life insurance industry has
endeavoured to codify the ethics to provide a guidance to those employed in the industry
to promote and maintain uniform ethical standards, and to uphold the trust and welfare of
policyowners at all times.
It is evident from the above statement of philosophy that life insurance business particularly
investment-linked life insurance should be conducted in a responsible and professional
m a nne r with a h i gh degree of integrity. This then will enable the commitments to the
policyowners, in the various forms of financial guarantees provided, to be met at all times.
It is thus a natural requirement that those involved, including the agency force, conduct
their affairs in a responsible manner so that any one insurer, in particular, and the life
insurance industry, in general, can meet the objectives formulated in the Statement of
Philosophy.
The sections that follow provide summaries of the codified ethical rules which the employees
of an insurer are expected to abide by at all times.
12.3.1.1.2 Coverage
The guidelines cover all employees of a life insurer operating in Malaysia. The guidelines set
out the minimum standards of conduct expected of all employees of an insurer. Insurers, if
they so desire, are f ree to formulate more comprehensive sets of rules for maintaining
ethical standards amongst their employees.
ii. Require all intermediaries (existing and upon appointment in the case of new
intermediaries) to sign a declaration to observe the guidelines;
iii. Assign responsibility to the heads of department to ensure compliance with the
guidelines on a day-to-day basis and to handle enquiries from employees on matters
relating to the code of conduct;
iv. Breaches observed are to be reported to an audit/disciplinary committee which
reports directly to the Board of Directors. In addition, the committee is required to
submit quarterly reports to Bank Negara Malaysia, the supervisory authority for
insurance companies, on breaches observed and the actions taken on these,
during the quarter;
vi. Report immediately cases of fraud to the police and Bank Negara Malaysia.
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vi. To ensure fair and equitable treatment of all policyowners and others who rely on or
who are associated with the life insurance company.
vii. To conduct business with the utmost good faith and integrity.
This part deals with the following aspects relating to selling of life insurance :-
Introduction.
Explanation.
Disclosure of Underwriting Information.
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12.3.1.2.1 Introduction
The following generalities are introduced :-
i. The term 'life insurance' used in the Code of Ethics and Conduct covers all types of
Annuities.
Pension Contracts.
ii. The Code applies to intermediaries, i.e. all those persons, including employees of a life
insurance company, selling life insurance. Registered insurance brokers are specifically
excluded, as they are subject to a separate professional code of conduct.
iii. The onus is placed on the member companies of LIAM to enforce the code and to use
their best endeavours to ensure compliance with the various provisions of the code,
by all those involved in selling their policies.
iv. In the case of complains from policyowners that an intermediary has acted in
breach of the Code, the intermediary shall be required to cooperate with the life insurance
company concerned in establishing the facts. The complainant shall be informed that
he can refer the complain to relevant life insurance company, if not so referred.
This and the following sections are reproduced from the Code of Ethics and Conduct of
LIAM to maintain the full spirit of the Codes.
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ii. Ensure as far as possible that the policy proposed is suitable to the needs and
not beyond the resources of the prospective policyowner;
iii. Give advice only on those matters in which he is competent to deal with and
seek or recommend other specialist advice if this seems appropriate;
ii. The amount of the annual premium under an existing policy may be lower than
that called for by a new policy having the same or similar benefits. Any replacement
of the same type of policy will normally be at a higher premium rate based upon
the insured's then attained age.
iii. Since the initial costs of life insurance policies are charged against the cash value in
the earlier policy years, the replacement of an old policy by a new one results in the
policyowner sustaining the burden of these costs twice.
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iv. The suicide clause and incontestible clause (if any) begin anew in a new policy
being denied by the insurance company which would have been paid under the
policy which was replaced.
3. Where projected benefits are illustrated, it should be made clear where applicable,
that they are based on certain assumptions, for example, future bonus declarations,
and hence are not guaranteed, and these benefits declared in the future may be
lower or higher than those presumed, (past performance may not necessarily be
repeated in the future). In the case of investment-linked policies, it should be made
clear that unit values may fluctuate up or down depending on the value of the
underlying investments.
4. When an intermediary has been supplied with an illustration by the life office, he
shall use the whole illustration in respect of the contract which he is discussing with the
prospective policyowner, and no other, and shall not add to it or select only the most
favourable aspects of it. The Sales illustrations shall be prepared in accordance with the
recommendations for bonus/interest/dividend/yield illustrations outlined in Appendix 1
of the Code.
2. Ensure that the consequences of non-disclosure and inaccuracies are pointed out to
the proposer by drawing his attention to the relevant statements in the proposal form
and by explaining them himself to the proposer.
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2. Forward to the company without delay any moneys received for life insurance.
Introduction.
Claims.
Proposal Forms.
Policies and Accompanying Documents.
Sales Materials/Advertisements.
12.3.1.3.1 Introduction
The aim of this part is to reduce the formalities involved in the issue of new policies and
payment of a claim. In addressing these, the guidelines recognise the problems posed by
non-disclosures and improper-claims; albeit by a few policyowners. Due to these and
possibly other reasons, the Statement of Practice is not made mandatory.
12.3.1.3.2 Claims
a. The guidelines require that an insurer may not unreasonably reject a claim. In
particular, an insurer may not reject a claim on grounds of non-disclosure or
misrepresentation of a matter that was outside the knowledge of the proposer.
The exceptions to this are those circumstances mentioned in the policy provisions or
the provisions of the Insurance Act, 1996 and Regulations.
b. If there is a time limit for notification of a claim, the claimant will not be expected to
do more than to report a claim and subsequent developments as soon as reasonably
possible.
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c. On the claimant proving the insured event and the right to receive the claim, the
claim has to be settled without undue delay .
d. The insurer shall not collect any claim processing fees from the policyowner or the
beneficiary.
The design of the proposal forms shall conform with Part III of the Code of Good Practice
for Life Insurance Business.
a. If the proposal form calls for the disclosure of material facts a statement should be
included in the declaration, or prominently displayed elsewhere on the form or in the
document of which it forms part :-
b. A life insurer shall provide a copy of the proposal form relating to the policy owner
together with the policy
a. Insurers will continue to develop clearer proposal forms and policy documents taking
into consideration the legal nature of insurance contracts.
b. The policy and accompanying documents must indicate whether there are rights to a
surrender value. If the policy carries a right to a surrender value then this right must be
indicated.
In respect of a proposal for whole-life or endowment, the sales literature should bring
out the following features of these contracts;
Insurers will ensure that information contained in the sales materials/ advertisements is
correct and truthful and thus not misleading to the public.
Read also chapter 10 ( 10.3.1.12 Disclosure of Information ) of this study text on the guidelines
provided by the regulatory authority, BNM in respect of sales material / illustrations of
Investment-Linked life insurance.
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SELF-ASSESSMENT QUESTIONS
CHAPTER 12
1. Generally, a market-oriented insurance company should undertake the following
functions;
i. Planning and control.
ii. Market identification.
iii. Product development.
iv. Undercut slow agents with productive ones.
a. i,ii,iv.
b. i,ii,iii.
c. i,iii,iv.
d. ii,iii,vi.
2. A sales plan includes the following :-
i. Sales strategy.
ii. Hard selling techniques.
iii. Sales goal.
iv. Objectives - these can be in terms of a target market.
a. i,iii,iv.
b. ii,iii,iv.
c. i,ii,iv.
d. i,ii,iii.
3. An agent can potentially get prospects effectively by utilizing the following methods.
i. Approaching his natural market.
ii. Taking out advertisement in newspapers and magazines to promote himself.
iii. Asking for qualified referrals from his satisfied clients.
iv. Obtain a list of existing clients from a rival company to replace their plans with his
company’s ones.
a. i,ii,iii.
b. ii,iii,iv.
c. i,iii.
d. ii,iv.
4. A truly professional person makes the following commitments;
i. Proudly announce about the quality of his clients and drop names to impress others.
ii. Shares intimate knowledge of his clients to fellow agents.
iii. Maintain a very high ethical standards when it comes to any information pertaining
his clients.
iv. Conduct himself in a professional and honourable way whilst carrying out his work.
a. i,ii only.
b. ii,iii, only.
c. i,iii only.
d. iii,iv only.
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5. The following are included in the Code of Ethics and Conduct for agents. It is known as;
i. To avoid conflict of interest.
ii. avoid misuse of position.
iii. To prevent misuse of information.
iv. To ensure completeness and accuracy of relevant records.
v. To ensure confidentiality of communication and transactions between the life insurance
company and its policyowners and clients.
vi. To ensure fair and equitable treatment of all policyowners and others who rely on or
who are associated with the life insurance company.
vii. To conduct business with utmost good faith and intergrity.
a. The seven principle underlying guidelines.
b. Bank Negara’s guidelines on good agent governance.
c. The international standards set for agents.
d, The leading criteria for the awarding of LIAM’s national award.
6. Sebastian is very unhappy with the policy that was given to him. He wants to make a
complaint. To whom can he complain to help him correct the situation?
i. Bank Negara’s Insurance Mediation Bureau.
ii. LIAM.
iii. The particular Insurance Company.
iv. The Newspaper.
a. i,iii,iv.
b. i,ii,iii.
c. ii,iii,iv.
d. i,ii,iv.
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ANSWERS TO SELF-ASSESSMENT QUESTIONS
CHAPTER 1
Answers : 1-C, 2-D, 3-D, 4-A, 5-A, 6-D
CHAPTER 2
Answers : 1-B, 2-C, 3-B, 4-C, 5-A, 6-B
CHAPTER 3
Answers : 1-A, 2-D, 3-C, 4-C, 5-D, 6-B
CHAPTER 4
Answers: 1-C, 2-D, 3-B, 4-C, 5-D, 6-B
CHAPTER 5
Answers : 1-D, 2-B, 3-B, 4-A, 5-C, 6-B
CHAPTER 6
Answers : 1-D, 2-D, 3-C, 4-A, 5-C, 6-B
CHAPTER 7
Answers : 1-B, 2-A, 3-B, 4-D, 5-A, 6-D
CHAPTER 8
Answers : 1-B, 2-A, 3-D, 4-D, 5-B, 6-B
CHAPTER 9
Answers : 1-D, 2-B, 3-C, 4-C, 5-C, 6-B
CHAPTER 10
Answers : 1-B, 2-B, 3-C, 4-D, 5-A, 6-A
CHAPTER 11
Answers : 1-B, 2-B, 3-B, 4-B, 5-C, 6-A
CHAPTER 12
Answers : 1-B, 2-A, 3-C, 4-D, 5-A, 6-B