Disclaimer

Established in 1996, Pru Life UK is a subsidiary of British financial services giant

Prudential plc. Pru Life UK is the pioneer and current market leader of unit-linked
or investment-linked life insurance products, and is one of the first life insurance
companies approved to market US dollar-denominated unit-linked policies in the
country. Pru Life UK is a life insurance company and is not engaged in the
business of selling pre-need plans.
Headquartered in the United Kingdom, Prudential plc has an extensive network
of life insurance and mutual funds operations around the world covering Europe,
the United States (US) and 14 markets in Asia. Its regional office, Prudential
Corporation Asia, is based in Hong Kong. Prudential plc has more than 23 million
insurance customers worldwide and manages £457 billion of assets as of 30
June 2014.
Pru Life UK and Prudential plc are not affiliated with Prudential Financial, Inc. (a
US-registered company), Philippine Prudential Life Insurance Company,
Prudentialife Plans, Inc. or Prudential Guarantee and Assurance, Inc. (all
Philippine-registered companies).
For more information: www.prulifeuk.com.ph
 PART
ONE

Objective

PART
ONE
prepare for and pass the
licensing examinations given by
the office of the Insurance
Commission (IC)

BTC 101 REVIEW 01/14/2015 version 1.1

PART PART
ONE ONE

Agenda

Morning: traditional life review

TRADITIONAL LIFE
Afternoon: variable life review REVIEW

PART PART
ONE ONE

Morning agenda Life insurance concepts

• life insurance concepts transfer of personal risk

• types of plans
pooling and sharing of risk
• riders
• insurance provisions substitutes uncertainty with
certainty

1
 PART PART
ONE ONE

Basic terms Basic terms

FACE AMOUNT
INSURED the person whose life is or amount payable to the
given protection SUM ASSURED Beneficiary

BENEFICIARY recipient of death PREMIUM amount of money paid in

BENEFICIAR proceeds BENEFICIARY exchange for protection
Y
POLICYOWNER person who owns the the written contract of
OR PAYOR Policy and pays the POLICY
insurance between the Insured
premiums and company

PART PART
ONE ONE

Insurable interest Life insurance concepts

exists if a person stands to suffer an

economic loss if the Insured dies Business uses: Other uses:
Relationships where insurable interest – keyman insurance – mortgage
exists: redemption
– collateral
– spouses, parent and child, siblings insurance
– contingency fund
– pecuniary (creditor-debtor) – estate creation
– business continuation
– business partners – estate conservation
– key person insurance

PART PART
ONE ONE

Types of premiums Modes of payment

SINGLE
PREMIUM premium paid in lump-sum
NATURAL premiums which increase
PREMIUMS as one ages
FRACTIONAL
PREMIUM premium paid more than
LEVEL BENEFICIARY once a year
premiums which remain the
PREMIUMS
BENEFICIARY same for the entire duration
of the contract ANNUAL
PREMIUM
BENEFICIARY premium paid once a year

2
 PART PART
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Factors in premium rate determination Risk selection

the process of identifying and

Interest classifying risk
Mortality factor Loading
estimates how investment earnings operating costs
many people are from collected
also known as underwriting
expected to die premiums
within a given year

guards against anti-selection

PART PART
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Risk factors Risk classification

age physical condition PREFFERED

RISK lower than usual mortality
built morals
STANDARD within expected risk or
occupation hobbies and RISK normal risk
avocations
personal history SUBSTANDARD
SUBSTANDAR higher than usual mortality
gender RISK
D
family history
RISK
residence and UNACCEPTABLE uninsurable or declined
habits
travel

PART PART
ONE ONE

Life insurance policies How does a participating plan work?

individual policies MORTALITY

SAVINGS
group
participating
DIVIDENDS Policyholders
industrial INTEREST SURPLUS
EARNINGS
participating - non participating
LOADING
temporary - permanent SAVINGS

3
 PART PART
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Basic plans Types of traditional plan

TRADITIONAL VARIABLE

PERMANENT
TEMPORARY
SINGLE PREMIUM TERM
(with CASH VALUES)
REGULAR PREMIUM a contract that pays the Face Amount
NON-PAR
LEVEL TERM LIMITED PAY only in the event of death within a
PAR
stated number of years
DECREASING TERM

WHOLE LIFE ENDOWMENT

protection
premium paying period
ORDINARY LIFE REGULAR ENDOWMENT
benefit period (upon death)
LIMITED PAY LIFE ANTICIPATED ENDOWMENT

LIMITED ENDOWMENT

PART PART
ONE ONE

Types of term plan Advantages of term plans

LEVEL TERM
PhP 5 million
• affordability
PhP 4 million

• option for renewal

PhP 3 million

PhP 2 million
• option for conversion
PhP 1 million

YEAR YEAR YEAR YEAR YEAR

1 2 3 4 5

PART PART
ONE ONE

Advantages of term plans Types of traditional plan

RENEWABILITY PERMANENT
offers protection and savings
MATURITY
option to extend the CONVERTIBILITY BENEFIT:
PhP 1 million FA=CV
contract for a specific
period without option to change to
undergoing a whole life or
medical exam endowment before
the contract expires
without undergoing a
medical exam
ISSUE AGE MATURITY

4
 PART PART
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Types of permanent plan Types of permanent plan

Insurance protection is until age 100. Insurance protection is until age 100.
WHOLE Premiums are payable until age 100. ORDINARY Premiums are payable until age 100.
LIFE Policy matures at age 100. LIFE Policy matures at age 100.

MM MM
SUM ASSURED AT SUM ASSURED
PhP 1 million
(INSURANCE PROTECTION)
A PhP 1 million AA
(INSURANCE PROTECTION)
TU TT
RI
U
TY UU
R RR
PREMIUM PAYING PERIOD I PREMIUM PAYING PERIOD II
T TT
Y YY

ISSUE AGE 30 AGE 100 ISSUE AGE 30 AGE 100

PART PART
ONE ONE

Types of permanent plan Types of permanent plan

Insurance protection is until age 100. Insurance protection is for a specified period.
LIMITED Premiums are payable for a limited period. ENDOWMENT Premiums are payable within a specified period.
PAY Policy matures at age 100. Policy matures at the end of a specified period..

M M
PhP 1 million INSURANCE PROTECTION A A
T PhP 1 million INSURANCE PROTECTION T
U U
R R
PREMIUM PAYING PERIOD I PREMIUM PAYING PERIOD I
T T
Y Y
ISSUE AGE 30 AGE 100 ISSUE AGE 30 20-YEAR ENDOWMENT AGE 50

PART PART
ONE ONE

Types of endowment plan Types of endowment plan

ANTICIPATED ENDOWMENT 60% 100%
of FA SPECIAL ANTICIPATED ENDOWMENT of FA

M
A M
INSURANCE PROTECTION T A
U PhP 1 million INSURANCE PROTECTION T
20% 20% R U
of FA of FA 20% 20% R
I
of FA of FA I
T
Y T
Y
ISSUE AGE 30 AGE 40 AGE 45 AGE 50
ISSUE AGE 30 AGE 40 AGE 45 AGE 50
20-YEAR ANTICIPATED ENDOWMENT 20-YEAR SPECIAL ANTICIPATED ENDOWMENT

5
 PART PART
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Types of endowment plan Summary

LIMITED ENDOWMENT
M COVERAGE BENEFIT CASH VALUE
PhP 1 million INSURANCE PROTECTION A
T
U TERM LIMITED PROTECTION
R
PREMIUM PAYING PERIOD I
T PROTECTION
WHOLE LIFE LIFETIME
AND SAVINGS
Y

ISSUE AGE AGE 65

PROTECTION
30 ENDOWMENT LIMITED
AND SAVINGS
10-PAY ENDOWMENT AT 65

PART PART
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Riders Riders

WAIVER OF PREMIUMS
Riders provide auxiliary benefits that TPD refers to an
basic plans do not offer. Insured shall no longer uninterrupted Once Insured is
pay premiums for his disability for not less able to be gainfully
Policy once he/she than six months employed,
becomes totally and which prevents the he/she shall
permanently disabled resume paying for
For the extra benefit, a small Insured from
(TPD). engaging in any premiums.
additional premium is added.
gainful occupation,
employment or
business for which
he was fitted by
education or training.

PART PART
ONE ONE

Riders Riders

PAYOR’S BENEFIT
Premiums shall be TWO TYPES:
ACCIDENTAL DEATH BENEFIT
waived upon
attached to • Payor’s
death or total and juvenile policies benefit for This provides
permanent death (PBD) additional cash
“double indemnity”
disability of the • Payor’s benefits if the
payor until child- benefit for Insured dies due to
Insured reaches death and an accident.
the age of majority disability
or end of the (PBDD)
premium payment
term which ever
comes first.

6
 PART PART
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Riders Riders
EXAMPLE:

TERM INSURANCE RIDER

ADB: PhP 1 million
This provides for additional benefits
on top of the basic coverage upon
death of the Insured before the end
of the term insurance period.
FA: PhP 1 million

ISSUE AGE AGE 70 AGE

30 100

PART PART
ONE ONE

Riders Riders
EXAMPLE: EXAMPLE:

10-YEAR TIR: 10-YEAR TIR:

PhP 1 million PhP 1 million

FA: PhP 1 million FA: PhP 1 milion

ISSUE AGE AGE ISSUE AGE AGE

AGE 30 40 100 AGE 30 40 100

death after two years death at age 60

death benefit: PhP 2 million death benefit: PhP 1 million

PART PART
ONE ONE

Riders Riders
EXAMPLE:
FAMILY INCOME RIDER
10-YEAR FIR:
This rider is a decreasing PhP 10,000/month
term insurance that provides
a monthly allowance in
addition to the Face Amount SA: PhP 1 million
if death happens within a
stipulated period.
ISSUE AGE AGE AGE
30 40 100
death after 1 year

7
 PART PART
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Riders Riders
EXAMPLE: EXAMPLE:
FIR:
PhP 10,000/month 10-YEAR FIR:
for nine years PhP 10,000/month

SA: PhP 1 million SA: PhP 1 million

ISSUE AGE AGE AGE ISSUE AGE AGE 40 AGE

30 40 100 30 100
death after 1 year Death at end of year 8

PART PART
ONE ONE

Riders Riders
EXAMPLE:
HEALTH INSURANCE RIDER
FIR: This rider provides It may be in the
PhP 10,000 additional benefits in form of:
per month
case the Insured • medical
for two years
suffers from expense
disability, illness or coverage
diagnosis of a dread • disability
income
SA: PhP 1 million disease.
• lump-sum
cash

ISSUE AGE AGE

AGE 40
30 100
Death at end of year 8

PART PART
ONE ONE

Riders Riders
RIDER BENEFIT CONDITION WHO’S COVERED
WP premium is total and permanent Insured
EXAMPLE: waived as it
falls due
disability

PB premium is PBD: death Payor

HIR: medical expense (attached to
juvenile
waived as it
falls due
PBDD: death and/or
total and permanent
reimbursement, disability income, policies) disability
lump-sum cash, daily hospital
ADB additional death due to accident Insured
income coverage
“principal
sum”
SA: PhP 1 million TIR additional death within the Insured
coverage specified term
FIR monthly death within the Insured
income for the specified term
ISSUE AGE 30 AGE 100 Beneficiary
HIR additional diagnosis of specific Insured
health illnesses, confinement,
benefits etc.

8
 PART PART
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Life insurance contract Life insurance contract

the Insurer agrees to pay a certain

UNILATERAL one legally enforceable VALUED amount of money (Face Amount),
CONTRACT promise CONTRACT regardless of the actual amount of
loss that was incurred
no exchange of
CONTRACT OF Insured would only accept or ALEATORY approximately equivalent
ADHESION reject the contract CONTRACT values

payment of claims depends

CONDITIONAL upon certain acts EXECUTORY promise of a benefit upon a
CONTRACT (i.e., payment of premiums) CONTRACT future occurrence

PART PART
ONE ONE

General provisions Policy provisions

 entire contract clause  reinstatement provision

required Policy imposes certain  grace period  dividend option

provisions which obligations on the  incontestable clause  non-forfeiture option
spell out and protect insurer in favor of the
the rights of Policyholders  suicide clause  transfer of ownership
Policyholders and
Beneficiaries of life  misstatement of age  settlement option
insurance  policy loan

PART PART
ONE ONE

Policy provisions Policy provisions

the process by which an insurer puts back into

ENTIRE a provision in life insurance Policies that REINSTATEMENT force a Policy that has lapsed for non-payment
CONTRACT defines the documents that constitute the of premiums
CLAUSE entire insurance contract • Fill-out an application for reinstatement.
• Pay all back premiums plus interest.
• Present satisfactory evidence of insurability.
refers to a specified period within which a • Reinstate within three to five years from the
renewal premium may be paid without date of lapsation.
GRACE penalty * The two-year contestability period will begin again.
PERIOD
(31 days from the premium due date)

9
 PART PART
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Policy provisions Policy provisions

Sum Assured is payable if insured commits suicide

provision in life insurance policies that limits the SUICIDE after two years from the issuance of the Policy or
INCONTESTABILITY company’s right to question the validity of the contract CLAUSE
CLAUSE last reinstatement.
(two years from the issuance or reinstatement of the
Policy)

GROUNDS FOR CONTESTING A POLICY: This provision describes how the Sum Assured will be
MISSTATEMENT adjusted to the amount which the premium would have
A.) fraud purchased at the correct age, if the age of the Insured
OF AGE
B.) concealment is misstated.
C.) material misrepresentation
DECLARED AGE ACTUAL AGE FA ADJUSTMENT
30 31 decrease FA
31 30 increase FA

PART PART
ONE ONE

Policy provisions Policy provisions

DIVIDEND OPTIONS

cash
POLICY a provision that grants the owner of a life
LOAN insurance Policy the right to take a loan for up
to a percentage of the Policy’s cash value. reduce premium payment
PROVISION
Death benefit payable while there is a loan: accumulate to earn interest
Face Amount - outstanding loan
buy paid-up additions

buy one-year term

PART PART
ONE ONE

Policy provisions Policy provisions

NON-FORFEITURE OPTIONS EXTENDED
TERM INSURANCE
CASH VALUE /
CASH SURRENDER
VALUE The Policyowner surrenders the
Policy for its corresponding cash ETI: PhP 1 million
value. for a shorter coverage period

EXTENDED
SA: PhP 1 million
TERM INSURANCE
Cash value is used to buy term
ISSUE AGE
insurance for the full coverage amount AGE 100
30
provided by the original Policy.

10
 PART PART
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Policy provisions Policy provisions

PAID-UP INSURANCE
(REDUCED AMOUNT)
Cash value is used to buy fully paid-up
insurance with a smaller Face Amount
than the original policy. AUTOMATIC
PREMIUM LOAN payment of an overdue renewal
premium by making a loan against
the Policy’s cash value
new SA < PhP 1 million

SA: PhP 1 million

ISSUE AGE 30 AGE 100

PART PART
ONE ONE

Policy provisions Policy provisions

TRANSFER OF OWNERSHIP TRANSFER OF OWNERSHIP

ABSOLUTE TEMPORARY
ASSIGNMENT ASSIGNMENT
an agreement under which one party
transfers some or all his ownership an assignment of a life a temporary assignment of
rights in a particular property to insurance policy under which the monetary value of a life
the Policyholder transfers all insurance as a security for a
another party Policyowner rights to the loan
assignee
Ex. Personal loan from a bank
Ex. Absolute assignment from
a parent to a child

PART PART
ONE ONE

Policy provisions Policy provisions

SETTLEMENT OPTIONS SETTLEMENT OPTIONS

INTEREST The insurer invests the proceeds of a life FIXED AMOUNT The insurer pays the Policy proceeds
insurance Policy and pays interest on and interest in a series of equal
OPTION these proceeds to the payee while the Sum OPTION installments for as long as the
Assured remains intact. proceeds last.

FIXED-PERIOD LIFE INCOME The insurer pays the Policy proceeds

The insurer pays the Policy proceeds and and interest in a series of periodic
OPTION OPTION
BENEFICIARY interest in a series of equal installments
for a specified period of time.
BENEFICIAR installments over the payee’s lifetime.

11
 PART PART
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Variable life

Variable life is a life insurance

UNIT-LINKED product where a major portion of the
policy premium is used to purchase
REVIEW units in the variable life fund
managed by the company.

PART PART
ONE ONE

Variable life Other names

P investment-linked

unit-linked

equity-linked

PART PART
ONE ONE

Comparisons with traditional life The link

The value of Policy is
• Variable life policies offer the potential for higher linked to the value
returns but at the expense of market volatility and variable contract
a higher degree of risk. of the units in the
investment fund.
• Variable life policies offer more choices in terms of
the investment fund.
units in
• The investment element of variable life insurance investment fund
is made known to the Policyholder at the outset.

• Charges levied on variable life insurance are

The value of units is
underlying
stipulated openly. linked to the value of the
investment
underlying investment.

12
 PART PART
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Types of unit-linked plans Characteristics of regular premium

pay premiums regularly

single premium variable vary the level of regular premium payments

vary the Sum Assured of the Policy

take premium holidays if funds are sufficient

regular premium variable
make full and partial withdrawal of units

make single premium top-ups

PART PART
ONE ONE

Top-ups How does variable contract work?

Single premium
PhP 10,000

Total charges
further single premiums PhP 400

used to purchase additional Net available

for investments
units PhP 9,600

Unit price
PhP 1.50

PART PART
ONE ONE

How does variable contract work? How does variable contract work?
Single premium Single premium Partial withdrawal
PhP 10,000 PhP 10,000 PhP 2,000

Total charges Total charges Unit price

PhP 400 PhP 400 PhP 2.00

Net available Net available

for investments for investments PhP 2,000 / PhP 2.00 =
PhP 9,600 PhP 9,600 1,000 units

Unit price PhP 9,600 / PhP 1.50 = Units purchased 6,400 – 1,000 =
PhP 1.50 6,400 units 6,400 units 5,400 units

13
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Investment assets Investment assets

Cash and deposits Cash and deposits

Fixed income securities • all liquid instruments that carry little or no risk that the
principal amounts invested can be lost
Shares
• highest safety; lowest returns
Common trust fund
• cash includes short-term debt instruments: also known
Mutual funds as money market instruments
Properties

PART PART
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Investment assets Investment assets

Factors that influence choice of deposits are:
TREASURY BILLS BANK ACCOUNTS
how long the funds
• short-term government • for fixed periods with funds available can remain in the
securities to borrow fixed interest rates account
money from the
investing public Examples: savings
accounts, time deposits
and offshore accounts
whether
emergency prevailing market
withdrawals are conditions
likely

PART PART
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Investment assets Investment assets

Disadvantages with bank deposits: : Fixed income securities

Disadvantages with bank deposits:
• Government bonds
1. Low-yielding in return
not a good
penalties upon • Corporate bonds
low-yielding in early or  Debenture stocks
inflation premature 2. Not a good inflation hedge
return hedge withdrawal
 Loan stocks
 Convertible stocks
3. Penalties upon early or premature
• Preferred shares
withdrawal

14
 PART PART
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Investment assets Investment assets

Fixed income securities Types of fixed income securities:

A. Government bonds
• certificate showing that the company or government
(bond issuer) has borrowed money from the • The government borrows money from the public
bondholder
• Interest payments and repayment of principal are
• return of fixed interest income and payment of principal guaranteed
at maturity
• In times of high inflation, capital can be eroded
• stress income and offer little or no opportunity for
appreciation in value

PART PART
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Investment assets Investment assets

Types of fixed income securities: Shares
B. Corporate bonds
a shareholder is a part owner of the company
1. Senior or loan stocks
• shares of all major public companies are traded
- secured loans, with collateral
on the stock exchange while private company
2. Debenture stocks shares are not
- unsecured loans ; no collateral
• can be a volatile investment
3. Convertible stocks
- can be converted to ordinary shares

PART PART
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Investment assets Investment assets

A. Ordinary 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.
Each share carries one vote at the company meetings.
Common trust fund (CTF)
Unit investment trust fund (UITF)
a pool of co-mingled funds contributed by many investors

B. Preferred shares (also a type of fixed income security)
These are shares which give the holder a right to a fixed
dividend provided enough profit has been made. This right
takes precedence over the right of ordinary shareholders to
dividends.
• managed by specialist fund managers who select the
investments
• kept in trust by a trustee who acts generally to protect the
unit-holders

15
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Investment assets How do they work?

Mutual funds
similar to that of UITFs - pool contributions from their UITFs
investors

• managed by specialist fund managers, whose function is to

buy and sell shares to make investment profits
VUL
• generally have a higher risk/reward profile than CTFs Mutual
Insurance
funds

PART PART
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Investment assets Investment assets

Properties Properties

Three types of real estate investments: Price of property depends on the following factors:

• agricultural property • quality of land as reflected on the quality and

profitability of the crops it grows
• domestic property
• location of the land
• commercial/industrial property
• value of the buildings on the land

PART PART
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Investment considerations Benefits of investing in investment-linked products

1. Pooling or Diversification
Key concepts: - wide range of investments with a small sum of money

1. investment objectives
2. funds available
3. level of risk tolerance
2. Flexibility
5. accessibility of funds - simple product designs for investment and life insurance protection
- allows the option of investment portfolio
6. taxation treatment
3. Expertise
7. investment performance - managed by professional fund managers

4. investment horizon 8. diversification 4. Administration

- relieved of day-to day administration of investments
- tracking through life company’s financial statements and financial
pages of newspaper

16
 PART PART
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Risks of investing in investment-linked products Risks of investing in investment-linked products

2. Charges
1. Investment risk - administration fee, insurance charge, fund management fees,
- death and disability benefits are dependent on sum assured
and/or value of units etc. are not guaranteed and may change over a period of
- suitable for those who can tolerate short-term fluctuations in three months
Fund Value
- not for those who want high protection and guaranteed cash and Types of charges:
maturity values
SINGLE PREMIUM: policy fee, mortality charges

REGULAR PREMIUM: policy fee, mortality charges, unallocated premiums,

full withdrawal charges

INVESTMENT MANAGEMENT CHARGES: bid-offer spread, fund management

fee

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Types of charges Types of charges

Policy fee Unallocated premiums
• typically charged as a uniform fee Allocation of premiums to purchase units is based on allocation rate.
• used to cover regular running expenses of administering the Policy Unallocated premiums are used to cover marketing and setting-up
• charged regularly expenses of the Policy.

Assurance charges/mortality charges Full withdrawal charge

• mortality • deducted when Policy is fully withdrawn for cash
• dread disease • usually applicable to policies with uniform allocation
• total or permanent disability and other benefits • used to cover initial expenses that have been incurred but yet to
be recovered

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Types of charges Types of charges

Investment management charges Fund management fee

• for investment expenses
Bid-offer spread • to provide profits to shareholders
• 0.5% - 2% per annum
• difference between offer and bid prices
amount charged depends on:
• used for marketing costs and expenses in setting-up the Policy
• market competition
• the returns expected and
• the profit requirements of the company

17
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Types of funds Types of funds

Equity fund
MANAGED FUND
• invest in a managed “basket” of assets
Fixed income or bond fund • higher proportion of assets in equities
• less investment in fixed income securities
Money market or cash fund • asset allocation depends on fund manager’s views

Balanced fund
GEOGRAPHICALLY-SPECIALIZED UNIT FUND
Managed fund • restrict investments to a particular country or region income securities
• offer exposure to different markets in different regions
Property fund • currency risk

Geographically-specialized fund

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Risk-return profile Switching

Equities
Managed x  facility for transferring from one fund to another
fund

Balanced x  limited number of switches are usually not charged

fund
Bond x  useful in retirement and education fees planning
Risk

fund
Cash x
fund
x

Return

PART PART
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Basics of computation Computing for the number of units

Php 1 million = INITIAL INVESTMENT

PhP 10.00 = PRICE PER UNIT

PhP 1 million
= 100,000 UNITS
PhP 10.00

18
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Computing for the unit price Computing for the fund value

PhP 1.5 million = INITIAL INVESTMENT

PhP 20.00 = PRICE PER UNIT

100,000 = NUMBER OF UNITS

100,000 = NUMBER OF UNITS

PhP 1.5 million 100,000.00 X PhP 20.00 = PhP 2,000,000

= PhP 15.00 PRICE PER UNIT FUND VALUE
100,000

PART PART
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Methods of computation Single pricing

SINGLE PRICING METHOD DUAL PRICING DEDUCTIONS

METHOD should client wish to get value of investment net of charges
UNIT PRICE OFFER PRICE: price used when
buying units
– buying or selling units 5% INITIAL CHARGE (IC)
BID PRICE: price used when
selling units 1.6% MORTALITY CHARGE (MC)
BID OFFER SPREAD: difference
between the offer price and bid PhP 100,000 INITIAL INVESTMENT
price
PhP 1.50 PRICE PER UNIT

PART PART
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Single pricing Single pricing

DEDUCTIONS
DEDUCTIONS
1 PhP 100,000.00 X 5% = PhP 5,000.00 IC

4 PhP 1,600.00 MC
X 1.6% = PhP 1,600.00 MC = 1,066.6666 UNITS
2 PhP 100,000.00
PhP 1.50

3 PhP 100,000.00 - PhP 5,000.00 IC = PhP 95,000.00

PhP 95,000.00 5 63,333.3333 - 1,066.6666 = 62,266.6667 UNITS

= 63,333.3333 UNITS
PhP 1.50

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Dual pricing method Important formulas

Number of units = Single premium / Offer price
Examples of transaction Price to use
Bid price = Offer price ( 1-Spread%) or BO1S

Single premium Offer price = Bid price / (1-Spread%) or OB/1S

Top-ups Offer price
Accumulation of fund = x (1 + i) n

Partial withdrawal
Full withdrawal
To pay for charges Bid price
Death benefit

PART PART
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Dual pricing method Dual pricing method

If the offer price is PhP 1.50 and the bid offer spread is 5%,
the bid price can be worked out as:
Bid price = Offer price x (1-spread%)
= PhP 1.50 x (1-5%)
= PhP 1.50 x (1- 0.05)
= PhP 1.50 x (0.95)
= PhP 1.4250
Assuming no movement in the prices and charges/ fees are deducted after
the single premium has been invested into the account, how much will the
Policyholder lose if he surrenders the Policy now?
SINGLE PREMIUM = PhP 450,000 BID PRICE = PhP 13.00
BID-OFFER SPREAD = 4% POLICY FEE = PhP 1,800
ADMIN AND MORTALITY CHARGE = 3%
Sum Assured is 200% of single premium or the value of units, whichever is
higher.

PART PART
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Dual pricing method Dual pricing method

A. OP = Bid price / (1-S%)
D. Units bought less charges:
PhP 13.00 / (1 - .04) = PhP 13.5417 33,234.85 – 1,176.92 = 32,057.93 UNITS

B. The single premium in units is:

E. Value of units if withdrawn:
PhP 450,000 / PhP 13.5417 = 33,234.85 UNITS 32,057.93 X PhP 13.00 = PhP 416,753.09

C. Less charges:
F. Policyholder loses:
Admin and MC: 3% x PhP 450,000 = PhP 13,500 PhP 450,000 – PhP 416,753.09 = PhP 33,246.91
Total charges: PhP 13,500 + PhP 1,800 = PhP 15,300
Charges in units: PhP 15,300 / PhP 13.00 = 1,176.92 units

20
 PART PART
ONE ONE

Computation of accumulation of fund over a period of time Computing for the death benefit
n
Future value = X (1+i)
Value of X after, n = years and it increases by i (interest rate)
1. Unit value plus Sum assured
Fund Value + Sum Assured
What is PhP 20.00 after 10 years if it increases by 5% annually?

Using the formula: X (1+i) n

2. Unit value or Death cover whichever is higher
Fund Value or Sum Assured whichever is higher
= PhP 20 (1+ 0.05) 10
= PhP 20 (1.05) 10
= PhP 32.58

PART PART
ONE ONE

Unethical practices Unethical practices

MISREPRESENTATION

M - MISREPRESENTATION
the act of making any false and/or misleading
R. - REBATING statements in the selling of life insurance

REBATING
T - TWISTING
K - KNOCKING the act of accepting a premium smaller than the
one stipulated in the Policy or offering anything of
O - OVERLOADING value as an inducement for the prospect to
purchase the contract

PART PART
ONE ONE

Unethical practices Unethical practices

TWISTING/
OVERLOADING
REPLACEMENT

the act of persuading a person to lapse or
surrender a Policy in order to purchase a new one
Twisting is a form of Misrepresentation.
the act of persuading a person to buy an amount
of life insurance which is beyond the buyer’s
means and which then forces the buyer to lapse
his Policy in the future

KNOCKING

the act of criticizing other agents and other life

insurance companies

21
 PART
ONE

Next steps

Licensure exams
 Test permits (Variable and Traditional)
 NBI or barangay clearance
 2 pcs. 1x1 identical pictures (Variable)
 2 pcs. 1x1 identical pictures (Traditional)
 PhP 1,010 exam fee (Variable)
 PhP 1,010 exam fee (Traditional)
 Valid ID

22
 CHAPTER ONE
INTRODUCTION

History

The first form of life insurance existed 2,000 years ago in the Mediterranean area but comprehensive
records were only kept from the 16th century onward.

There came a point in history when shipping was the main means of transportation. However, growth in
shipping was deferred due to the long distances involved and the likelihood of loss, which brought about
the development of property insurance. The fact that ships and their cargo could be insured encouraged
people to invest their money in overseas trade. Such investments helped the shipping industry to
flourish.

While the present principles of life insurance are based on accurate mathematical science, the concept
of life insurance actually started with friendly neighbors passing the hat for the family of someone who
had died. Because the problem was so great, passing the hat never came close to lifting the stricken
family’s burden.

Someone then had the idea of creating a death fund. The death fund is a pooled fund coming from
community members to take care of any bereaved family. The fund contained the following plan:

 a definite amount from the fund would be paid to the surviving members of the family
 regular contributions made to keep an adequate fund

One of the early problems of life insurance was that information was not available or sufficient to enable
underwriters to predict the probable rate of loss accurately. The subsequent and continuing
development of mortality table helped the underwriters and, later on, life insurance companies, to
predict such loss.

In 1759, the first insurance company was established in the United States and was called The
Corporation for Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed
Widows and Children of Presbyterian Ministers. This insurance company further defined life insurance
as:
 pooling of risks
 cooperative risk-sharing scheme
 group sharing of losses
 a certainty rather than an uncertainty
 family protection

Life Insurance in the Philippines

In the Philippines, life insurance companies are regulated by the Securities and Exchange Commission
(SEC) and the Insurance Commission (IC).
Since the life insurance industry is placed in a position of trust, a special law was promulgated to govern
insurance. On December 18, 1974, Presidential Decree No. 612, better known as the Insurance Code of
the Philippines, was enacted. The Code incorporated many provisions of the old Insurance Law (Act
2427).

However, because many provisions were rendered obsolete by 1978, a decree to consolidate and codify
all the insurance laws in the Philippines was passed and is now known as the Insurance Code of 1978 or
the Presidential Decree No. 1460.

In cases where there is a deficiency in the Insurance Code, the Civil Code provisions apply. Together,
these laws govern the insurance industry in the Philippines.

The Insurance Commission

The Insurance Commission (IC) is tasked with the faithful execution of all laws pertaining to insurance,
insurance companies and other insurance matters. It presently regulates thirty-two (32) life insurance
companies and is the government agency concerned with the following:
 issuance of licenses to insurance and reinsurance companies
 review of insurance policy contracts and premium rates
 examination of the financial condition of the insurance company to ensure solvency
 rendering of assistance to the public on matters pertaining to insurance

The IC’s Power of Adjudication

The IC also exercises quasi-judicial functions. It tries and decides on cases of claims involving loss,
damage or liability of amounts of up to PhP 100,000. Most of these cases are usually filed by people who
are denied of claims by insurance companies. The cases are decided upon within 90 days.
 CHAPTER TWO
LIFE INSURANCE

Definition of Life Insurance

Life insurance is a unique legal contract which, for a stipulated consideration called the premium,
insures the life of a particular person called the insured. Upon the insured’s death, the insurance
company agrees to pay a stated sum of money to the named beneficiary.

Human Life Value Concept

Dr. S.S. Heubner came up with the human life concept to demonstrate how life and health insurance
contained solutions to the problem of protecting human life values against economic loss through
death, disability and old age. Dr. Heubner stated that human life can:
 be expressed as a monetary (dollar) valuation
 determine the economic value of the person by discounting estimated future earnings used for
the family and at reasonable rate of interest
 provide a way to measure how much financial protection a family may need

Basic Insurance Terms

Insured - the person whose life is covered under a life insurance policy; the person who is given the
insurance protection

Beneficiary - the person who receives the life insurance proceeds upon the death of the insured

Face Amount - the amount payable to the beneficiary upon the death of the insured, as stated in the life
insurance policy

Premium - the amount of money that must be regularly paid to the insurance company to keep the
insurance policy in force

Policy - the written contract between the insured and the insurance company

Policy Owner or Payor - the person who pays the premium of the life insurance policy
 CHAPTER THREE
LIFE INSURANCE COMPANIES

Types of Insurance Companies

Based on Organization

Stock Companies. These companies have stockholders. They are organized to provide stockholders with
a profit.

Mutual Companies. Instead of having stockholders, these companies are owned by policyowners who
have the right to vote for directors or trustees.

Based on Insurance Policies Sold

Participating (Par) Policies. They are sold by both stock and mutual companies, which may also sell non-
participating policies. Owners of par policies pay gross premiums which are higher than the fixed
premiums paid by non-participating policy owners for the same types and amounts of insurance. Par
policies generally pay dividends if the company earns a profit. Thus, dividends are not guaranteed.

Non-participating (Non-Par) Policies. These are policies sold in which an extra safety charge factor is not
built into the premium rate. Since no extra charge is made, a return of part of the premium will not be
paid to owners of such policies. While premiums for non-participating policies are lower, these policy
owners receive no dividends.

Who Sells Life Insurance?

Usually, the buying public thinks of procuring life insurance through the purchase of an individual policy,
of whatever kind and in whatever amount desired, from a life insurance company, with the transactions
handled by an agent or a broker.

An agent is the person who has been given authority to represent the company in the following
transactions:
 describing the company’s policies to the buyer and explaining the conditions under which these
policies may be obtained
 soliciting applications for the policies
 collecting payments called premiums for policies at times
 rendering service to prospects and to owners of policies issued by the company

A contract of agency between the company and the agent clearly defines the authority of the agent.
Within the authority granted to the agent, the agent is identical with the company and makes his acts
binding on the company. Thus, a high degree of responsibility rests with the contracted agent who
represents the company.

Unlike an agent, a broker of insurance does not technically represent the company that he or she does
business with. Instead, a broker represents the client. A broker determines the kind and amount of
insurance the client needs. Then, in representing the client, the broker selects the insurance company
with which to place the business transaction. In effect, the broker is responsible to the client he
represents.

The following table illustrates the difference between an agent and a broker:

AGENT BROKER
Represents Company Client
Can be accredited
Contract With only one company broker with several
companies
 CHAPTER FOUR
PREMIUMS

The premium is very important in putting the insurance policy in force. The moment the premium is
paid, the policy owner starts receiving the protection provided by the insurance policy. However, to
continuously benefit from the policy, the owner should pay the subsequent premiums.

Basic Factors Related to the Premium

 expense
 interest
 others

Mortality Factor

Life insurance is based on the accurate prediction of mortality called the mortality factor. Going back to
the concept of the death fund, if life insurance companies were to provide an adequate fund, there
would have been a problem in predicting the number of people who would die within a year. If the
expected death figure could be determined, however, it would be easier to decide on the size of the
death fund.

At first, the community members tried to pool information on the dates of birth and deaths of the
people in the community to determine the average life span within the area. The mortality table
gradually developed over the years as more statistics were gathered. Wide cross section of data about
people and dates within a given group were used to show the probable mortality rates on the first year
of life, on the second year, the third and so on.

Today, a branch of science called Actuarial Science is devoted to developing more accurate and more
probable mortality table. Actuarial science is the exact science of getting the probability of mortality
(death) and morbidity (illness). Actuaries, or those who are knowledgeable in this branch of science, set
the premium rates and develop various insurance products.

Law of Large Numbers

The law of large numbers states that the more figures there are to study, the more the figures approach
the true probability. The following table shows the probability of getting heads and tails when tossing a
coin for the given number of trials:

NUMBER OF TRIALS HEAD TAILS

10 8 2
1,000 385 615
1,000,000 492,000 508,000
The expected or true probability is that 50% of your tosses would yield heads and the other 50% would
yield tails. Actual trials may not give equal outcomes for heads and tails. However, as the number of
trials increases, the true probability will emerge.

Data in the latest mortality table, presented in the 1980 CSO Mortality Table, were based on 10 million
lives all starting at age zero. The following table shows a simpler version of that mortality table, focusing
only on 100,000 lives belonging to ten-year age intervals from 0 to 100 years old.

NUMBER OF DEATH WITHIN THE NUMBER DEATHS WITHIN THE

AGE LIVING YEAR AGE LIVING YEAR
0 100,000 708 60 76,987 1,566
10 98,509 119 70 55,920 2,784
20 96,650 173 80 26,264 2,888
30 94,804 202 90 4,681 1,068
40 92,414 326 99 64 64
50 87,623 729 100 0 0

The table above simply states that out of the 87,623 fifty-year olds living at the beginning of the year,
729 are expected to die within the year.

Expense Factor

Just like any other business, there are also operating expenses involved in the business of life insurance.
These are reflected as loading or expense factor. Each individual premium has to carry small
proportions of the normal costs to ensure that the factor of expense is computed and built into the
policyowner’s premium rate.

The following considerations are necessary in computing the expense factor:

 premiums that are invested promptly and wisely by the Investment Department
 premium rates established by the Actuarial Department
 life insurance screening of applicants by the Underwriting Department
 commissions based on sales to be paid to agents
 company employees who earn salaries
 paperwork requiring equipment and supplies that cost considerable amount of money
 rental of buildings
 taxes to be paid

Interest Factor

When a premium is paid, it is combined with other premiums and invested to earn interest. Since the
company expects to earn interest from the combined premiums, it passes the earned interest to the
policyowner thus reducing the premium.

When considering the interest factor, the company assumes that:

 Premiums will earn a specific rate of interest.
 Earned interest will apply for one full year.
Other Factors

A glance at a life insurance rate book will show an amazing variety of premium rates. Life insurance and
premium rates have indeed branched out considerably from the basic one-year insurance agreement as
the years went by. Aside from the factors discussed in this chapter, there are other considerations in
determining the insurance premiums, namely: age, sex and insurability of the person, size of the policy,
the kind of policy—whether it is participating or non-participating—and the type of premium--whether
it is natural or level.

This chapter will focus on the difference between natural and level premiums. Participating and non-
participating insurance policies have already been differentiated in Chapter 3. The age, sex and
insurability factors will be discussed in Chapter 5.

The margin of safety of a policy is also frequently taken into consideration by most companies in
establishing gross premiums since the expense involved in issuing one large policy is less than that
incurred in issuing several small policies.

All the factors discussed so far refer to those needed in determining a basic premium rate for one-year
term insurance. A term insurance only offers pure insurance which provides a benefit only in cases of
death. If the insured dies during the term period, the company will pay the prescribed death benefits. If
he or she lives to the end of the term, however, the protection ends unless it is renewed. Term
insurance will be discussed more in Chapter 6.

Natural Versus Level Premiums

Natural Premium. This type of premium increases yearly with the rising rate of mortality. Since
insurance policy must be renewed every year, natural premium is not practical at all. The high mortality
rate in the future will even make the premium prohibitively high.

To illustrate better how the natural premiums work, consider the probability of death benefits for all
ages. A greater need for a death benefit should be expected after middle age. At the same time, an
excessive cost of insurance should also be expected after middle age. However, the person’s income
would also tend to level off or completely stop as he or she exceeds the middle age.
Consequently, there should be a way to provide death benefits for all ages at costs that each person
could reasonably pay for. This dilemma brought about the need for another type of premium: the level
premium.

Level Premium. This type of premium derived its name from the fact that the amount of premium
remains at a constant level from the beginning to the end of a policy which is in effect for a number of
years.

The illustration shows that in the early years, the level premium per PhP 1,000 of insurance coverage is
higher than the one-year term insurance rate but, in later years, when compared with one-year term
rates for these older ages, the level premium is considerably lower.

The excess premiums for the early years are put into special fund called “reserve” to help pay the
heavier mortality claims in the later years as stated in the illustration.

For instance, a client named Brian Tan takes out a policy at age 20. Even if he pays the same amount of
premium from the beginning to the end of his policy, the mortality charge on his premium will be higher
than the mortality charge on his premium at age 64.

Another example could be the case of a client named Patricia Lopez, who is 39, and her grandfather who
is 70 years old. They both have policies which were taken out with the same company at the same age.
Therefore, they have to pay the same amount of premium. However, a good part of Patricia’s payment
goes to the reserve fund. In the meantime, the extra insurance protection in her grandfather’s policy is
paid for partly by his premium and partly by the reserve accumulated during his policy’s early years.

Gross Versus Net Premiums

In computing the premiums for life insurance, actuaries first determine the net single premiums or the
amount that allows the companies to insure individuals for the entire duration of their policy contracts.
However, since not many people can pay out large sums of money for life insurance protection,
actuaries convert the net single premiums into easier-to-pay net annual premiums.
Next, actuaries take the assumed interest earnings into consideration and deduct these anticipated
earnings from the mortality cost. Afterwards, the assumed interest is subtracted from the mortality cost
to get the net premium.

Finally, the expense factor, sometimes called loading, is added to the net premium to arrive at the gross
premium.

The gross premium is the amount listed in the rate book. The following diagram illustrates how the
different factors related to premium come together to comprise the gross premium.
 CHAPTER FIVE
RISK SELECTION

The company requires making a decision when accepting or rejecting a particular risk. This decision-
making process is called underwriting.

What is Risk Selection?

As discussed in an earlier chapter, life insurance entails sharing or pooling of risks. To provide insurance
coverage on an equitable basis, insurance companies charge each insured person a premium rate
corresponding to the risks that each individual presents to the company.

The Need for Risk Selection

Anti-Selection

Life insurance companies must guard against anti-selection. Anti-Selection is the high predisposition or
tendency of individuals with impaired health or those with hazardous occupations and avocations to
purchase life insurance. Life insurance becomes a speculative purchase—a gamble in anticipation of a
shorter life expectancy—when anti-selection occurs.

Classification of Risks

Underwriting is essential in determining the degree of risk that each applicant can pose to the company.
There are four types of risks:

 Preferred or Superstandard Risk. The present condition, occupation, lifestyle and health history
of an applicant indicates a lower-than-usual mortality rate. For instance, the individual may be a
non-smoker who undergoes a regular physical fitness program. Not all companies, however,
use this type of classification.
 Standard Risk. This type of risk applies to applicants with normal mortality rate. Their current
health status or lifestyles do not present any extra mortality risk. The insurer sees no reason to
believe that these individuals will have shorter-than-average life expectancies. Most applicants
for life insurance belong to this category.
 Substandard Risk. This type of risk applies to individuals who possess more risks than usual
probably due to occupational hazards, illnesses, disabilities, or unwise habits. Consequently,
these applicants are charged with higher-than-usual premium rates.
 Unacceptable Risk. Applicants who belong to this category are declined because of the pricing of
the life insurance. It is difficult to set a proper premium for an individual who is extremely
unhealthy or engaged in some dangerous hobbies. A person with only a few months to live is
uninsurable because the premium would most likely be close to the face amount.

Sources of Information

There are several sources of information that can help in determining the risk classification. The primary
and most important source is the life insurance agent since this individual actually serves as the field
underwriter.
The following are the most common sources of insurability information:

 application form
 agent’s confidential report
 inspection report
 financial statements
 credit factors
 medical records
 attending physician’s statement (APS)
 Medical Information/Impairment Bureau (MIB)

Application Form

The application form provides information on the name, age, sex, occupation, and a brief medical
history of the applicant. These pieces of information are very helpful in determining the insurability of
the applicant.

 Age and Sex. Premium rates vary for age and sex. The lower the age, the lower the premium
rate. As for gender, females have longer life expectancies than males. Hence, a 31-year-old
female will have lower premium than a 31-year-old male. However, it has been a common
practice to charge the same premium for the base plan for both male and female.
 Avocation. Dangerous hobbies such as sky or scuba diving and parachuting pose higher risks to
insurance companies and thus call for higher premium rates.
 Medical History. The vast majority of the applicants usually pose perfectly acceptable risks at
standard rates. A small percentage of applicants, however, may have impairments and will pose
substandard or even unacceptable risks. For instance, an applicant who suffers from high blood
pressure or is substantially overweight will most likely be rated.
 Occupation. The nature of the applicant’s job is crucial, especially if it entails danger. People
whose jobs expose them to normal risks are usually insurable. However, life insurance
companies may be hesitant to insure those with extraordinary occupations. For instance, given
two applicants in the trucking industry—a driver who delivers fruits and vegetables around a
town and a dispatcher who does not drive and is involved in office duties instead—the driver
would be more exposed to hazards and would pose more risks to the insurance company than
the dispatcher.

Agent’s Confidential Report

An agent may supply additional information (i.e., supporting facts) about a client. These pieces of
information could help the underwriter analyze the applicant’s case for a more comprehensive
assessment. For example, if there is a suspicion that a client’s lifestyle may be hazardous, the supporting
facts may facilitate proper assessment of the application.
Inspection Report

Inspection report is obtained by life insurance companies from all clients who have applied for
significant amounts of insurance policies. This report contains information that can help determine the
insurability of a particular applicant.

The investigator may interview the applicant’s employer, neighbors, or associates to gather necessary
information about the following:

 habits
 character
 financial condition
 occupation
 home file
 business

Financial Statements

A person applying for a significant amount of insurance may be required to submit his or her income
statements, income tax returns and balance sheets. The amount of coverage that the applicant is
applying for should be commensurate to the proposed insured’s net worth.

Credit Report

Applicants with poor credit standing can cause an insurance company to lose money. Insurance policies
of said persons are more likely to lapse within a short period of time, or maybe even before paying the
second premium.

An insurance company loses money if a policy lapsed quickly because the money spent for acquiring the
business cannot be recovered in a short period of time. Hence it might be helpful to obtain a credit
report, which is a valuable underwriting tool, from retail merchant associations or from any other
sources.

Medical Records

Insurance companies require applicants to undergo physical examination to determine the following:

 the amount of insurance requested

 a possible physical impairment indicated in the medical history section of the
application form

Attending Physician’s Statement (APS)

If an applicant was recently hospitalized or treated in any medical or healthcare facilities, a report
stating his or her present state of health may be required from his or her attending physician.
Medical Information/Impairment Bureau (MIB)

The MIB is a non-profit central information agency which was established in Boston, Massachusetts by
life insurance companies. It provides guidelines to the underwriting process of life insurance. The
Bureau is supported by more than 700 life insurance companies.

Locally, the MIB is regulated by the Philippine Life Insurance Association (PLIA). It has twenty-six
members at present.
 CHAPTER SIX
BASIC PLANS

Life insurance contracts can be issued for individuals or groups. Individual contracts are classified into
three categories:

 term
 permanent
 annuities

Term Insurance

Some individuals choose to have temporary life insurance protection. This type of insurance only
provides temporary shelter. It is only offered for specified period such as one, five, ten, or twenty years
and up to age 60, 65, or 70 years old only. It only provides death benefits to the applicant’s
beneficiaries. It does not provide any living benefits and there is no build-up in the cash values. Hence,
term insurance premiums are very cheap and affordable.

Types of Term Insurance and Their Uses

There are two kinds of term insurance: level term and decreasing term.

Level Term. The policy owner is given protection that remains constant throughout a specified period.
Let us say a certain Anna Hocson buys a ten-year term policy with a face amount of PhP 500,000. If she
dies on the seventh year, the beneficiary will be paid PhP 500,000. If she dies on the eleventh year, the
beneficiary will be paid nothing. If she lives until the end of the tenth year, the beneficiary will also get
nothing.

Because there is no build-up in the cash value, the benefits of the term policy are lesser than those of a
permanent policy. Consequently, the premium rates per PhP 1,000 will be significantly lower. For
instance, a business executive has borrowed a sizable sum from a bank payable for five years. Since he
does not want his family to be burdened of his debt if he dies, he buys a five-year term insurance with a
face amount equal to the amount of the loan.

Decreasing Term. The payable amount to the insured decreases constantly until the end of the term. By
the end of the term period, the death benefit is reduced to zero. This term insurance can be very
practical at times when a particular need for life insurance will decrease from year to year.

For example, a client named Miguel Reyes arranges a mortgage worth PhP 2 million, which is payable for
30 years. Miguel wants a term insurance to pay off the mortgage balance in case of death. If Miguel buys
a PhP 2 million-level term policy to cover the mortgage balance, then the amount of insurance
protection for each year will be greater than what is needed. If he buys a 30-year decreasing term
policy worth PhP 2 million, he eliminates the unnecessary insurance because the policy just provides an
adequate amount to cover his decreasing mortgage.
Buying a decreasing term policy will enable Miguel to match the decreasing amount of his loan with an
appropriate protection which will also decrease over time. The premiums for this decreasing term
insurance would be less than the premiums for level term insurance.

Decreasing Decreasing
Face Amount
Mortgage Term Insurance of Decreasing Term

To further illustrate the difference between level term and decreasing term insurance, suppose that a
client named Raymond buys a 15-year level term policy worth PhP 1 million while another client named
Louise buys a 15-year decreasing term policy that is worth PhP 1 million also. If both insured dies on the
first day after their policies have been issued, Raymond’s family will be paid the same death benefit as
Louise’s family. If both insured dies ten years after their policies have been issued, Raymond’s family
will get greater benefits. If both insured dies fifteen years and one day after their policies have been
issued, both their families will no longer have anything to claim.

Provisions in Term Policies

Term policies have two important features or provisions: convertibility and renewability. Term policy
owners often renew their policies or convert them to permanent life insurance because of various
reasons.

Convertible Term Insurance

If a term policy is convertible, the policy owner can convert the policy to permanent insurance at some
point in time before the contract expires whether or not he or she is still insurable. In such case, the
policy owner does not have to show any proof of insurability.

However, giving a policy owner the right to extend his or her insurance protection even though he or
she may not be insurable poses extra risks to the insurance company. Since the extension is an extra
benefit to the policy owner, the premium of a convertible term insurance is slightly higher than that of
the non-convertible term insurance.

Renewable Term Insurance

Many term policies are renewable. Policy owners can renew their policies for an extended period of
time whether or not they are still insurable or not so long as they do this before the term period expires.

Premiums for renewable policies are slightly higher than premiums for non-renewable policies. To keep
the premium within practical bounds, a term policy can be renewable for a certain number of times only
or until a specified age. Each time the policy is renewed, the premium becomes higher until it becomes
too costly for the policy owner.
Advantages of Term Insurance

 It is affordable.
 It can be renewed.
 It can be converted to a permanent plan.

Permanent Insurance

A permanent life insurance policy combines insurance protection and auxiliary benefits made possible
by the build-up of cash value. When the owner of a permanent life insurance policy pays a premium,
part of it goes to build-up cash value. As long as premiums are paid, the cash values in a permanent
policy will increase.

The Face Amount of any life insurance policy is the amount of insurance purchased, which is written on
the first page of the policy. It is also the amount the insurance company promises to pay as death
benefit to the Beneficiaries when the insured dies while the policy is still active.

However, if the insured still lives and premiums are paid regularly, the cash value of a permanent life
insurance policy grows until it eventually becomes equal to the face amount. It normally happens at the
age of 100. The policy is said to endow or mature at this point. The policy owner will then receive the
face amount of his or her policy in cash. The cash value of a policy builds up as a result of the level
premium system.

Whole Life Policies

The most basic form of permanent life insurance is the whole life policy. Almost all permanent life
insurance contracts are modifications of the whole life policy.

Whole life policy has three distinguishing characteristics:

 Insurance protection until the age of 100. The face amount will be paid as death claim, if all
required premiums have been paid until the time of death and the insured died before the age
of 100.

 Premiums payable until the age of 100. Level premium installments extend from the date of
purchase to age 100.

 Endowment at the age of 100. The cash value assigned to each policy grows steadily and, if
premiums are paid to age 100, the cash value will then be equal to the Face Amount. The Face
Amount is paid to a living policy owner at age 100 as an endowment.
 protection until the age of 100

premium-paying period until the age of 100

endowment at the age of 100

WHOLE LIFE POLICIES

The age 100 is significant in life insurance computations because it is assumed that every insured will be
dead by the age of 100.

Although policy owners can surrender their policies, take the cash surrendered values, and end their
insurance protection before the age of 100, they have the privilege of paying premiums until the age of
100 and can keep their policies in force.

Advantages of the Whole Life Policy

 Good protection. Compared to other permanent insurance plans, whole life policy provides the
largest amount of insurance protection for the smallest premium payments.

 Good cash value growth possibilities. Although whole life policy emphasizes protection more
than cash value, the cash value increases steadily. It is the level premium concept which makes
the living benefits of life insurance possible.

 Option to change plan. The whole life policy may be purchased when the policy owner needs
insurance protection the most. The policy owner can later change his or her plan to any other
type of permanent policy which has greater emphasis on cash value, if desired. The policy can be
converted without showing proof of insurability.

 Flexible. Some types of cash value policies and insurance protection end before the age of 100.
However, insurance is very often still needed to offset the costs of death. With whole life policy,
the policy owner can either keep the contract active, if desired, or terminate it earlier. When the
policy is ended, the policy owner may use the cash value as a retirement fund.

Limited Pay Life Policies

Limited pay life policies appeal strongly to many prospects, especially to those who prefer to confine
premium payments to their highest earning years. Like the whole life policy, a limited pay life also has
the following features:

 insurance protection until the age of 100

 endows at the age of 100
 Limited pay life policies give insurance protection until the age of 100.
 Limited pay life policies endow at the age of 100.
However, unlike a whole life policy, a limited pay life policy has premiums that are payable for a limited
time. Some of the more common limited pay life policies are life paid up at age 60, life paid up at age
65, 10-pay life, 15-pay life; 20-pay life, and single premium life.

Some of the more common limited pay life policies are the following: life paid up at age 60, life paid up
at age 65, 10-pay life, 15-pay life; 20-pay life, and single premium life.

protection until the age of 100

limited premium-paying period

endowment at the age of 100

LIMITED PAY LIFE POLICIES

With limited pay life policy, the premiums are higher because they are squeezed into shorter paying
periods. Consequently, the shorter the paying period, the higher each installment becomes. Since a
portion of each premium goes into a policy reserve, when the premium-paying period is shortened and
each individual payment is increased, a greater amount is credited to the cash value. Hence, the cash
value builds up faster.

If you will recall, a portion of the premium goes into a policy reserve. Thus, when the premium-paying
period is shortened and each individual payment is increased, a greater amount is credited to the cash
value. The cash value builds up faster.)

Endowment Policies

Endowment policies are ideal for those who want to have protection and build up the cash value rapidly.
This cash value can be used for a definite purpose such as retirement or education. It can also be used to
cover the premium in case the policy owner cannot afford to pay his or her dues anymore.

Furthermore, in an endowment policy, the policy owner is being paid the face amount at a specified
time or age. It endows before the age of 100. It also provides insurance protection to the time of
endowment and protection ceases with the termination of the policy.
 protection to end of period

premium-paying period to end of period

endowment at end of period

Start of period End of period

ENDOWMENT POLICIES

Most of endowment policies adhere to the characteristics above. However, there are some that vary in
the premium paying periods and the time of endowment.

 Limited Endowment. This type of policy endows at the end of a specific period while the
premium paying period ends before the end of the policy period. For instance, if a client buys a
20-year endowment policy at age 60, that person has to pay premiums for twenty years and will
receive endowment when he or she reaches the age of 60.)

 Anticipated Endowment. With this policy, the client does not have to wait for the maturity date
of the endowment before receiving a portion of the face amount. For example, a client will
receives 20% of the face amount 15 years before maturity date, another 20% 10 years before
and another 20% five years before. At maturity, that person will receive 60% of the face
amount. For Special Anticipated Endowment, the policy owner will receive 100% of the face
amount at maturity aside from the three payouts at 20% each.

Following is a chart showing the types of permanent plans and the policies that fall under them.

PERMANENT INSURANCE

WHOLE LIFE ENDOWMENT

ORDINARY LIFE LIMITED PAY LIFE REGULAR

LIMITED

ANTICIPATED

Only permanent insurance policies can be participating policies.

Other Types of Permanent Insurance

In the 1970s and the 1980s, inflation rate was high so interest rate on savings accounts and consumers
soared as well. Cash values of whole life policies were earning investment returns at rates much lower
than the rates that savings accounts and other investment vehicles could earn. To address the need for
more responsive insurance products, insurers began to market products that reflected current
conditions in the financial market-place.

Universal Life Insurance

Universal Life insurance is a form of permanent life insurance that has flexible premiums and face
amounts and is unbundling of the pricing factors. As earlier discussed, whole life and endowment
insurance policies state a premium that must be paid to keep the policy in force, The gross premium, as
discussed in the earlier section, combines the three pricing factors (mortality, interest and expenses)
while universal life policies list them separately.

Whole Life and Endowment insurance policies state a premium that must be paid in order to keep the
policy in force. This gross premium, as discussed in the earlier section, combines the three pricing
factors (mortality, interest and expenses) while universal life policies list them separately.

Thus, a universal life policy focuses on the following:

 mortality charges that will be applied periodically

 interest rate that will be credited periodically to the policy’s cash value
 the expense charges that will be applied

Mortality Charges. The mortality charges pay for the cost of the life insurance coverage. The amounts
are based on the insured’s risk classification. Typically, mortality charges increase every year as the
insured ages. Universal life policies guarantee that the mortality charge will never exceed a stated
maximum amount.

Interest. A universal life policy guarantees that the insurer will pay at least a stated minimum interest
rate on the policy’s cash value each year. If economic conditions warrant, the insurer will pay a higher
interest rate.

Expenses. Each universal life policy lists the expense charges that the insurance company will impose to
cover the costs it incurs to administer the policy. These charges include:

 a flat charge on the first policy year to cover sales and policy issue costs
 a percentage of each annual premium to cover expenses
 a monthly administration fee
 specific service charges to cover changes, cash withdrawals, and policy surrenders
Flexible Face Amounts

At the time a universal

Option A: life policy is purchased, the policyowner specifies the policy’s face amount and
decides whether the death benefit amount will be =level
Death benefit Face(Option
AmountA) or vary with changes in the policy’s
cash value (Option B). Net Amount at Risk = Death Benefit – Cash Value

Option B:
Death benefit = Face Amount + Cash Value
Net Amount at Risk = Face Amount

After the policy has been in force for a specified time, the policy owner can request for an increase or a
decrease in the policy’s face amount. An increase will require evidence of continued insurability while a
decrease would require that the change does not cause the policy to lose its status as an insurance
contract.

Flexible Premiums

The policy owner is allowed to determine, within certain limits, the amounts to pay for the initial
premium and for each subsequent renewal premium. Maximum limits, though, are imposed on the
amounts of initial and subsequent premiums to ensure that the policy will maintain its status as an
insurance policy.
 CHAPTER SEVEN
RIDERS

Riders provide auxiliary benefits which basic plans do not offer. For the extra benefit, a small amount of
additional premium is sometimes added. Most life insurance companies even have variations for the
same riders.

Waiver of Premium

Some companies include this clause as a standard part of the contract with the cost built into the overall
premium. In other companies, waiver of premium rider may be added for a small amount of additional
premium.

For the waiver to take effect, the company should specify that the disability is total and permanent.

Total and Permanent Disability is a condition of uninterrupted disability for not less than six months
which prevents the insured from engaging in any gainful occupation, employment or business for which
he or she is fitted in terms of education or training. If the company determines that the insured is totally
disabled, the policy owner can forget about paying premiums.

Before premiums are waived, there is a six-month waiting period. Premiums that fall due during this
waiting period have to be paid. However, if any premiums were paid during the waiting period and the
disability continues through the end of the period, premiums will be refunded. From then on, premiums
will be paid by the company. If the insured gets well and is able to go back to work, he or she as a policy
owner must resume paying for the premiums. The policy remains in force while cash values and
dividends (for participating plans) continue to increase.

Payor’s Benefit

The payor’s benefit is attached to a juvenile policy and is a type of Waiver of Premium rider. When a
payor dies or becomes totally and permanently disabled, premiums will be waived up to the policy
maturity or up to a specific age (usually age 25 years old) of the child, whichever comes first.

There are age limits that apply to both the waiver of premium and the payor’s benefit. In most
companies, the benefits are no longer made available when an applicant reaches the age 50 or 55 years
old. Likewise, the said benefits are removed at a specified age when they are written into the policy
before the insured reaches the age limit.

Accidental Death Benefit

The accidental death benefit adds a block of special insurance to the face amount of the base policy and
is commonly referred to as double indemnity. The extra insurance is like term insurance in that it does
not build cash value.
The insurance company pays an additional amount, referred to as principal sum, if the insured dies due
to accident and the accidental death is strictly defined. The accidental death benefit, however, does not
include accidents resulting directly or indirectly from any ailment or physical disability of the insured.

The extra proceeds are paid if the insured dies of a bodily injury from an external, violent and purely
accidental cause and if death occurs within a specified number of days (usually 90 days) after the injury.

Exclusions. The following are some causes of death that might be construed as accidental as specifically
excluded by this rider:

 sickness
 poisoning
 suicide
 gas inhalation
 warlike/combat activities
 committing a crime
 some aviation activities

Term Insurance Rider

Term insurance can be attached to a basic permanent plan to provide additional coverage at desirable
rates. A common Term Insurance Rider (TIR) is a ten-year term insurance.

For instance, a prospect agrees that he needs PhP 5 million in coverage but cannot afford a permanent
plan with that face amount. The agent supplements the base plan with the TIR. The agent can have
PhP 3 million in coverage under a Whole Life policy and attach PhP 2 million as TIR for ten years. Hence,
the prospect is covered amply while he needs the protection the most. After ten years, the client’s
coverage would be reduced to PhP 3 million.

Guaranteed Insurability Option

Young people may not be able to afford as much life insurance as they need. Having just started to earn
or to acquire assets such as a new home, adequate amounts of insurance are seldom possible. However,
since earnings increase along with family responsibilities, it may be impossible for people to get
additional insurance maybe because of impaired physical conditions.

To resolve the issue, a lot of life insurance companies make it possible for people to buy additional life
insurance at stated future intervals. This benefit comes in different titles, namely:

 Guaranteed Insurability
 Guaranteed Issue
 Guaranteed Purchase
While there may be slight variations among the plans offered by different companies, the insurance
plans generally adhere to the following essential features:

 For an extra premium of modest amount, the guaranteed insurability rider is attached to new
permanent life insurance policies.
 The rider permits the insured to purchase specific amounts of additional insurance of the same
kind at stated future ages.
 Such purchases are available at standard attained-age rates without evidence of insurability.
 The number of available option purchase dates depends on the insured’s age at the time he or
she purchased the original policy. For example:

Original Purchase Age Number of Purchase Options Ages when Options are
Available
0-24 6 25,28,31,34,37,40
25-27 5 28,31,34,37,40
28-30 4 31,34,37,40
31-33 3 34,37,40
34-36 2 37,40
37 1 40

 The amount of additional life insurance that can be purchased is limited.

Option dates may be advanced in consideration of events such as a birth of a child or marriage. Thus, if
the insured is now 26 years old and has given birth, she may exercise her right for additional coverage
that she should have availed of at 28 years old.

Family Income Rider

A decreasing term insurance may be attached as a rider to a permanent plan. It generally provides a
monthly allowance in addition to the face amount up to the end of the decreasing term insurance
period.

For example, a client named Andres Jacinto has a PhP 2 million-face amount of a Whole Life plan. He
can have an additional ten-year Family Income Rider attached to his base plan that would provide his
family with a PhP 20,000-monthly allowance from the time of his death until the end of the decreasing
term insurance period.

Health Insurance Rider

Some companies may offer riders that give benefits in the event of some disability, illness or diagnosis of
some dread disease. They may come in the following form:

 medical expense coverage

 disability income to cover the financial loss of being unable to work
The above-mentioned forms are simply variations of basic health insurance plans which will be
discussed further in a later chapter.
 CHAPTER EIGHT
THE LIFE INSURANCE CONTRACT

The life insurance policy is a legal contract between the two parties of the contract: the policy holder
and the life insurance company. Since the company is bound by all promises in the policy if a contract is
actually in force, it is important to know the type of contract, the manner by which the contract
becomes effective and the effectivity date of the contract.

Unique Characteristics of a Life Insurance

Unilateral Contract

The contract only involves the enforceable promises of one party—the insurer. The policyowner makes
no promise to pay the premiums. If premiums are paid, the insurer has to accept the premiums and
meet his or her full obligation under the contract.

Contract of Adhesion

All provisions in a life insurance contract are determined by the life insurance company. The applicant
only has to accept or reject the contract. If the applicant accepts the contract, he has the obligation to
adhere to the terms of the contract.

Conditional Contract

The obligation of the insurance company to pay claim depends on the performance of certain acts by
the insured or on other factors such as the payment of premiums or furnishing a proof of death.

Valued Contract

The policyowner agrees to pay a certain sum of money (the premium) which has no direct relationship
to a potential monetary loss. If the insured dies, the face amount of the policy will be paid as a death
benefit, whether only one or more than one premium has been paid.

Aleatory Contract

There is no exchange of approximately equivalent values between the parties of a life insurance
contract. It is always possible for the beneficiary of the insured to receive much more than was paid in
premiums.

Executory Contract

The insurance contract promises a benefit based on a future occurrence. If there is no future loss as
stipulated in the contract, there will also be no payment of benefits.
Legal Capacity

Both parties in the life insurance contract–the life insurance company and the policyowner—must have
the legal capacity to enter into a contract.

A life insurance company has the legal capacity to enter a life insurance contract if it has the following
qualifications:

 registered with the Securities and Exchange Commission (SEC)

 accredited with the Insurance Commission (IC)
 has a minimum capitalization of PhP 100,000,000

The policyowner, on the other hand, has the legal capacity to enter into a life insurance contract if he or
she possesses the following:

 has sound mind and body

 is of legal age (18 years old)

Insurable Interest

Usually a policy is owned by the person who is insured under the policy. A person always has an
insurable interest in himself or herself. However, a person will sometimes buy a policy that insures the
life of someone else. This can only happen if there is an insurable interest between the policyowner and
the life insured. There should also be an insurable interest between the insured and the named
beneficiaries.

Insurable interest exists when the owner has a reasonable chance of suffering financial loss if the
insured dies. Various relationships such as those established by blood, marriage or business
automatically create insurable interest. Although insurable interest does not have to exist throughout
the duration of the policy or at the same time of the claim, it should have existed at time the policy was
issued.

Insurable interest may exist given any of the following relationships:

 ties of love and affection between spouses, parent and child, siblings, etc.
 creditor-debtor relationship (pecuniary)
 employer-employee relationship
 business partners

Representations and Warranties

The statements made by the applicant influence the life insurance company’s decision whether or not to
accept certain risks. Therefore, the person applying for insurance has the duty to supply all the
necessary information for the insurer to accurately assess the risk that the applicant poses to the
insurer.
Certain documents like this information may be given orally and voluntarily or may be written down as a
response to questions asked in an application from. However the information is communicated, such
information forms the basis for the acceptance or rejection of the contract as it describes and defines
the risk that will be assumed by the insurer. Consequently, statements made are presumed to be
representations. A representation of material facts has to be substantially true.

Representations may qualify as implied warranties. A warranty is a statement that must be literally true.
It must be strictly complied with (as in a promise) and should expressly be written in the policy.

Should the representations or statements made by the applicant turn out to be false or do not comply
with the facts, the insurance company will have to consider whether or not the statements have any
bearing on the issuance of a policy. Should the statements affect the policy, they become material
representations.

For instance, an applicant stated that he had a doctor’s visit last year for the treatment of his left ear
when, in fact, it was his right ear. This is considered a substantially true statement or a representation
that does not have any bearing on the company underwriter’s decision to issue the policy for the said
applicant. However, if the doctor’s visit was for a heart ailment but the applicant declared it to be for
the treatment of his ear, said statement becomes a material representation.

Representations are mere inducements to the contract. Warranties form part of the contract and are
presumed to be material.

Offer and Acceptance

For the contract to be valid, there must be an OFFER and an ACCEPTANCE. One party must make an
offer and another party must accept that offer to form a legal contract.

Depending on the varying circumstances under which a life insurance contract is formed, one of the
following scenarios may happen:

 The person applying for insurance may make the offer with the company accepting the
applicant’s offer, or
 The company may make the offer with the applicant accepting the offer.

It does not really matter who makes the offer and who accepts it. What is more essential is when the
offer and the acceptance take place as these determine when a contract is formed.

Assuming that an agent has persuaded a client named Teresa Villanueva to apply for a PhP 1 million
policy. The client fills out the application, signs it and promises to pay the premium when the newly
issued policy is delivered to her. In submitting the application without the premium, Teresa is not
making an offer. She is simply submitting the required information for consideration and is actually
asking the company to make an offer. If the company issues the policy at standard rates, such issuance is
considered an offer and, to form a contract, Teresa should accept it it by buying the required premium.

In another scenario, assume that Teresa submits the application with a premium. Upon receiving the
premium, the agent hands Teresa the receipt attached to the bottom of the application. In this case, a
signed application with premium paid places the coverage in effect contingent upon certain conditions.
Conditional Receipt

The receipt attached to the bottom of the application that the agent handed to Teresa is the Conditional
Receipt. When the agent hands it to the client, the agent can say:

“You are covered now (or when a medical examination is completed, if one is needed) provided the
company finds that as of now (or at the time of the medical exam) you qualify for the policy as it is
applied for. If you do qualify, you don’t have to wait until a policy is issued and delivered. You have
insurance protection immediately or upon completion of the medical examination.”

In this case, offer and acceptance requirements are completed when one of the following conditions is
met:

 the application is signed and the premium paid; or, if later,

 when the application passes any required medical examination

With the conditional receipt, the applicant and the company have formed a conditional contract—a
contract that is contingent upon conditions that existed at the time the application was signed or when
any later medical exam was completed.

When a qualified applicant pays the first premium right away, the risk is taken from that person’s
shoulder and is now assumed by the company. The company’s only requirement is that all the facts
submitted and all investigation results are such that the company normally would have issued the policy
as applied for.

Another case may be that Teresa signed the application, paid the first premium, and passed a medical
examination required by the company. No conditions were existent that would have caused the
company to decline the offer. If Teresa becomes seriously ill two days later, the policy will be issued just
the same. If Teresa dies in an accident on the succeeding week, before the policy is even printed, the
death benefit would still be paid. If she does not die, but is seriously injured such that she is no longer
qualified for the policy applied for, issuance of the policy will be unaffected.

Another example would be that on May 5, a client named Claire Santos buys a PhP 2 million-policy from
an agent and pays that agent the PhP 23,000 annual premium based on the standard rate. Claire takes a
medical examination the same day. On May 8, while going down the stairs, Claire slips and dies at once
as a result of a skull fracture. On May 10, the company receives the application, premium and medical
report. The medical report shows that Claire’s blood pressure was sufficiently high to put her in a
substandard risk class requiring an extra premium of PhP 4.00 per PhP 1,000 on the policy applied for.
The policy would have required a PhP 31,000 premium, not PhP 23,000.

Since Claire has died already, the company’s liability with respect to Claire Santos’ beneficiary would be
the following:

 PhP 23,000 insurance worth of premiums would have been bought at the substandard rate
 return of the PhP 23,000 premium
 payment of the PhP 2million death benefit
In the Philippines, there is a Binding Certificate that states a maximum amount payable to the insured or
the policy’s face amount, whichever is lower.
 CHAPTER NINE
POLICY PROVISIONS

The policy which a company sells provides opportunities for its prospects and security for its
policyowners. It is a fascinating document in which the broad principles of life insurance focus on a
person’s life.

The life insurance policies of different companies come in a variety of sizes, shapes and colors.
Regardless of language or makeup, each policy contains a similar series of provisions that set forth the
obligations of the company and the policyowner. Every clause is there for a good reason. These clauses
are required by law to protect the policyowner and the beneficiaries.

Life insurance provisions are segregated into three distinct categories:

 formal provisions
 living options and benefits
 death and disability options and benefits.

Who is favored under a life insurance contract?

As mentioned previously, the two parties involved in an insurance contract are the insurance company
and the policyowner.

The company promises to pay all the benefits of the contracts while the policyowners agree to pay the
premiums to keep the policy in force. However, the company cannot compel policyowners to keep on
paying premiums. The policyowners can stop paying any time. Nonetheless, the policyowners have the
right, within certain practical limitations, to ask the company to amend their policies and the company
will do everything it can to make sure that the policyowners’ wishes are granted. It is apparent then that
a life insurance policy is a unilateral contract that favors the policyowners.

If during a limited period after the policy is issued (usually two years), any facts come to light that
originally would have caused the company to reject the application or issue a modified contract, the
company has the right to cancel or amend the existing policy.

Policy Provisions that are Focused on the Contract Itself

The following policy provisions are focused on the contract itself rather than on any of the benefits. The
provisions spell out the obligations of both the insurance company and the policyowner.

Entire Contract Clause

This provision makes two important statements to protect the policyowners and their beneficiaries.

 The policyowner is assured that every word of the contract is contained in the contract. The
contract consists of the policy and the attached applications including a report of physical
 condition. Since all the company’s obligations and all the policyowner’s rights are written down,
the contract cannot be affected by later changes in company practice.
 The company accepts the applicant’s statements as representations which means that, to the
best of the applicant’s knowledge, the statements are true.

Even if the statements are found to be untrue, the contract may still hold. The company would have to
prove that it relied so heavily on an untrue statement that it otherwise would not have issued the policy
or would have issued it with modifications.

Insuring Clause

One of the most important clauses in a life insurance policy is the insuring clause. It is usually the first
clause in a life insurance contract, appearing on the face of the policy.

While wording may somehow vary from policy to policy, the insuring clause in essence states: The
insurance company for a certain sum of premium promises to pay, upon death of the insured while the
policy is in force, the face amount of the policy as a death benefit to a named beneficiary.

The Face of the Policy

The amount of information on the face of the policy will vary from company to company but, generally,
the following data are found on the face of the policy:

 name of the insured

 face amount/sum assured
 beneficiaries
 when the company will pay the benefits
 policy number
 date policy was issued
 signatures of certain company officials

Sometimes, the face of the policy can have additional information such as the following:

 premium to be paid by the policyowner

 date when this premium is to be paid
 notation of any added benefits
 extra premium on these added benefits (if any)

The insuring clause states that the company promises to pay—not perhaps nor maybe nor if economic
conditions permit or if the courts say so.

The insuring clause also states that the company will pay a specified amount of money. Even though
there is recession, or the stock market is off, or the policyowner died early, or that he has just paid one
or two premiums, the company will pay the guaranteed amount.
Ownership Provision

While the insured is usually the owner of a life insurance policy, it is desirable in some cases to place the
ownership in the person of a third party. This is called a three-party policy, wherein the insurance policy
is owned by the insured, the insurance company and the third party.

Policyowners have valuable rights under the insurance contracts and the ownership provision lists those
rights as follows:

 assign, transfer, or have their policies amended

 change the beneficiaries
 exercise every option and privilege provided in their contracts or allowed by company practice

They also have full right to the cash value and dividends, if any, under their policies. They may also
transfer these rights if they so desire.

Premium Payment

The premium clause tells whether premiums will be paid annually, semi-annually, quarterly, or monthly.
On any policy anniversary (or more often if the company rules permit) the policyowner may switch from
one payment plan to another, provided the payment is not less than the minimum permitted by the
company for that payment plan.

All premiums are payable in advance. The first premium is due on the day the policy is issued. The next
premiums are due at the end of each period for which the preceding premium was paid.

The first premium is generally paid to the agent at the time of the application. If it is not paid on that
day, then it must be paid at the time of policy delivery. If the policyowner pays his or her annual life
insurance premium on the day it is due, he or she has paid up his or her policy for the next twelve
months.

The insuring clause states that the company will pay a guaranteed amount of money. There are
conditions or qualifications surrounding this guarantee as long as the policyowner pays the premiums.
The policyowner binds the company to its promise through payment of the premiums.

Although the required premiums are stated in the premium clause, the payment of premium is not
binding on the policyowner. He or she can stop paying the premiums anytime.

Grace Period

If a policyowner neglects to pay his premiums on the due date, the grace period protects the policy from
lapsing. In the early days of life insurance, policies would lapse if premiums were not paid by noon on
the day they were due. Today, policyowners are allowed a grace period of 30 or 31 days. Policyowners
may keep their policies if they pay their premiums anytime during the grace period.

If an insured dies during the grace period and the premium has not been paid, the premium due is
deducted from the benefits paid to the beneficiary.
 FACE AMOUNT – UNPAID PREMIUM = NET PROCEEDS

A policyowner may request for an extension of the grace period but must make this request in writing
before the grace period ends. The extension runs for another thirty days.

Premium Loan

No life insurance company would want a policy to lapse any more than an owner would. To prevent this
from happening, a premium loan provision is inserted in their contracts. This loan is also known as the
Automatic Premium Loan (APL).

When the policyowner overlooks paying the premium during the grace period or is temporarily short of
funds, the company takes enough out of the cash value to pay the premiums. Hence, there is a loan
against the policy. After a time, interest on the loan is also deducted from cash values.

If later on the premiums are not paid, the same procedure is repeated until the cash value of the policy
is exhausted. Once cash values are exhausted, the policy shall no longer be in force.

Suicide Clause

If an insured takes his or her own life, and if the policy has been in force for a stipulated period of time—
which is usually two years but can also be one year—the company will pay the full proceeds, just as
death were from a natural cause.

However, if suicide takes place within the stipulated period, the company will pay the beneficiary not
the regular death proceeds but a refund of all the premiums paid by the policyowner.

Period A: Usually two years Period B

POLICY ISSUED

If the insured commits suicide in Period A, the beneficiary will get a refund of premium. If the suicide
occurs in Period B, the beneficiary will get the proceeds of the base plan.

This time period protects the company and its policyowners against the kind of individual who might buy
a large policy with the deliberate intent of committing suicide to pay off a debt or provide financial relief
to his or her heirs named as beneficiaries. Because of the natural instinct of self-preservation, most
courts will assume that death was unintentional unless there is strong evidence to the contrary.

Thus, although there may be suspicion of suicide, the company must prove beyond doubt or else pay
the beneficiary the full proceeds of the policy.
Incontestable Clause

When policyowners buy life insurance, they are asked important questions about their health, habits,
occupations, family medical histories, and other information about themselves. Most applicants answer
these questions as honestly as they can but memories are sometimes faulty. The life insurance company
also seeks additional information from other sources. So, even after a contract is in the policyowner’s
hands, he or she may worry about some ghost of the past or a newly uncovered fact that might cause
the company to protest paying the insurance proceeds.

Though the company has the right to question the statements in any application, the contestable clause
sets a limit to the length of time the company can hold such right.

Contestable Period
POLICY ISSUED (usually two years)

An insurance company cannot contest the claim beyond this two-year contestable period unless it can
show gross fraud on the part of the client.

Misstatement of Age

The incontestable clause bars the company from protesting payment of the proceeds after the
contestable period has expired. However, the company can make a compensation adjustment at any
time if the insured has given an incorrect age because the age of the insured is of basic importance in
determining the correct premium rate for life insurance. The same holds true if there was a
misunderstanding about the insured’s sex as this would have resulted in an incorrect premium for the
policy.

If there has been a misunderstanding about the applicant’s age or sex, the company would be acting on
wrong information in setting the premium rate for the policy. Thus, when the company learns after a
policy has been issued that the wrong age or sex was used to establish the premium, an adjustment
must be made either in the premium rate or in the amount of insurance protection.

Consider the following when an error in age or sex is discovered at the death of the insured (and
assuming a female premium rate is lower than the premium rate for a male). If the insured was younger
than the age shown in the policy or is actually a female instead of a male, the amount of proceeds is
increased to the amount the premium would have been bought at the correct age or sex. If this happens
while the insured is alive and the policy is still in force, the company may do either of the following:

If the insured were younger than the policy shows or were a female instead of a male, the amount of
proceeds is increased to the amount the premium would have bought at the correct age or sex.
If this happens while the insured is alive and the policy is still in force, the company may either:

 correct the premium by adjusting it downward and by refunding in cash any amount due the
policyowner because of premium overpayments; or
 correct the amount of insurance protection by adjusting it upward in line with the amount of
premium the policyowner has been paying

If the insured was older than the age shown in the policy, or is actually a male rather than a female, the
amount of proceeds is decreased to the amount the premium would have been bought at the correct
age or sex. If this happens while the insured is still alive and the policy in force, the company may do
either of the following:

 suggest that any shortage of cash due to premium underpayments be made up by the
policyowner and pay, thereafter, a higher premium, or
 change the amount of insurance protection by adjusting it downward in line with the amount of
premium the policyowner has been paying

Assignment

A life insurance policy is an asset. Since it is the property of the policyowners, they can give their
respective policies away. If they wish to secure loans, the policyowners can temporarily assign their
policy to the lender as security for the loan. The policy is said to be assigned in this case.

The assignment clause sets forth the procedure of assigning one’s policy. The life insurance company
should be notified of any assignment and the company will accept the validity of the assignment without
question.

The recipient of a policy is called the assignee. For example, a client named Chris Bengzon gives a life
insurance policy to a church as a donation, the church becomes the assignee.

Policy Loan

Insurance laws require cash value life insurance policies to include a policy loan provision. Within
prescribed limits, policy owners may borrow money against their policies if they wish to do so.

The amount of the loan should not exceed the policy’s cash value. Policyowners may repay the loans at
any time. If the loan is unpaid at the death of the insured, loan balances and any interest due are
deducted from policy proceeds at the time of claim settlement.

Policyowners have to pay interest on their loan even if they are borrowing their own money because
cash values left with the company earn investment interest. The company depends on these earnings
when setting the premium rate. Cash values in the policyowner’s hands, in contrast, do not earn interest
and carry certain amount of handling costs. Consequently, charging interest is fair to the insured, the
company and the other policyowners.
Dividend Options

As explained earlier, dividends are paid on participating policies. At the end of the year, the company
issuing participating policies looks over the year’s operations. Surplus earnings can result from any of
the following scenarios:

 fewer claims than anticipated

 better investment earnings than expected
 less expenses than estimated

The company can then return part of the policyowner’s premium. Such payments are called dividends.

Because so many things affect the amount of the dividend, dividend amounts will vary from year to
year. Dividends usually start at the end of the first or second policy year and the dividend provision tells
the policy owners when they can begin receiving them.

Policy owners may choose from any of the following dividend options:

 First Dividend Option. Policyowner pays dividends in cash.

 Second Dividend Option. Policyowner uses the dividends to help pay premiums.
 Third Dividend Option. Policyowner leaves the dividends to accumulate with the company and
earn interest.
 Fourth Dividend Option. Policyowner uses dividends to purchase paid-up insurance bonus
additions.
 Fifth Dividend Option. Policyowner may buy yearly renewable term insurance with any extra
cash remaining on deposit with the company and earning interest at a rate to be declared by the
company from time to time. This type of dividend option has been introduced only recently.

Change of Policy

Sometimes policyowners may want to change their policies because of one of the following reasons:

 They are enjoying an increase in their income and can afford higher premium policies that will
accumulate more cash value; or
 They are finding it too difficult to meet their present premiums so they want to change their
policies with lower premiums.

A change of plan is only possible for permanent plans. It is always desirable to keep policyowners
satisfied with their life insurance so the company will do its best to make any change of plan, if possible.

If the policyowner wishes to switch from a low premium to a high premium permanent policy, there
would be no hesitation on the part of the insurance company. The previous policy has built up reserves
and the collection of a higher premium would only serve to increase the policy’s reserve.

If, however, the client wishes to switch to a lower premium plan, the company may request for proof of
insurability.
Non-Forfeiture Options

As long as policyowners pay premiums and there are no questions raised during the contestable period,
the company is contractually and unavoidably bound to meet its obligations. Should the policyowners
decide to break these contracts and quit paying premiums, however, they can opt for any of the
following strategies:

Cash Surrender Value

In a permanent life insurance policy, the amount that is available to the policyowners to cash in is called
the cash value of the policy. A policyowner can claim an immediate payment of cash equal to the cash
value.

If the policyowners prefer to receive their cash value as income payments—an advantage for those who
have reached retirement age--they may choose to apply one of the settlement options to the cash
value. This topic will be discussed in a later section.

When the cash surrender value is paid out or if a settlement option is applied, the insurance contract
stops completely. When there is still a need for insurance, surrendering a policy is a drastic and final
action. There are other options that keep part of the policies alive.

Reduced Paid-Up Insurance

Reduced Paid-Up (RPU) is sometimes referred to as paid-up insurance. If the policyowner finds himself
or herself unable to make premium payments but still needs protection, he or she can request the
insurance company to take the cash value built up in his or her contract to purchase paid-up insurance
exactly the same kind of plan that was originally issued.

Because he or she will no longer be paying premiums, the face amount of the new paid-up policy will be
smaller. However, cash values in the reduced policy will continue to grow.

For example, a man takes out a Whole Life Policy at age thirty with a face amount of PhP 1 million. He
stops paying premiums at age 50.

FA = PhP 1 million
F FA = PhP 700,000

30 100

Premiums stop at age 50

Extended Term Insurance

When the policyowner chooses this option, the company uses the cash value of the policy to buy a term
insurance contract which extends the period of protection even though no more premiums are being
paid. The policyowner will still have the same amount of protection as the previous policy but the length
of protection will depend on the amount of cash value that has built up in the original policy.

FA = PhP 1 milliom FA = PhP 1 million

Premiums stop at age 50 End of

Original Policy

When there is no non-forfeiture option selected and there is nothing specified in the policy contract as
to the default option, Extended Term Insurance (ETI) is assumed to have been chosen.

Reinstatement Provisions

This is a valuable provision that may save a policy when it has already lapsed. Unless certain conditions
apply, the policy owner has the right to reinstate the lapsed policy and bring its values up-to-date.
However, the reinstatement provisions do not apply to cashed-in policies or policies surrendered for
cash values.

The policyowner has a limited period of time to reinstate a policy, usually three to five years.

Period A Period B
Usually 3 to 5 years
POLICY LAPSE

The policyowner may only reinstate within Period A which is usually three to five years. In Period B, the
policyowner has forfeited his chance to reinstate his policy.
If the policyowner chooses to reinstate a lapsed policy, he must do the following:

 pay all past due premiums

 pay interest on past due premiums (because the company has not had a chance to invest and
earn interest on them)
 pay back any outstanding policy loan
 prove insurability
 be aware that a new contestable period is in effect
 be aware that the exclusion period of the suicide clause starts over

There are two ways to reinstate a policy:

 Pure (or Straight) Reinstatement. Policyowner pays back all past due premiums plus interest on
these premiums.
 Redating. A new premium would be charged to the policyowner based on his or her attained
age.

Provisions When Insured Dies

Beneficiary Provisions

Since the policyowner’s purpose in purchasing insurance is to provide for the security of the
beneficiaries, it is important to identify the beneficiaries so there can be no possibility of error in
carrying out the wishes of the policyowner. The policyowner selects the beneficiaries who will receive
the proceeds of the policy.

Primary versus Secondary Beneficiary

If an insured dies, the first person in line to receive the death proceeds is called the primary beneficiary.
Since the primary beneficiary may die before the company begins or complete paying out the death
proceeds, the policyowner usually names a substitute beneficiary. This secondary or contingent
beneficiary is the person next in line for payment in case the primary beneficiary predeceases the
insured.

The policyowner can even name tertiary beneficiaries in case of the death of both primary and
secondary beneficiaries. For example, a policyowner named Paolo Recto names his wife as his
beneficiary, as well as his three children who would share the money equally if his wife dies before him,
and his college to receive the proceeds if his wife and children all die before him.

In the example, Paolo’s wife is his primary beneficiary. His children are all secondary beneficiaries. His
college is his tertiary beneficiary.

Policyowners can name more than one beneficiary in any category and specify how much of the death
proceeds each beneficiary will receive. They can also state how the benefits are to be paid if they wish
to delay payment for a certain period of time or until beneficiary reaches a certain age. These
settlement options are discussed in a later section.
Beneficiaries need not be actual persons. Policyowners can leave the proceeds to institutions,
businesses or their estates. If no other beneficiaries have been named or if all the named beneficiaries
have died before the insured, the death proceeds will go to the insured’s estate.

Beneficiary Designation

Beneficiary designation must be carefully prepared because once it is in effect, the company must follow
the designation to the letter. Beneficiaries should be clearly identified by name as well as their
relationship to the policy owner.

For instance, Carmina Aquino, wife of the insured. This designation included both the name and the
relationship of the beneficiary to the insured.

Another example can be Carmina Aquino, wife of the insured, if living; otherwise, Martin Edward
Aquino, son of the insured, and Clarissa Ann Aquino, daughter of the insured, equally or to the survivor.
If additional children are born to the Aquinos and the designations are not changed, the additional
children will not share the proceeds if Mr. and Mrs. Aquino die.

While both the name and the relationship to the insured are important in the designation, the name is
far more important. Suppose Mr. and Mrs. Aquino are divorced and Mr. Aquino dies a short time later
without having changed the beneficiary designation, proceeds will be paid to Mrs. Aquino. The same
thing would happen if Mr. Aquino remarried and forgot to change the beneficiary designation. Proceeds
would still go to his former wife.

Revocable versus Irrevocable Beneficiaries

Applicants for life insurance tell the company whether or not they want to retain the right to change
their beneficiaries. If they retain this right—which most people do—the applicants designate revocable
beneficiaries. Policyowners can change their beneficiaries whenever they want and can exercise all
ownership rights.

If the applicants tell the company they want to name certain beneficiaries and give up the right to name
anyone else at a later time, then they designate irrevocable beneficiaries.

Designating irrevocable beneficiaries affects all the contract rights that otherwise would be retained by
policyowner so this is a decision that should never be made hurriedly.

Unless policyowners have the written consent of their irrevocable beneficiaries, they cannot do any of
the following:

 surrender the policy

 borrow any part of the accumulated cash values
 assign their policies
 make change in their policies in any way

Policyowners can regain control of their policies if one of the following conditions is satisfied:
  if the irrevocable beneficiaries consent in writing; or
 if the insured or policy owners outlive the irrevocable beneficiaries

Common Disaster Clause

If both the insured and the primary beneficiary die as a result of a common disaster, the claim is
examined carefully. If no clues surface as to who died first, it is assumed that the primary beneficiary
died first and that the proceeds should go to the secondary or contingent beneficiary.

Settlement Options

Previously, claims were paid out in lump sum. However, the beneficiaries often made unwise
investments or mismanaged the money so the proceeds were quickly used up. Such defeated the major
purpose of life insurance: the protection of the deceased family against financial hardship. At present,
there are various ways to pay out death proceeds to beneficiaries.

Under the settlement options, the proceeds are held by the company in trust and are paid out as regular
income for a fixed period of time or for the balance of the beneficiary’s life. There are four settlement
options:

 interest option
 fixed period option
 fixed amount option
 life income option

The company guarantees the absolute safety of the funds and keeps them profitably invested so that
they will earn a fair rate of interest.

Interest Option

Under the interest option, the company holds the proceeds for a specified period of time and, at regular
intervals, pays the beneficiary a guaranteed rate of interest. The proceeds are paid out at the end of the
specified period of time, either in cash or under one of the other settlement options. Interest earnings
are paid regularly and are not accumulated. The proceeds of the policy remain the same.

Death of the Insured

PROCEEDS HELD FOR FUTURE DELIVERY

PROCEEDS
PAYABLE AT
SOME
DEFINITE TIME

INTEREST PAID UNTIL PROCEEDS ARE RELEASED

Fixed Period Option

Under the fixed period option, the company pays the beneficiary equal amounts at regular intervals over
a specified period of years. Both the principal amount and the interest earnings are paid out. The
amount of each installment is determined by the length of desired period of income.

DEFINITE PERIOD OF PAYMENT

PROCEEDS
CREATED AT
DEATH OF
INSURED

EQUAL INSTALLMENTS OF AN AMOUNT THAT WILL EXHAUST THE PRINCIPAL AND INTEREST
DURING THE FIXED PERIOD OF PAYMENT

Fixed Amount Option

Under the fixed amount option, the policy proceeds are used to pay out a specified amount of income as
long as the proceeds last. It pays out both the principal proceeds and the earnings from interest.

PROCEEDS
CREATED AT
DEATH OF
INSURED

EQUAL INSTALLMENTS OF A STATED AMOUNT PAYABLE UNTIL THE PRINCIPAL AND INTEREST ARE
EXHAUSTED

Life Income Option

Under the life income option, the beneficiary receives a guaranteed regular income—not for a specified
period of years, nor for as long as the proceeds last—but for the primary beneficiary’s entire life, no
matter how long he or she lives.

Principal and interest are paid out with the amount of payment calculated to last a lifetime. The life
insurance company works on averages. An annuity table can tell how long men and women of various
ages are expected to live on the average. Some beneficiaries won’t live that long while others will live
longer.

There are five considerations in determining the amount of income paid under any type of life income
option:

 Age of the Beneficiary. The older the beneficiaries are the shorter the period of time they are
expected to live. Hence, income payments would be higher.
 Sex of the Beneficiary. On the average, women live longer than men. Thus, the company would
be expected to pay a life income to a woman beneficiary for a longer period of time.
 Interest Rate. Interest earnings are returned to the beneficiary as part of the life income
installment. Hence, the higher the rate, the bigger the installment becomes.
 Amount of the Proceeds. The more insurance proceeds there are to provide to life income, the
greater the income will be.
 Type of Option Selected. There are several life income options: Life Income Only; Guaranteed
Return of Proceeds; Period Certain Life Income; and Joint and Survivor Life Income.

Life Income Only

Under this option, the company pays a guaranteed income to the primary beneficiary for as long as he
or she lives. Nothing is paid to anyone after the primary beneficiary dies.

Installment Refund Option

The same income due to the primary beneficiary will be given to the secondary beneficiary until the
total payments equal the original policy proceeds. If the secondary beneficiary dies, the next beneficiary
will receive the income.

Death of Primary Beneficiary

PAYMENTS TO SECONDARY
BENEFICIARY WILL
CONTINUE UNTIL TOTAL
INSTALLMENTS EQUAL
PROCEEDS PAYMENT TO PRIMARY BENEFICIARY ORIGINAL PROCEEDS
CREATED AT
DEATH OF
INSURED

Period Certain Life Income

As in the case of all life income options, the primary beneficiary is paid an income for life. The unique
feature of this option is that if a primary beneficiary dies within a stipulated period of years, the
secondary beneficiary will receive payments of the same amount for the balance of that period. If the
primary beneficiary dies after the end of the stipulated period, the company’s obligations cease.
An option that has a ten-year stipulated period is called a ten-year certain life income option. If a
primary beneficiary has one such option and dies on the eighth year, the secondary beneficiary receives
an income for two years and the income ceases after that. If the primary beneficiary dies after the ten-
year period, the secondary beneficiary receives nothing.

Joint and Survivorship Life Income

This type of life income option provides income for two people. As long as both of them are alive, one
check is issued in both their names. When one of them dies, the survivor receives the income for the
rest of his or her life.

The amount of life income for the survivor depends on any of the following joint and survivorship
options originally chosen by the insured:

 Joint and Full Survivor Option. The survivor receives for life the same income that was paid to
both beneficiaries. For instance, if joint income is PhP 5,000 a month, the survivor’s life income
will still be PhP 5,000 a month.

 Joint and 2/3 Survivor Option. Two-thirds of the income of both beneficiaries continues as life
income for the survivor. For example, if joint income is PhP 7,000 a month, the survivor’s
monthly life income will be PhP 5,000.

 Joint and ½ Survivor Option. One-half of the income of both beneficiaries continues as life
income for the survivor. Thus, if joint income is PhP 5,000 a month, the survivor’s monthly
income will be PhP 2,500.

Under the joint and survivor option, there is no further payment to anyone when the survivor dies.

POLICY PROVISIONS
PERMANENT TEMPORARY
When the insured lives
Entire contract clause YES YES
Insuring clause YES YES
Ownership Provision YES YES
Premium Payment YES YES
Grace Period YES YES
Premium Loan YES NO
Assignment YES YES
Policy Loan YES NO
Dividend Option YES NO
Change of Plan YES NO
Conversion NO YES
Renewability NO YES
When the insured dies
Suicide Clause YES YES
Incontestable Clause YES YES
Misstatement of Age YES YES
Beneficiary Provision YES YES
Settlement Provision YES YES
When the policyowner quits paying
Reinstatement Provision YES YES
Non-forfeiture Option YES NO
 CHAPTER TEN
GROUP AND INDUSTRIAL INSURANCE

Although life insurance companies issue life insurance contracts on the lives of individuals, groups can
also be covered under one insurance contract.

Group Insurance

A group insurance has the following features:

 covers a number of persons in one policy

 provides low-cost protection
 generally issued without evidence of insurability

A group can be employees within a company and maybe classified according to location, salary level,
duties, department or length of service. The group must have the following qualifications:

 natural group—not formed for the sole purpose of obtaining a group insurance
 has been in existence for a satisfactory length of time
 satisfies the required minimum number of people to be considered a group
 satisfies the required minimum premium

Group Terms versus Permanent Insurance

Most group life insurance plans do not have cash values. These are simply term plans that pay a stated
amount to the group member’s family. There are group plans that offer permanent insurance that vary
according to how contributions are used.

PLAN TYPE CONTRIBUTIONS

Group Paid Up and Decreasing
Terms
Level Premium Group
EMPLOYEE EMPLOYER
to purchase whole units of to purchase Decreasing Term
Whole Life Insurance Insurance
to purchase level premium to purchase level premium
Whole Life or Endowment Whole Life or Endowment
policies policies

Group Certificate

With group insurance, the employer makes the application to the life insurance company to cover its
employees. Instead of a life insurance policy for each covered individual, a master policy is given to the
employer. The employee gets a certificate of insurance that states the amount of life insurance
coverage.
Premium Payment

Premiums are either paid entirely by the employer or shared by the employer and employee. So a plan
can either be contributory or non-contributory.

Non-Contributory Plan

 paid entirely by the employer

 must cover 100% of all eligible employees

Contributory Plan

 employees take part in the premium payment

 must cover 75% of all eligible employees

Underwriting

The health of the individual members of the group is not questioned in putting a group plan in place. To
establish a premium for a group case, the insurance company must look at some factors such as the
following:

 number of members
 age of individual members
 sex of each member
 income
 type of work
 working environment
 geographic location

After the initial premium is established, premiums may either increase or decrease depending on actual
claims experienced. Once an employee is covered under the group plan, he cannot lose his coverage
because of poor health.

Conversion

When employees terminate their employment, their insurance coverage need not be terminated. They
can convert their group coverage into an individual policy. They should pay premiums that apply to their
respective ages at the time of their conversion.

Most policies give the employees thirty-one (31) days from date of separation from employer to convert
their policy. They do not have to provide proof of insurability.

Termination

Employees are assured of coverage thirty-one (31) days after terminating their employment or after the
termination of the group plan. Their coverage continues even if they do not exercise their conversion
privilege. If the employee dies within 31 days, death benefits are payable as claims by the insurance
company.

The following table shows a comparison of individual and group life insurance:

INDIVIDUAL GROUP
Policy Contract individual life insurance policy master policy for the employer;
certificate of insurance for employees
Contracting Parties insurance company and policy insurance company and employer
owner
Application individual application forms enrollment card
Underwriting individual’s age, sex, avocation, age, sex, salary, type of work, working
occupation and other necessary environment and geographic location of
information those in the group
contributory if paid by both employer
Premiums paid by policy owner-payor and employee
non-contributory if paid wholly by the
employer

Industrial Insurance

Industrial insurance offers small amounts of coverage for individuals who cannot afford large policies
and cannot set aside enough money to pay even a monthly premium. Face amounts are generally up to
PhP 50,000 only and are there only to cover for burial expenses.

Premiums

Industrial insurance premiums are computed and paid on a weekly or monthly basis. If a premium is
overdue, the company may keep the policy in force for a period based on how the premiums were paid.

 If premiums were paid weekly, the policy stays in force for four weeks.
 If premiums were paid monthly, the policy is in force for one full month.

A debit agent collects these premiums from policy owners.

Facility of Payment Clause

There is a facility of payment clause that allows the company to pay the death benefit to a near relative
of the deceased if a beneficiary is not named or the named beneficiary cannot be located. This simplifies
procedures and saves the insurance company the time and the expense of locating the beneficiary.
 CHAPTER ELEVEN
ANNUITIES

An annuity is not really a life insurance policy; it is a purchase of income. While life insurance effectively
meets the need for income in later years, some prospects may not have a need for additional life
insurance protection but may need an annuity income.

Annuity

An annuity is the scientific liquidation of both capital and interest with income payments calculated so
the annuity income does not stop before the person receiving it dies.

An annuity has the following features:

 offers no life insurance protection

 simply an accumulation and distribution of cash to provide income
 cannot be outlived
 guaranteed so long as the person receiving it called the annuitant lives

Some companies do not use the word premium with respect to annuity contracts. In this discussion on
annuities, premium will mean the same as the purchase payment.

The names of annuity contracts differ according to:

 how the money is collected for the required annuity fund

 when the income to annuitant starts

Annuities may also be fixed or variable.

Fixed Annuities

Single Premium Immediate Annuity

As the name suggests, single premium indicates that the entire premium is deposited in the annuity
fund at one time. Immediate annuity states that the income begins immediately. Therefore, a Single
Premium Immediate Annuity is one that is paid for in a single sum and then the company, right away,
begins to pay the annuitant a regular income that is guaranteed to last as long as he or she lives.

Single Premium Deferred Annuity

Similar to the first type of annuity, the single premium deferred annuity is purchased by making a single
payment but annuity income begins some years after the single payment is made. The single premium
is invested and it grows because of interest earnings. Because of this, the single premium that the
annuitant would have to pay would be less than the same level of an immediate annuity at a later age.
Installment Deferred Annuity

This is commonly referred to as Retirement Annuity. With this kind of annuity, the annuity fund is built
up through a series of regular payments or installments and the annuity income will begin some time in
the future. In this plan, the annuity is accumulated gradually over the years by regular premium
payments plus interest earned by the accumulating fund.

If the annuitant dies before the annuity income begins, the fund is paid out to the designated
beneficiaries after certain costs are deducted.

Factors that Affect Annuity

Age of Annuitant

Statistics show that the older the annuitants are when income starts, the fewer the number of years
they are expected to live. The company can expect to make payments to a younger person for a longer
period of time than to an older person. If an older and a younger person had annuity funds of the same
amount, the older person would get a larger annuity payment per month because the company would
expect to be paying for it for a shorter length of time.

Gender of the Annuitant

Records show that women outlive men by several years. The company can expect that annuity
payments to women would be extended over a longer period than payments to men. In case of
variations in age, when life expectancy is longer, the payment per PhP 1,000 of the annuity is smaller.

Settlement in Case the Annuitant Dies

The company may be under any of the two obligations:

 pay something to a beneficiary if the annuitant dies after he or she begins receiving the annuity
income; or
 pay nothing to anyone after the annuitant’s death

The usual settlements are as follows:

 life annuity
 cash refund annuity
 installment refund annuity
 period certain annuity
 joint and full survivor annuity

Life Annuity

If the annuitant dies after his or her annuity income begins, no payment will be made to a beneficiary or
to anyone else. Death ends the contract.
 DEATH OF ANNUITANT

ANNUITY
FUND NO MORE
PAYMENTS TO
BENEFICIARIES

Cash Refund Annuity

If the annuitant dies after his or her annuity income begins, his or her beneficiary will receive a cash
payment equal to the annuity fund less the amount of income already paid out to the annuitant.

DEATH OF ANNUITANT
ANNUITY
FUND CASH PAYMENTS TO BENEFICIARY
MINUS INSTALLMENTS PREVIOUSLY
PAID

Installment Refund Annuity

If the annuitant dies after his or her annuity income begins, the beneficiary will receive the same
monthly income until all installments are paid—including those paid to his or her relative.

DEATH OF ANNUITANT
ANNUITY
FUND

Period Certain Annuity

If the annuitant dies within a specified period (such as ten or twenty years), the same annuity payments
will continue to his or her beneficiary until end of the stated period.

DEATH OF ANNUITANT
ANNUITY
PAYMENTS CONTINUE TO
FUND BENEFICIARY UNTIL END OF
SPECIFIED PERIOD
Joint and Full Survivor Annuity

An annuity income is paid to an annuitant and his or her beneficiary. If either dies, the same income
continues to the survivor for life. When the survivor dies, no further payments are made to anyone.

Joint and 2/3 Survivor Annuity

This is similar to the Joint and Full Survivor Annuity except that the survivor’s income is cut into two-
thirds of the original joint income.

Joint and 1/2 Survivor Annuity

This is also similar to the Joint and Full Survivor Annuity except that the joint income is cut in half.

Variable Annuity

The variable annuity cannot guarantee an interest yield from investments because its results are usually
geared mostly to a portfolio of common stocks. The interest yield in the conventional annuity is
guaranteed and is based on fixed-dollar investments which specify the interest and the maturity values.

A variable annuity can be for and put into operation on a deferred or an immediate basis. In a deferred
variable annuity, the period of time during which funds accumulate is called the accumulation period.
During this period, the value of each individual account rises and falls depending on the fund’s
investment results.

Separate Accounts

The separate account which serves the variable annuity product of a life insurance company may be
invested heavily or entirely in common stocks. This account has its own income, investments, interest,
expenses and taxes kept separate from other accounts of the company.

The separate account can respond to changing market conditions since the account is legally recognized
as a separate entity and is free of the legislative restriction which regulates the investments of a life
insurance company.

Tax-Deferred Annuities

Specified non-profit, charitable, educational, and religious organizations are encouraged to set aside
funds for their employees’ retirement. Whether the money is set aside for the employees of such
organizations by the employers or the funds are contributed by the employers through deduction in
current salaries, such fund may be placed in tax-deferred annuities to be excluded from the employees’
current taxable income.

Upon retirement, payments received by an employee from the accumulated savings in tax-deferred
annuities become reportable income. However, since the total annual income of the employee is likely
to be less after retirement, a tax rate lower than the applicable rate during employment shall be
applied.
 CHAPTER TWELVE
ETHICS & QUALITY BUSINESS

Given how a life insurance contract is formed, any agent might be tempted to use unethical practices in
getting the sale and getting the policy issued. Hence, life insurance agents must be fully aware of the
laws and regulations that are designed to control unscrupulous selling activities.

Unethical Practices in the Life Insurance Business

Rebating

Rebating occurs when the agent does any of the following:

 offers part of his commission to the purchaser

 accepts a smaller premium than the one stipulated in the policy
 gives the buyer of life insurance anything of significant value

The commissions paid under the terms of any life insurance contract are fixed in accordance with what
the company considers fair to the agent, the policyholder and the company itself.

Replacement or Twisting

Replacement occurs when the agent persuades a policy owner to discontinue or lapse a policy in order
to purchase a new policy. When the policy owner interrupts one plan of insurance and starts all over to
build up values in another, it often results in a serious financial loss to the policy owner.

Twisting also occurs if the policy owner is persuaded to:

 surrender a contract with another company and buy a new one from the agent’s company; or
 allow a policy to become paid-up or use the extended term insurance option to free up
premium.

The reason why this practice is condemned is that it is almost never to the policy owner’s advantage.
Stopping an existing plan and starting a new plan usually results in financial loss because the
policyowner will have to pay acquisition costs all over again at an older age.

Misrepresentation

Agents must be extremely careful about the statements or representations they make to prospects or
clients. They run the risk of having those statements regarded as misrepresentations, which are both a
serious breach of ethics and a violation of the law.

Misrepresentation takes place in any of the following situations:

 an agent makes any written or oral statement which does not tell the exact truth about the
policy’s terms or benefits (policy misrepresentation)
  an agent describes a policy by a name that does not reflect the true nature of the policy (policy
misrepresentation)
 an impression is given that any illustration of dividends is a guarantee of future payments
(dividend misrepresentation)
 false information is entered into the application in order to secure the issuance of the contract

While agents would not misrepresent intentionally, they must constantly be on the guard to avoid any
form of misrepresentation.

Knocking

If an agent runs down or makes derogatory remarks about a competing policy, agent or company, it is
considered knocking. While it may be tempting to criticize other agents and other companies, an agent
should never do so. Any criticism of another agent or company is a criticism of the business where one is
currently connected with.

Penalties for these acts can range from reprimands to fines or imprisonment, depending on the
seriousness of the violation. The Insurance Commission can also revoke a license or terminate a contract
of agency with a life insurance company. However, it is really incumbent upon the life insurance
companies to ensure that their agents uphold standards set by the industry.

The Life Underwriters Association of the Philippines

The Life Underwriters Association of the Philippines (LUAP) was organized to promote the highest
standards of professional life insurance selling in the Philippines. All members shall abide by the
following rules:

 ALWAYS place the best interest of their clients above their own direct and indirect interests.
 MAINTAIN the highest standards of professional competence in order to give the best possible
advice to their clients.
 HOLD in the strictest confidence, and consider as privileged, all business and personal
information pertaining to their clients’ affairs.
 MAKE a full and adequate disclosure of all facts necessary to enable their clients to make an
intelligent decision.
 MAINTAIN the highest level of quality production while observing the strict ethical standards.
 REFRAIN from conduct which would cause the public to lose confidence in the life insurance
profession and the life insurance industry.
 REFRAIN from replacement practices which may be detrimental to the clients.
 ABIDE by and conform to all the provisions of the laws and regulations of the Insurance
Commission and the Insurance Company to which they belong.
 VARIABLE LIFE: A Review

Chapter 1: INTRODUCTION

Variable life insurance product in U.S., or what is known as Unit-linked or Investment-linked life
insurance products in Europe offers the consumer life insurance policies whose values are
directly linked to investment performance. The policyholder’s premiums are used to
purchase funds in one of the company’s investment funds.

Variable life insurance policies were introduced as a way of offering investors policies with
values directly linked to investment performance. This is usually done by formally linking the
value of the policy to units in a special fund run by the company. The values of the units directly
reflect the values of the underlying assets of the fund, and fluctuate according to the
performance of those investments.

How do Variable life insurance policies work?

Variable life insurance policies operate on a similar principle as mutual funds. In variable life
insurance, a major portion of the policy premium is used to purchase units in the Variable
Life fund managed by the companies. A lesser part of the premiums will be allocated for the
mortality protection aspects under the policy.

The investment returns under variable life insurance policies are not guaranteed. They
are linked to the performance of an investment fund managed by the company. Ownership of
the fund is sub-divided 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 rises, the unit price increases. As the asset value of the fund rises, the
unit prices increase. As the asset values of the fund falls, so does the unit price. The
policies therefore lack the smoothing process of the traditional participating life policies and
instead reflect the investment performance actually achieved with the policyholders’ money.
Different generations of policyholders receive different results. Some do better than others and it
is possible to lose money.

Under traditional participating 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 Variable life
insurance policies is similar. The fundamental differences, however, are:

a. Traditional participating life policies aim to produce a steady return by smoothing out
market fluctuations. Variable life insurance policies offer the potential for higher returns
but at the expense of market volatility and a higher degree of risk, although this risk is
considerably less if the Variable life insurance policy invests in a managed fund which
has a broadly similar investment portfolio as a traditional participating life fund (for
example, government bonds, shares and property)

b. Variable life insurance policies are likely to offer far more choice in terms of the type of
investment funds (for example, shares, government bonds, property or a mix of all
these)
 c. Variable life insurance policies may or may not be more flexible than the traditional
participating life insurance policy.

d. The investment element of variable life insurance policies is made known to the
policyholder at the outset and is invested in a separately identifiable fund, which is made
up of units of investment.

Unlike traditional participating life policies, the peaks and the troughs of investment
returns of variable life insurance policies are not adjustable to provide policyholders with
a smoothed rate of return, as the net benefits and risks of investment returns are
immediately passed to policyholders.

e. The structure of policy charges and the investment content of variable life insurance
policy are more identifiable by the policyholders as they are specified in the Variable 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. However, in the long term,
charges are likely to be similar.

Under traditional participating life policies, the expenses of running a company and
acquiring business are covered by making certain charges on the policies issued, both
‘up-front’ and regular policy charges. Such charges under traditional participating life
policies are not specifically detailed in the policy terms. The policyholder bears some of
these charges directly in relations to his particular policy; others are taken out of the life
funds as a whole.

By contrast, charges levied on variable life insurance policies are stipulated openly
including the types and level of charges imposed by the companies. The charges are
likely to be a combination of two or more of the following:
 Policy fee
 Annual fund management fee
 Bid-offer spread or initial charge
 Reduction in allocation of units – Unallocated premiums
 Initial units
 Mortality Charges
 Surrender Charges

Chapter 2: TYPES OF INVESTMENT ASSETS – A REVIEW

In this chapter, we will look at the range of investment choices available to individual investors.
The common instruments available include:

 Cash and Deposits

 Fixed Income Securities
 Shares
 Common Trust Funds
 Mutual Funds
 Properties
2.1 Cash and Deposits

The term cash and deposits refer to all liquid instruments that carry little or no risk that the
principal amounts invested can be lost. They represent the highest safety in the investment
universe; they also provide the lowest returns.

Strictly speaking, cash cannot be regarded as an investment. Cash is used as a means only to
finance investment. 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 medium of exchange.

For the purpose of our learning, the definition of cash will include short-term debt instruments.
These cover:

a. Treasury Bills

These are short-term government securities (of one year or less) issued by
governments to borrow money from the investing public to fund government
expenditure. They are the safest type of investments and are generally considered as
riskless as these investments are default-free. Investing in a Treasury Bill (T-bill) is
equivalent to lending money to a sovereign government.

b. Bank Accounts

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:

 Funds available for investment

 How long the funds can remain in the account
 Whether emergency withdrawals are likely
 Prevailing market conditions

However, because of their low-risk nature, the disadvantage with bank deposits is that
they are low yielding in return.

Also, time deposits do not provide a good inflation hedge, as the stated interest rates
offered by banks at inception do not change over the deposit period in response to
changes in the market interest rates.

Another disadvantage with time deposits that there are penalties upon early or
premature withdrawal, due to loss of interest.

2.2 Fixed Income Securities

Fixed income securities are a group of investment vehicles that offer a fixed periodic return. A
fixed income security 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 (I Owe
You) or promissory notes 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 any
time before maturity. This marketability gives the investors the opportunity to realize capital
gains since bond prices may rise if interest rates fall. However, if the secondary market is very
inactive, the investors’ money is locked up for the full life span of the security.

The types of the fixed income securities include:

a. Money Market Instruments (Discussed under the section of Cash and Deposits)
b. Government Bonds
c. Corporate Bonds
d. Preferred Shares

2.2.1 Government Bonds

Government bonds are effectively financial instruments used by the government to

borrow money from the public. Government bonds are the safest type of investments,
carrying almost no default or credit risk since interest payments and repayment of
principal are guaranteed by the government. Because of its credit quality, government
bond yields are usually the lowest among fixed income securities of similar maturity
periods.

Since government bonds are backed by the government, they are considered very safe.
They are very marketable, and income for future years is guaranteed. However, in times
of high inflation, capital can be eroded.

2.2.2 Corporate Bonds

Like the government, companies can also issue bonds or loan stocks, there are basically
three types of corporate stocks. They are:

2.2.2.1 Senior or Loan Stocks

These 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 and sell the
property charged 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 death, the trustees act on behalf of the investors.

Like government bonds, loan stocks pay a fixed interest rate for a fixed term at
the end of which the capital is repaid.

However, the company can repay earlier if it wishes. 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,
but a forced sale might not raise enough money to cover the capital.

Interest rates for corporate bonds tend to be higher than government bonds as
the security is lower.

2.2.2.2 Debenture Stocks

These are unsecured loans to a company. Both the interest rate and the 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 the company’s performance.
Compared to debentures, loan stocks are much less secure. They therefore,
normally carry a higher interest rate.

2.2.2.3 Convertible Stocks

The difference between convertible stocks and the above two stocks (i.e.
debentures and loan stocks) are that it can be converted to ordinary shares of
a company on a fixed date.

On that date, the investor can convert his investment from a fixed interest loan to
being part owner and entitled to a share of its profit 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.

2.3 Shares

Shares are different from stock in that a shareholder is a part owner of the company. A
company is a separate legal person, which is owned by all of its shareholders. The shareholders
control the company through the fact that basically each share carries one vote at the company
meetings.

The shareholders thus decide on the major issues and vote in new directors to run the company
if they wish. Shareholders are not liable for the debts of their company.

Each company maintains register of shareholders and each shareholder gets a share certificate
as evidence of title.

Companies can be public or private. Generally speaking, private company shares are not
listed on the Philippine Stock Exchange (PSE) and are not available to ordinary investors.
Public limited company shares can be quoted on the PSE if they meet the Exchange’s
requirements.

The workings of the PSE are regulated by the Securities and Exchange Commission to protect
the investing public. The shares of all major public companies are traded on the stock
exchange, which means that there is a daily list of their prices, which appears in the newspaper.
Listed company shares are thus easy to buy and sell through stockbrokers. The shares can in
theory be bought and sold on any working day, although on a new issue of shares in a popular
company (for instance a privatization) there may be more would-be buyers than shares
available. Equally, if the 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 price will tend to rise and if it is doing badly it will
tend to fall.

Share prices are also influenced by other factors, such as how the country’s economy is doing
overall, the general level interest, inflation rate, company earnings and currency performance.

A share can be a volatile investment. A shareholder must therefore realize 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 or large, well-established, reputable companies, but events like the one
happening in mid-1998 has shown that this does not always work in practice.

The costs of buying and selling shares include stockholder’s commission as well as the
difference between buying prices and selling prices.

2.3.1 Ordinary 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 dividends. Dividends 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 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 semi-annually and provide income from the investment.

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.

2.3.2 Preferred Shares

These are shares which give the holder the right to a fixed dividend provided
enough profit has been made. This right takes precedence over the right of ordinary
shareholders to dividends. Preferred shares differ from stocks in that although the
income is fixed, it is not interest and may not be paid if profits are not made.

2.4 Common Trust Funds (CTSs)

CTFs are useful vehicles for small private investors, who do not have sufficient funds
and/or time, to receive the benefit of professional investment management as well as
access to 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 Common Trust Fund (CTF) is a pool of co-mingled funds contributed by many investors kept
in trust by a trustee and managed by a professional fund manager.

A CTF 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.

The investments of the CTF are selected and managed by the fund managers but 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
generally to protect the unit-holders.

The trust deed sets out:

 The fund manager’s investment powers;
 The price structure;
 The registration of unit-holders;
 The remuneration of the fund managers;
 The accounting and auditing rules

Investors buy units in the unit trust at the offer price calculated as per the trust deed. Unit can be
sold back at any time at the bid price.

2.5. Mutual Funds

The function of mutual funds is similar to that of common trust funds, i.e. to make investment
much simpler, more accessible and more cost effective for small investors.

Mutual funds, like common trust funds, 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
(i.e., manage the investment) of the fund to make investment profits

These profits increase the value of fund and, therefore, the value of each investor’s share
of 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 fail.

The unit prices are recalculated every day and quoted daily in at least one national newspaper.
The price reflects the value of the underlying investments.

Mutual funds also should not be seen as very short-term investments of less than, say, three
years. Mutual fund, generally, have a higher risk/reward profile than CTFs.

2.6 Properties

Real estates have always been part of the investment scene. There are basically three types of
real estate investments. These are agricultural property, domestic property and
commercial/industrial property both locally and overseas.
The price of an agricultural property depends on the following factors:

a. Quality of land as reflected on the quality and profitability of the crops it grows
b. The location of the land
c. The value of the buildings on the land

On the other hand, the price of domestic and commercial/industrial properties generally
depends on the location and types of buildings on the land.

Chapter 3: KEY CONSIDERATIONS IN INVESTMENT

In order for the consumer to be able to make a choice on his investment, it is important for him
to become familiar with key concepts and fundamentals that figure in making sound investment
decisions. The following are some key concepts:
 Investment Objectives
 Funds Available
 Level of Risk Tolerance
 Investment Horizon
 Accessibility of Funds
 Taxation Treatment
 Performance of the Investment
 Diversification

3.1 Investment Objectives

Generally, people invest their money to:

 Enhance or provide a comfortable standard of living; to provide for dependents
 Improve one’s financial situation
 Provide income during retirement
 Provide funds for the education and bringing up of children, and
 Provide a fund for paying necessary costs and taxes when a person dies

Depending on these objectives, an investor would need to choose between investing in assets
that yield more regular income or in those that have better potential for capital gain. Different
investments produce different combinations of these two types. For example, fixed deposits
produce only regular income flow without capital gains. On the other hand, investments in
commodities produce no regular income flow but offer the possibility of capital gains.

3.2. Funds Available

The level or amount of funds available definitely affects the investment decision. If an investor
has a small amount of free funds, certain types of investments are not accessible to the
investor. The more funds an investor has, the greater or wider is the choice of investment
available to the investor.

Another consideration pertaining to funds is the source of the available funds, whether the
free or available funds are provided out of income. If the potential investor can set aside a fixed
amount of current income which is surplus to his needs, then certain investments like insurance
policies, CTFs and the like can be considered.
3.3. Level of Risk Tolerance

The return on short-term government securities or bank deposits is almost certain and hence,
carries little or now risk. In contract, investment in shares produces very uncertain results in the
short term, as day-to-day fluctuations in the stock market can be quite substantial. Generally,
the higher the risk, the higher must be the potential return in order to attract people into
investing in it. This is what is termed the tolerance for the magnitude and variability of the
future return of loss. An investor’s level of risk averseness is very much influenced by his age,
investment objectives, financial condition, and personality. What may be suitable investment for
a millionaire who can afford to risk his capital on a speculative venture will obviously not be
appropriate for a young couple with children.

3.4 Investment Horizon

The time horizon can range from a few days (more speculation than investment) to several
years. A person’s investment horizon will depend on the investment objectives, his age, and his
current financial condition.

A match between the investment horizon and the maturity of an investment asset is very
important. For instance, keeping one’s money in a top-tier bank is considered one of the safest
investments. However, if the investment horizon is say, ten years, the choice of investing in a
bank deposit becomes a risky one as the investor will encounter reinvestment risk from rolling
his bank deposits and the risk of inflation eroding the real value of the original sum of money.

3.5 Accessibility of Funds

With regards to the use of funds, accessibility of funds has three components:

First, if an individual requires the funds in a short period of time, he would not want to lock
the fund in an investment that goes beyond the time frame that the fund is needed.

Second, the cost or penalty of realizing the investment before its maturity period should
the fund be needed urgently.

Third, the initial cost in setting up or buying into the investment.

3.6 Taxation Treatment

Different types of investment vehicles enjoy (or suffer) a wide range of tax treatment, which
affects the taxation of the investment vehicle itself and the subsequent taxation liability of the
investor. An individual should, therefore, consider the different tax treatments on different types
of investment before making a decision on what to invest.

3.7 Performance of the Investment

The performance of an investment depends on a country’s economic factors, the

competencies, and capability of the management team and the invested company’s level
of costs. Performance also depends on the past experience and history of the invested
company although other factors like the life cycle of the investment must also be taken into
consideration.
3.8 Diversification

Diversification in investment is the process of investing across different asset classes and
across different market environments. 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.

Chapter 4: HOW VARIABLE LIFE INSURANCE PRODUCT WORK

For variable life insurance products, the insurance companies offer policyholders a range of
variable life funds in which they invest.

4.1 The Workings of Variable Life Insurance

To further illustrate, assume that there is a fund which invests only in stocks and shares (called
an equity fund). Further assume that the value of this fund value of this variable life funs at a
certain point in time is Php 1 million. This is calculated by adding the value of all the investments
owned by the fund.

Instead of looking at the fund as whole when considering how a policyholder might benefit from
that investment, these variable life funds are normally divided into a number of units, in a similar
way to the ownership and value of the company being divided into a number of shares.

In this example, assume 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 a value for this fund of Php 10 per unit (i.e. Php 1.5 million
divided by 100,000 units).

The holder of these units will either profit or suffer loss from the rise and fall in the value of
investments held by this equity fund. If the value of the investments increases the value of fund
to, for example, Php 1.5 million then, if there are still 100,000 units in existence, the value of
each of these units will have increased from Php 10 to Php 15 (i.e. Php 1.5 million divided by
100,000 units).

A traditional participating life insurance policy can never reduce in value, provided that the
company is solvent, as the cash dividends are added to the guaranteed cash values and can
never be taken.

In contrast, the value of a variable 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.

Turning to the actual mechanics of a policy there is no guaranteed minimum sum insured for the
purposes of declaring cash dividends, although there will, of course, be a sum insured as a level
of life insurance.

Instead, each of the policyholder’s premium will be used to purchase units, the number of units
purchase being calculated as the amount of premium by the price of each unit. Thus for a
premium of Php 100 and buying units with current value of Php 2 per unit, the number of units
that can be purchased will be 50 (i.e. Php 100 divided by Php 2).
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.

The value of the policy will therefore depend on two factors:

i. The value of each of the units, and
ii. The number of units the policy has accumulated to date

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 investment falls in
value.

The flowchart below (Figure 4.1) shows how a variable life insurance policy works.

Under a variable life insurance policy, a policyholder pays either lump sum (for single premium
plans) or regular payment (for regular premium plans) to the insurance company. The company
invests the premium in the variable life fund. This is usually done after the company deducts its
initial expenses, which include expenses for setting up the fund and for marketing. The balance
of the premium is then allocated to buying units at the offer price.

Figure 4.1 How a Variable Life Insurance Policy Works

4.2 Top-ups

Policyholders are normally allowed to top-up their policies at any time, subject to a minimum
amount. To top-up a policy, the policyholder pays additional single premiums 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 variable life fund which will be added to the existing units in the
policyholder’s account.

4.3 Single Premium Policies Methods of Calculating Benefits

For ease of understanding, we will concentrate on the tabulations for single premium variable
life insurance policies in this text.

For single pricing method of single premium policies, the policyholder buys the units at the offer
prices 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.

The charges that are normally deducted for either method are the policy fee and the
administrative and mortality charges.

In cases presented below, we have assumed a policy fee of Php 100 and mortality charge of
1% (Please note that mortality charge depends on the age of the life insured and it differs from
company to company).

4.4 Computation for Number of Units

4.4.1 Single Pricing Method

The whole single premium or a big part of it is used to buy units. Charges like initial
charge and mortality charge can be deducted from the single premium either before or
after the premium is converted into units. In the case where a charge is deducted before
the premium is converted, only the remaining part of the single premium is used to buy
units. In the case where a charge is deducted after the single premium is converted, an
equivalent number of units corresponding to the charge are deducted from the number
of units after the conversion of the single premium.

Example
A policyholder pays a single premium of Php 50,000 and the unit price at that time is
Php 1.50. The insurance company deducts an initial charge of 5% and a mortality
charge of 1.6%, both as a percentage of the single premium. The initial charge is
deducted before the premium is allocated, while the mortality charge is deducted by
cancelling units. The following outlines the steps in calculating the number of units
bought after all the charges:

 We calculate the charges first. These are:

Initial Charge (5% x Single Premium) Php 2,500.00

Mortality charge (1.6% x Single Premium) 800.00

 Because the Initial Charge is deducted before the single premium is used to buy
units, we calculate the remaining single premium
 Single Premium Php 50,000.00
Less: Initial Charge 2,500.00
Single Premium (Net of Initial Charge) Php 47,500.00

 The Single Premium (Net of Initial Charge) will then be used to buy units. This is:

Number of Units Bought = Single Premium (Net of Initial Charge)

Unit Price

= Php 47,500.00
1.50

= 31,666.6667 units

 The Mortality Charge is deducted by cancelling units. The number of units to

cancel (Mortality Charge) is

Number of Units to cancel = Mortality Charge

Unit Price

= Php 800.00
1.50

= 533.3333 units

 To get the Number of Units After All Charges, we deduct from the Number of
Units Bought the Number of Units to Cancel (Mortality Charge). This is

Number of Units Bought = 31,666.6667 – 533.3333

After All Charges
= 31,133.3333 units

4.4.1.1 Annual Yield on Investment

The value of units increase whenever the units price increases. The policyholder
therefore gains for increases in unit price. During a period of time, the increase in
the value of the units can be measured using the Annual Yield of Return on
Investment (ROI).

The Formula for Annual Yield is

Yield = (Full Withdrawal Value / Single Premium) 1/n – 1

Where:

n = no. of years

Example:
Under the single pricing method, still using the example above, suppose the unit
price after 15 years is Php 3.75. The full withdrawal value of the 31,133.3333
units would now be:

Full Withdrawal Value = Number of Units x Units Price

= 31,133.3333 x 3.75

= Php 116,749.9999

Using this value and the formula for the Yield above, the ROI is:

Yield = (116,749.9999 / 50,000) 1/15 – 1

= 5.82%

We can therefore say that the investment of the policyholder earned 5.8% per
annum in the last 15 years.

4.4.1.2 Withdrawal Benefit

Partial or full withdrawal of units can be made by the policyholders at any time
while their policy is in force. Withdrawals are made by selling (or “cancelling”)
some or all of the units using the unit price at the time of withdrawal. Although
there is no limit to the number of times a policyholder can partially withdraw,
there is usually a minimum withdrawal. In addition, there is also a minimum
balance that the policyholders have to maintain. An exit fee or a withdrawal
charge may also be imposed for every withdrawal.

When full withdrawal of units is made, the insurance policy is terminated. All
policy benefits like the sum insured guarantee and other supplementary benefits
will cease.

Example:

Suppose that the policyholder has 10,000 units and the unit price is Php 1.97. He
wishes to partially withdraw Php 10,000 from his policy. The following steps show
how the withdrawal is made and the remaining number of units after the
withdrawal.

o Because withdrawals are made by selling units, the number of units that
needs to be sold to fund the withdrawal is calculated. This is:

Number of Units to Sell = Withdrawal Amount

Unit Price

= Php 10,000.00
1.97

= 5,076.1421 units
 o The remaining number of units after withdrawal is therefore:

Remaining number of = 10,000.0000 – 5,076.1421

Units after withdrawal
= 4,923.8579

4.4.2 Dual Pricing Method:

Under the dual pricing method, the price used to buy units (offer price) is higher than the
price used to sell units (bid price). The difference between the offer price and the bid
price, expressed as a percentage of the offer price is called the bid-offer spread. One
price can be worked out from the other if the bid-offer spread (Spread%) is known using
the following formula:

Bid Price = Offer Price x ( 1 – Spread % )

Offer Price = Bid Price / ( 1 – Spread % )

Example:

If the offer price is 1.50 and the bid-offer spread is 5%, the bid price can be
worked out as:

Bid Price = Offer Price x ( 1 – Spread % )

= 1.50 x ( 1 – 5% )

= 1.4250

The table below illustrates the price to use when a type of transaction is made.

Type of Transaction Price to Use

Single Premium Offer Price

Top-ups

Partial Withdrawal Bid Price

Full Withdrawal
Cancel Units to pay for charges
Death Benefit

Two Methods in Canceling Units from the Single Premium:

Method A

A policyholder pays a single premium of Php 50,000 and the offer price at that time is
Php 1.50. The company’s bid-offer spread is 4%. The insurance company deducts an
initial charge of 5% and a mortality charge of 1.6%, both as a percentage of the single
premium. The charges and fees are deducted by cancelling units after the whole single
premium is used to buy units.

We calculate first the number of units allocated without charges:

No. of Units allocated = Single Premium

Offer Price / unit

= Php 50,000
1.50

No. of Units allocated = 33,333.3333 units

(w/o charges)

Because the Initial Charge and Mortality Charge are deducted by cancelling units
after the single premium is invested. We add the charges then convert into units
using the bid-price. We will use the bid price since the policyholder is, in effect,
buying units to pay for the initial and mortality charge. In the example, only the
offer price is given, thus we have to compute for the bid price using the given bid-
offer spread:

Bid Price = Offer Price x ( 1 – Spread% )

= 1.50 x ( 1 – 4% )

= 1.44

Then we now calculate for the number of units to cancel (Initial and Mortality Charge)

Initial Charge (5% x Single Premium) Php 2,500.00

Mortality Charge (1.6% x Single Premium) 800.00
Total Charges Php 3,300.00

Total charges in units = Total Charges

Bid Price

= Php 3,300.00
1.44

= 2,291.6667 units

Now subtract the total charges in units from the number of units allocated for investment

No. of Units bought = 33,333.3333 units – 2,291.6667 units

after all charges
= 31,041.6663 units

Method B

A policyholder pays a single premium of Php 50,000 and the offer price at that time is
Php 1.50. The company’s bid-offer spread is 5%. The insurance company deducts an
initial charge of 5% and a mortality charge of 1.6%, both as a percentage of the single
premium. The initial charge is deducted before the premium is allocated, while the
mortality charge is deducted by canceling units. The following outlines the steps in
calculating the number of units bought after all the charges:

We calculate the charges first. These are:

Initial Charge (5% x Single Premium) Php 2,500.00

Mortality Charge (1.6% x Single Premium) 800.00

Because the Initial Charge is deducted before the single premium is used to buy
units, we calculate the remaining single premium.

Single Premium Php 50,000.00

Less: Initial Charge 2,500.00
Single Premium (Net of Initial Charge) Php 47,500.00

The Single Premium (Net of Initial Charge) will then be used to buy units. The
price to use is the offer price because the policyholder is, in effect, buying units.
This is:

No. of Units Bought = Single Premium (Net of Initial Charge)

Offer Price

= Php 47,500.00
1.50

= 31,666.6667 units

The Mortality Charge is deducted by canceling units. The price to use is the bid
price because the policyholder is, in effect, selling units to pay for the mortality
charge. But only the offer price is given, so the bid price should be calculated first
by using the company’s bid-offer spread. This is:

Bid Price = Offer Price x ( 1 – Spread% )

= 1.50 x ( 1 – 5% )

= 1.4250

It is now possible to calculate the Number of Units to Cancel (Mortality Charge):

No. of units to = Mortality Charge

Cancel (MC) Bid Price

= Php 800.00
1.425

= 561.4035 units
To get the Number of Units After All Charges, we deduct from the Number of
Units Bought, the Number of Units to Cancel (Mortality Charge). This is:

No. of units = 31,666.6667 – 561.4035

Bought after all
Charges
= 31,105.2632 units

4.4.2.1 Computation of the accumulation of fund with interest rate

over the period of time

To compute for the accumulation of fund over a period of time where the amount
is X after n years and it increases by i (interest rate), this formula is used:
X ( 1+i)n

Example A:

What is Php 20.00 after 10 years if it increases by 5% annually?

Using the formula, X ( 1+i)n

20 ( 1 + 5% ) 10 = Php 32.58

Example B:

Over the next 6 years, the price projected to constantly increase by 7% annually.
Compute for the bid price and offer price after 6 years if the bid price now is Php
1.20 and the bid-offer spread is 5%.
Offer Price (Present) = Php 1.20 / unit
( 1 – 0.05 )

= 1.26

Offer Price (after 6yrs) = X(1+i)n

= 1.26 ( 1 + 0.07 ) 6

= Php 1.89

Bid Price (after 6yrs) = 1.89 ( 1 – 0.05 )

= Php 1.80

4.4.2.2 Annual Yield on Investment

Under the dual pricing method, and continuing the example above, suppose the
offer price after 15 years increased to Php 3.75. the bid-offer spread is 5%. To
compute for the Annual Yield or Return of Investment (ROI):
 The full withdrawal value of the policy after 15 years should be compared
against the policyholder’s initial investment, which is just the single
premium. Because the policyholder will be selling the units, we use the
bid price 15 years later. Computing for the bid price,

Bid Price = Offer Price x ( 1 – Spread% )

= 3.75 x ( 1 – 5% )

= 3.5625

It was previously determined that there are 31,105.2632 units in the

policy. The full withdrawal value is:

Full Withdrawal Value = No. of units x Bid Price

= 31,105.2632 x 3.5625

= Php 110,812.50

So from an initial investment of Php 50,000, the investment grew to

Php 110,812.50 after 15 years. The ROI is therefore:

Yield = (Full Withdrawal Value / Single Premium) 1/n – 1

= (110,812.50 / 50,000) 1/15 – 1

= 5.45%
4.4.2.3 Withdrawal Benefit

Under the dual pricing method, units are sold upon full or partial withdrawal using
the bid price.

4.7 Death Benefit

There are two types of death benefit under variable life insurance products. A company may
offer either or both types depending on its product design and the discretion of the policyholder.

4.7.1 Unit Value plus Sum Insured

The first type of death benefit pays the sum insured and the full withdrawal value of the
units upon death of the insured. The following table graphs the behavior of the death
benefit under this type against the policy year. The death cover, which is the sum
insured, is level all throughout policy’s terms. The value of units however, is expected to
increase, so that the death benefit also increases.
 Figure 4.7.1

The formulas for death benefit under this type are:

Single Pricing
Death Benefit = ( No. of units x Unit Price ) + Sum Insured

Dual Pricing
Death Benefit = ( No. of units x Bid Price ) + Sum Insured

Example:

At the time of death of an insured, the number of units in his policy is 3,800 and the bid
price is Php 25.22. The policy pays the sum insured of Php 50,000 and the value of units
upon death of the insured. The death benefit is:

Death benefit = ( 3,800 units x Php 25.22 ) + Php 50,000

= Php 95,836 + Php 5,000

= Php 145,836

4.7.2 The Higher of Unit Value or Sum Insured

The second type of death benefit pays either the sum insured or the full withdrawal value
of the units, whichever is higher, upon death of the insured. The following table graphs
the behavior of the sum insured and the value of units against the policy year. In the
areas to the left of the line T, the sum insured is higher than the value of units. The death
benefit during this period is equal to the sum insured. To the right of line T, the opposite
is true.
 Figure 4.7.2

4.8. Regular Premium Policies

Regular premium variable life insurance policies operate under similar principles as single
premium policies. The important points here are:

a. The regular premium variable life insurance policyholder is required to pay premiums
regularly but enjoys the flexibility of being able to very the level of regular premiums
payments, making single premium top-ups or taking premium holidays. If the
policyholder’s account has sufficient funds, the policyholder may stop paying premiums,
in which case the account will continue to fund for the mortality charges until the policy is
cashed or the life insured dies and a claim is made.
b. The policyholder may surrender all his units or partially surrender his units. A partial
surrender is known as a partial withdrawal.
c. The policyholder may vary the sum insured of his policy without changing the level of his
regular premiums. Increasing in sum insured would normally require further medical
underwriting. The higher the level of coverage, the more the mortality charges and the
lower the cash values. The converse is also true.

The policyholder may also increase or reduce the level of regular premium subject to
constraints.

Chapter 5: BENEFITS AND RISKS OF INVESTING IN VARIABLE FUNDS

5.1 Benefits

5.1.1 Pooling or Diversification

Like common trust funds, variable life funds offer the policyholder an access to “pooled”
or “diversified portfolio” of investments. The funds normally consist of wide range of
equity stocks and fixed income securities. On his own, the policyholder, with a small sum
of money, is unable to construct such a diversified portfolio. A well-diversified variable
life fund has better risk characteristics than a less-diversified one.

5.1.2 Flexibility
 Variable life products have simple product designs with clear structures which cater
separately for investment (unit-driven) and insurance protection (charge-based).

As a result, a policyholder can easily charge the level of his premium payment, take
premium holidays, add single premium top-ups, make withdrawals, change the level of
sum insured and switch his investment between funds.

5.2.3 Expertise

Variable life 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 policyholder does not normally have good knowledge of financial markets to
invest his money wisely.

5.2.4 Access

A policyholder can gain access to well-diversified variable life funds managed by

professional investment managers with proven track records, simply by a variable life
insurance policy with an initial investment, at as low as Php 20,000.

5.1.5 Administration

The policyholder 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
business/financial sections of major newspapers.

5.2 Risk of Variable Funds

5.2.1 Investment Risk

The death and disability benefits of a variable life insurance policy are based on the sum
insured and/or the value of units. Its cash and maturity date are equal to the value of
units only.

The sum insured 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 funds.

In times of volatile stock market, the cash and maturity values of a variable 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.

Variable life insurance policies (especially those risks which are fully invested in units of
equity funds) are only suitable for policyholders who can tolerate the risks of short-term
fluctuations in his cash value.

The policyholder can, however, expect to achieve higher return than the
traditional product over the long term.
 5.2.2 Charges

The administration fee, insurance charge, fund management fee, etc., of a variable life
insurance policy are usually not guaranteed. They are subject to regular review and they
can be changed by the company after giving a written notice over a specific period of
e.g. 3 months.

Chapter 6: TYPES OF VARIABLE LIFE INSURANCE POLICIES

Although there are numerous variations and types of variable life insurance policies, available in
the overseas market, which major types we will describe below, the basic types are limited to
the single premium life insurance plans (where a one-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 major variable life insurance policies:

 Single Premium Variable Whole Life Plan

 Regular Premium Variable Whole Life Plan
 Variable Individual Pension Plan
 Variable Permanent Health Insurance
 Variable Crisis Cover Insurance

6.1 Single Premium Variable Whole Life Plan

This is a single premium plan, where the premiums are used to purchase units in a variable or
unitized fund.

Typical investments are single premium variable whole life insurance plan, where a ‘one-off’
premium contribution is made to the policy which uses the premium to purchase units in a
Variable or unitized fund and provides a certain level of life cover.

Single premium variable whole life plan is one of the first types of variable 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.

The emphasis for single premium variable whole life plan is normally on long-term
savings and investment. Thus, the plan offers only nominal life protection.

Administration and insurance charges or costs are recovered by imposing policy fees, other
administrative charges and mortality charges. The variable life fund would normally incur an
investment management fee of 0.5% to 2% per annum, depending on the type of fund and bid-
offer spread.

Top-ups or single premium injections are usually allowed.

The policyholder has the right to withdraw part or whole of the units allocated to him. This is
attractive to investors who want to have easy access to their funds.

6.2 Regular Premium Variable Whole Life Insurance Plan

The scope of regular premium variable whole life insurance plan is similar to that of single
premium variable 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, monthly, quarterly, semi-
annually, or annually.

Units in the variable or unitized fund would be purchased as premium is received. The plan
serves two distinct purposes investment and life protection, with life protection as the main
objective of the plan.

Premium holidays or top-ups, subject to the company’s administrative rules are usually allowed.
Partial and full withdrawals are allowed, usually after a few years’ premiums have been paid.

6.3 Variable Individual Pension Plan

The basic variable individual pension plan usually involves a high allocation of the premium
contributions to investment through simply accumulating the fund to retirement, when the
fund is then used to purchase either a traditional annuity or variable annuity,

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 variable individual pension plan being launched with the life
insurance cover being funded by cancellation of investments on pension plan.

A further development is the introduction of variable individual pension plans where all or part of
the funds can be converted into traditional participating life insurance policy as an alternative to
switching into other variable life funds.

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.

6.5 Variable Permanent Health Insurance

Some companies have created other types of variable plans, instead of providing the usual
death coverage, they offer other forms coverage such as permanent health and crisis
cover/living insurance.

The variable permanent health insurance:

 Provides health coverage such as disability income
 Contains cash value unlike traditional health products that does not have cash value

A new variable life insurance product which incorporates long-term disability benefits is now
available in the overseas market. This product is priced very competitively when compared to
traditional participating life insurance products, sometimes by as much as 255 off cost if
traditional participating life insurance products in strong economic environment.

The product design of this variable permanent health insurance also has the advantages 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.

6.6 Variable Crisis Cover Insurance

One of the most successful innovations in the variable life insurance product design in the UK
was Living Assurance by Abbey Life Company. It was an insurance policy which advances the
whole of the sum insured in the event of the diagnosis of a heart attack, stroke, coronary artery
by pass, end stage rental failure or total permanent disablement. The risk cost of the critical
illness cover is reviewed on a regular basis and improved product benefits or premium are
passed to the policyholder in the event of better than expected claims or investment.

Chapter 7: LOANS AND WITHDRAWALS OF VARIABLE LIFE POLICIES

Some variable life insurance policies grant loans to policyholders. However, the withdrawal
value could leave the company without security for some portion of the debt if the value of the
underlying portfolio declined after the loan was made. Thus, loans are sometimes limited to
some percentage of the withdrawal value.

Policyholders may request for a partial withdrawal of the policy and the withdrawal amount will
be met by cashing the sufficient units at the bid price to meet the policyholders’ requests.

Recent UK new business figures revealed that variable life insurance products account for one
third of the total individual life new business. The popularity of variable life insurance business
will continue to grow for several reasons.

These include:
 Variable life insurance contracts are easier to understand;
 The charges for variable life insurance product are more transparent
 Variable life insurance plans are much more flexible
 The performance of variable life insurance contracts can be monitored by reference to
the unit prices published in the daily newspapers

DEFINITIONS

Policy Fee

The policy fee payable by the policyholder 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 company will normally levy a uniform policy fee on each
policy.

Annual Fund Management Fee

The management of the variable life fund is handled by professional investment managers. A
deduction of a percentage of the variable life fund accumulated within a policy’s holding of
investment units to cover investment management charges will be made. This could be
between 0.5% to 2% of the fund each year.
Offer Price

The offer price is the price at which units under a variable life insurance policy are offered for
sale by the company.

Bid Price

The bid price is the price at which the units under a variable life insurance policy are cashed
when the policy matures, or when the policy is surrendered, or at which units are cashed
to pay for charges under the policy. Bid price is always lower than the offer price at the
published date.

Bid-Offer Spread

There is commonly a difference between offer price and bid price, with the offer price
being bigger than the bid price, usually falling between 5% to 6% of the offer price. This
difference is known as the bid-offer spread and is an effective initial of 5% or 6% by the
company to the policyholder on every premium made to cover expenses in setting up the policy.

Reduction in allocation of units – unallocated premiums

Under this form of charge the company does not use the policyholder’s entire premium
to buy investment units. The difference represents the company’s charges to meet marketing
and setting-up expenses of the policy. Thus a policyholder may find that approximately 60% of
each premium is used to purchase investment units, in approximately the first year or two of the
policy contract. Some insurers make nil allocation to units until their initial charges have been
recouped.

Initial Units

Alternatively, the company may allocate the policyholder’s entire premium to units.
However, the units allocated in the early years will be known as initial units and will have higher
annual management charges such as 6% per annum through out the term of the policy contract.
Initial units bear heavy discontinuance charges and their cash value is much lower than their
face value for years. This method is much less common these days than in the past.

Mortality Charge

This covers the mortality cost of the policy and is, 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 company can then
allow the policyholder to vary the sum insured over time.

Full Withdrawal Charges

This is a charge deducted from the value of units at full withdrawal and is applicable to policies
with uniform allocation. It represents initial expenses, which have already been incurred
but not yet recovered.
Formulas to Remember

 No. of Units = Single Premium / Unit Price

 Bid Price = Offer Price x ( 1 – Spread% ) or BO1S
 Offer Price = Bid Price / ( 1 – Spread%) or OB/1S
 Yield = (Full Withdrawal Value / Single Premium)1/n-1
 Accumulation of Funds = X(1+i)n

Chapter 8: TYPES OF VARIABLE FUNDS

8.1 Introduction

Premiums from variable life insurance policies are invested in the variable life funds
according to written instruction of policyholders.

Variable life funds can be structures into 2 ways:

 Accumulated Units
 Distribution Units

As the value of variable life insurance policy depends on the performance of financial
instruments, the policyholders bear both the risk and the benefits of the policy. In theory,
the funds can be invested in any financial instrument. Currently, the following
instruments are used:
 Cash Funds
 Bond Funds
 Property Funds
 Specialised Funds
 Managed Funds
 Balanced Funds

8.1.1 Cash Funds

Cash funds invest mainly in cash and other forms of bank deposits. Cash deposits
are typr of instruments which are low risk and relatively safe.

8.1.2 Equity Funds

Equity funds invest in equity assets such as stocks, shares, etc. Prices of
equity shares 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 immediately depreciate in high amounts.
But the magnitude of the change in unit prices will depend on the quality of the
equities held.
8.1.3 Bond Funds

Bond funds invest in government and corporate bonds, and in other forms of fixed
income instruments. The assets are chosen on the basis of their income producing
characteristics. They are also known as “income” or “fixed income” funds.

8.1.4 Property Funds

Property funds are generally considered to be safer than equity funds, but lower
liquidity.

Properties, especially real estates, are liquid assets. It is not always possible to
quickly sell a property when policyholder redeems the 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.

8.1.5 Specialized Funds

These funds are normally segmented based on geographical regions or

particular industries.

Specialized funds that are restricted to investment in a particular geographical region

include such examples as the ASEAN Fund, the Emerging Markets Funds and the
International Bond Fund.

Specialized units that are restricted to investment in a particular country only include
such examples as the China Fund and the US Fund.

For industry specialized funds, investments are put in a specialized sectors such as
commodities, mining, plantation, public utilities, etc.

Specialized funds offer a policyholder exposure to different markets in different

regions of the world and different currencies.

It is important to take note of the currency risk when investing in a specialized fund
invested overseas, particularly in times of volatile currency and financial markets.

8.1.6 Managed Funds

These funds invest in a wide variety of assets such as equities, bonds, properties,
cash, etc. and the asset allocation depends on the fund manager’s views of the
future prospects of the financial markets involved. This works like a “managed”
basket of assets comprising a higher proportion of equity and a lower proportion of
fixed income instruments.
 8.1.7 Balanced Funds

The funds invest in a fixed proportion of specified assets. For example, 70% of the
funds are in equities and 30% in bonds.

8.2 Risk-Return Profile

The risk return profile of some types of variable life funds is shown for comparison
between returns of funds in relation to levels of risk involved.

The risk return graph below shows the higher return normally comes with a higher risk.
At the top of the graph are the equity funds. The relatively riskless cash funds sit at the
bottom end.

8.3 Switching

If a life insurance company sells variable life insurance policies and it offers more than
one variable life fund to its policyholder, it usually provides a switching facility which
allows a policyholder to switch part or all his investment from one fund to another fund.

Switching practices vary. Switches between funds may,

 be offered free of charge
 be offered free of charge for a limited number of switches within a given period
(normally a year) and charges imposed for subsequent switches, or
 incur a specific charge for each and every switch

For example, a policyholder 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.
In times of volatile stock market, he may want to switch all his investment in equity fund
to a cash fund in order to protect the capital value if he things the stock market will
crash.
 TRADITIONAL LIFE MOCK EXAM 1

Direction: Choose the best answer. Indicate your answer on an answer sheet by writing
the letter.

1. Both endowment and term life policies provide that

a. No cash value is available to the policy owner during the term of the policy
b. Renewal and conversion privileges are available
c. A benefit will be paid at the end of the period of coverage if the person is
then alive
d. Insurance protection will be limited to a specified period

2. Indicate which of the following is not a function of an application for life

insurance policy.

a. To give details pertaining to non-forfeiture options

b. To furnish information on which the contract of life insurance may be
written
c. To furnish initial information as to insurability
d. To convey to the company the desire of the applicant to obtain insurance

3. A father has his present life insurance payable to his estate and because he has
now retired he wants to pass the policy on to his son who will assume the premium
payments. Which of the following will he have to appoint his son to achieve his
desire and protect the son from Estate Tax Liability?

a. Irrevocable primary beneficiary

b. Absolute assignee
c. Irrevocable secondary beneficiary
d. Revocable primary beneficiary

4. A policy where an irrevocable beneficiary has been designated the insured,

without the beneficiary’s permission, can

a. Avail of a non-forfeiture option

b. Discontinue premium payments
c. Borrow minimal cash loan
d. Alter the dividend option now in effect
5. What are the basic settlement options?

a. Policy loan, guaranteed insurability

b. Cash surrender value, automatic premium loan
c. Fixed amount, fixed period, life income, interest on deposit
d. Double indemnity, total and permanent disability waiver

6. An insurance company generally has the right to rescind a life insurance policy
if

a. Company discovers at any time that the policy owner was actually a minor
at the time of application
b. Insured person intentionally kills himself during the suicide exclusion
period specified in the policy
c. Insured person is killed in military action during the contestable period of
the policy
d. Company discovers during the contestable period that the application
contains a material statement.

7. Which of the following is the least important reason for requiring that insurance
agents be licensed?

a. To establish and maintain high professional and ethical standards

b. To protect the public
c. To give the government adequate control over the conduct of agents
d. To provide additional income to the government through license fees

8. In the event that a policy owner elects the paid-up insurance option

a. The premiums stop and the policy continues for the full face amount
until age 65
b. The insurance continues at a reduced amount and with a reduced premium
c. The policy will automatically terminate
d. The premiums cease and protection continues with a reduced amount of
Coverage

9. The company will allow a policy change from a higher premium to a lower
premium provided the insured

a. Buys a new plan altogether

b. Presents satisfactory evidence of insurability
c. Momentarily assigns the policy to the company
d. Obtains written consent from his or her spouse
10. A policy which permits the policyholder to vary the level of premiums, the sum
insured and has its cash values dependent upon the investment performance and
the level of premium paid is known as __________ policy

a. Participating whole life policy

b. Participating endowment
c. Universal life
d. None of the above

11. Which of the following statements about “ Disability Waiver of Premium Rider”
is false?

a. Disability must occur before a stated date

b. The insured has to die while disabled
c. There is a waiting period
d. It has to be attached to a life insurance policy

12. In most life insurance applications, the largest amount of information requested
is data which

a. Identifies the applicant

b. Describes the type of insurance applied for
c. Relates to the insurability of the applicant
d. Describes the desired benefits and mode of payment

13. Paid-up additions

a. Affect both cash and loan value of the policy

b. Don’t affect the cash value of the policy
c. Don’t affect the loan or cash value of the policy
d. Only affect the cash value of the policy

14. The total life coverage of a permanent basic policy can be greatly increased
through the use of

a. An accidental death benefit rider

b. An interim term rider
c. A supplemental term rider
d. None of the above

15. Life insurance companies make use of the laws of probability in order to

a. Estimate future death rates among members of a given group

b. Predict when an individual insured will die
c. Develop statistics of past deaths among the general population
d. Determine the experienced death rate among the insured persons
16. In the case of renewable term insurance, the policy owner may

a. Renew the coverage based on a higher premium

b. Change the life insured at renewal date
c. Renew providing the insurance company agrees to continue coverage
d. Renew at the same premium for further period of years

17. A man applied for a Ps. 20,000 whole life policy and paid the full initial premium
to the soliciting agent. The agent issued a binding receipt. Under such a receipt,
the insurance company

a. Offers permanent insurance coverage effective as of the date of the

application
b. Promises that the insurance coverage will become effective as of the date
the application is approved
c. Guarantees the policy will be issued as applied for
d. Immediately provides interim insurance that remains in effect until the
policy is issued or the application is declined

18. Endowment life insurance and term life insurance are similar in that both plans

a. Build up cash value rapidly in the early policy years

b. Provide for payment of the face amount if the insured is alive at the end
of the specified period
c. Provide life insurance protection for only the period of time specified in
the policy contract
d. Contain provisions for automatic continuation of the insurance protection
at the end of a specified period

19. An agent who determines a prospect’s complete financial requirements

preparatory to offering him a policy using the correct selling approach knows as

a. Counselor selling
b. Total needs selling
c. Planned selling
d. Multiple products selling

20. Name the provision in a permanent life insurance policy under which premiums
are discontinued, full insurance will be maintained for a specified period:

a. Extended term insurance

b. Paid-up insurance additions
c. Life income option pension
d. Reduced paid-up insurance
21. Notwithstanding various possible legal impediments, if the owner of an
endowment at age 65 policy tells you that the maturity of the policy he wants to
provide his church with a monthly donation for as long as the church exists.
which option do you recommend?

a. Fixed income option

b. Periodic annuity option
c. Interest option
d. Life annuity option

22. The extent of medical evidence required is determined by

a. The age of the applicant and the proposed sum to be insured

b. Occupation of the applicant
c. Financial condition of the applicant
d. Date of the last medical examination

23. The conservation of a life insurance policy is dependent on all the following
except

a. The level of first year commission

b. Agent’s service oriented attitude
c. Pressure selling
d. The use of effective needs selling

24. All of the following are sources of information to an insurance company

pertaining to the insurability of an applicant except

a. The applicant’s personal appearance

b. Medical examination report
c. Agent’s inspection report
d. Government tax records

25. If the applicant for life insurance fails to disclose or misrepresents material fact,
the contract is

a. Valid if the insurer issues a policy which is delivered to the applicant

b. Void from the beginning
c. Voidable by the insurer if it has been in force less than 2 years
d. Valid unless the insurer can prove fraud
26. The settlement options provision may provide all of the following except:

a. Payment of the proceeds for the life of the insured

b. Payment of the proceeds over a fixed period
c. Payments of the proceeds in fixed amounts until exhausted
d. Proceeds held by the company, with interest payable to the beneficiary
on request

27. Non-forfeiture provisions are included in whole life and endowment policies to
assure the policyowner that certain minimum policy benefits shall remain with
him even under certain changed conditions. Non-forfeiture values guarantee to
the policyowner that

a. No death claim will be denied for any misstatement on the application

b. Any guaranteed policy values will belong to the policy owner even if
premium payments are discounted
c. The face amount of the policy will remain the same even if the insured’s
health becomes impaired
d. The premium on the policy will remain the same even when another
beneficiary is added to the policy

28. Purchasing a continuous-premium, whole life policy rather than a limited

payment, whole life policy gives the policyowner the advantage of

a. Concentration of premium payments during the period of highest

Earnings
b. Liberal risk selection procedures
c. More insurance protection for the same annual premiums outlay
d. More rapid accumulation of cash values

29. In certain situations a company may file interpleader actions with a Court of Law
This remedy is used to

a. Determine if the cause of the insured’s death was an excluded risk

b. Decide conflicting claims on the same insurance proceeds
c. Resolve the question of insurable interest
d. Recommend the best settlement options for the beneficiary If the interest
on a policy loan is not paid at the policy anniversary the insurance

30. Which of the following statement is false?

a. The cash value of a whole life policy builds up at a slower rate than for a
20 year endowment
b. The cash value in a permanent policy is guaranteed by the company
c. The cash value of an endowment builds up faster than that for a limited
pay life policy of the same duration
d. Because of its very short duration the cash value of a yearly renewable
term policy grows very fast
31. Which of the following does not have a legitimate insurable interest?

a. An individual on the life of his mistress

b. An individual on his own life
c. An individual on the life of his spouse
d. A finance company on the life of its borrower

32. The basic coverage provided by the life insurance policies may be supplemented
by a separate provision that provides coverage for accidental amounts or of a
different nature. Collectively these provisions are known as

a. riders
b. deposit privileges
c. dividends
d. assignment

33. Which of the following statements regarding insurance premiums is false?

a. Cash is required for all premiums paid in the grace period

b. A premium is the legal consideration needed to affectuate a life insurance
policy
c. The grace period is usually 31 days
d. Premiums which are paid quarterly or semi-annually are higher than those
paid annually

34. A non-forfeiture option would ordinarily be selected at the time a policyowner

a. Renews a term life policy

b. Converts a term policy to a whole life policy
c. Chooses a mode of settlement for the life proceeds
d. Discontinues premium payments for a whole life or endowment policy

35. If the interest on a policy loan is not paid at the policy anniversary the insurance
company may
a. Demand full settlement of the loan
b. Terminate the contract
c. Refuse to grant future additional loan
d. Increase the present loan by the interest

36. The incontestability clause

a. Gives the company the right to rescind a policy at any time
b. Permits the company to pay claims within 2 years
c. Makes it necessary for the beneficiary to present proof of death in the
event of a death claim
d. Prevents the company from denying a claim after the policy has been in
force for 2 years
37. The insured named a primary and secondary revocable beneficiary for Ps. 20,000
policy. Which of the following is correct?

a. The designation of a contingent beneficiary is subject to the primary

beneficiary’s approval
b. The insured can add a third beneficiary at any time
c. Any policy loan assignment will require the primary beneficiary’s
signature
d. Upon the insured’s death the primary and secondary beneficiaries shall
each receive Ps. 10,000

38. When you bought an insurance policy on your wife’s life, you were 27 and
she was 26, but you stated that you were 26 and she was 27. Five years later
your wife died. The insurer will pay

a. Slightly less than the face amount

b. The face amount
c. The face amount adjusted for misstatement of age
d. The sum of the premium paid

39. If the interest on a policy loan is not paid at the policy anniversary the insurance
company may

a. Increase the present loan by the interest

b. Terminate the contract
c. Refuse to grant future additional loan
d. Demand full settlement of the loan

40. A yearly renewable term life insurance policy generally specifies that

a. The policyowner may renew the policy only once

b. Premiums shall increase every time the policy is renewed
c. Evidence of insurability shall be required every renewal
d. Cash values will increase for as long as the policy is in force
Direction: Write T if the statement is TRUE and F if the statement is FALSE.

1. In a case where the premium has not been paid and the cash values has been
exhausted, the policy can still avail of the grace period.

2. According to the law of large numbers, events which happen seemingly by chance
will actually be bound to follow a predictable pattern, if enough such happenings
are observed.

3. Anti-selection occurs when persons in poor health wish to buy insurance.

4. A policy is still in force for the full face amount and will remain in force for a
further period of four years and 118 days, without the payment of any premiums
has availed of paid up insurance option.

5. In the case of misstatement of age, the amount of insurance is adjusted to the

amount which the premium paid at the correct age would have purchased.

6. A policy that provides guaranteed cash values plus extra annual distributions and
pays the insured after a specified time is known as a participating endowment.

7. In a group insurance it is assumed that every member of the group is insurable,

provided that every member of the group is working a minimum number of
(usually 50 hours) each week.

8. An endowment at age 65 policy with premium payable for a limited period of 20

years pays the full amount after 20 years.

9. In most life insurance applications, the largest amount of information requested is

data which identifies the applicant.

10. A policy is not rendered void by reason of misstatement of the assured’s death.
MOCK 1 ANSWER KEY

Multiple choice: True or False

1. d. 1. F
2. a. 2. T
3. b. 3. T
4. b. 4. F
5. c. 5. T
6. a. 6. T
7. d. 7. F
8. d. 8. F
9. b. 9. F
10. c. 10. T
11. b.
12. c.
13. c.
14. c.
15. a.
16. a
17. d.
18. c.
19. b.
20. a.
21. c.
22. a.
23. c.
24. d.
25. d.
26. d.
27. b.
28. c.
29. b.
30. d.
31. a.
32. a.
33. a.
34. d.
35. d.
36. d.
37. b.
38. c.
39. a.
40. b.
 VARIABLE LIFE LICENSING MOCK EXAM (Set D)

NAME: _____________________________________________
BRANCH: ___________________________________________
SCORE: _____________________________________________

Instructions: Please encircle the correct answer.

1. Variable life insurance policy owners may make withdrawals in terms of ___________.
a. Number of units or fixed monetary amount through cancellation of units
b. Number of units of fixed monetary through reduction of the life cover sum assured
c. Fixed monetary amount only through reduction of the life cover sum assured
d. Number of units through cancellation of units

2. Which of the following statements about flexibility features of variable life policies is false?
a. Policyholders may request for a partial withdrawal of the policy and the withdrawal amount will be
met by cashing the units at the bid price.
b. Policyholders can take loans against their variable life up to the entire withdrawal value of their
policies
c. Policyholders have the flexibility of switching from one fund to another provided it satisfies the
company’s switching criteria
d. Policyholders have the flexibility of increasing or decreasing their premiums for regular premium
variable life policies

3. The investment returns under variable life insurance policy _______________

I. Are not guaranteed
II. Are assured
III. Are linked to the performance to of the investment fund managed by the life insurance company
IV. Fluctuate according to the rise and fall of market prices

a. I, II and III
b. I, II and IV
c. I, III and IV
d. II, III and IV

4. Which of the following statements is TRUE?

I. The policy value of variable life policies is determined by the offer price at the time of valuation
II. The policy value of endowment policies is the cash value plus any accumulated dividends less any
outstanding loans due at the time of the surrender
III. The life company needs to maintain a separate account for variable life policies distinct from the general
account

a. I & II
b. I, II & III
c. I & III
d. II & III

5. Which of the following statements is FALSE?

a. Rebating is to offer a prospect a special inducement to purchase a policy
b. Twisting is a specific form of misrepresentation
c. Misrepresentation is a specific form of twisting
d. Switching is a facility allowing the policyholders to switch to another variable life funds offered by
the company
6. Which of the following statements about variable life policies is TRUE?
I. Offer price is used to determine the number of units to be credited to the account
II. The margin between the bid and offer price is used to cover the managements cost of the policy
III. The policy value is calculated based on the bid price of units allocated into the policy

a. I, II & III
b. I & II
c. I & III
d. II & III

7. What is the most suitable investment instrument for an investor who is interested in protecting his principal
and receiving a steady stream of income?
a. Equities
b. Warrants
c. Variable life policies
d. Fixed income securities

8. What are the disadvantages of investing in common shares?

I. Dividends are paid more than fixed rates
II. Investors are exposed to market and specific risks
III. Shares can become worthless if company becomes insolvent

a. I & II
b. I& III
c. II & III
d. I, II & III

9. Which of the following statements about the difference between variable life policies and endowment policies
are FALSE?
I. The policy values of variable life policies directly reflect the performance of the fund of the life company
II. The premiums and benefits of the endowment policies are described at the inception of the policy
whereas variable life are flexible as the are account driven
III. The benefits and risks of variable life and endowment policies directly accrue to the policyholders

a. I & II
b. I, II & III
c. I & III
d. II & III

10. Which of the following statements about twisting is FALSE?

a. Twisting is a special form of misrepresentation
b. It refers to an agents including a policyholder to discontinue policy with another company without disclosing
the disadvantage of doing so
c. It includes misleading or incomplete comparison of policies
d. It refers to an agent offering a prospect a special inducement to purchase a policy

11. Mr. Juan dela Cruz is currently earning Php 30,000.00 per month. He is 35 years old and he has a reasonable
amount of savings. He has a moderate level of risk tolerance. What kind of policy would you recommend for
him to buy?
a. Participating Endowment c. Participating whole life
b. Variable life policies d. Annuities
12. What are the benefits available when investing in variable life funds?
I. The variable life funds offer policyholders an access to pooled or diversified portfolios
II. The variable life policyholders can vary his premium payments, take premium holidays, add single
premium top – ups and change the level of the sum assured easily
III. The variable life policyholder can have access to a pool of qualified and trained professional fund
managers

a. I & II
b. I & III
c. I, II & III
d. II & III

13. Rank the following in terms of their liquidity, from the least liquid to the most liquid:
I. Short term securities
II. Property
III. Cash
IV. Equities

a. IV, II, III, I

b. III, I, IV, II
c. II, I, IV, III
d. II, IV, I, III

14. A unit trust is ____________________

a. Established by a trust deed which enables a trustee to hold the pool of money and assets in trust in
behalf of the investor
b. A close-end fund and does not have to dispose off if the large number investors sell their shares
c. One whereby the investor buys units in the trust itself and not share in the company
d. An organization registered under the SECURITY EXCHANGE COMMISSION (SEC) which usually
invests in a wide range of equities and other investment

15. Under variable life insurance policies ______________________

I. There is no guaranteed minimum sum assured for the purpose of declaring dividends
II. There is no guaranteed minimum sum assured as a level of life insurance protection
III. Each of the policy owner’s premium will be used to purchase units the number of which is dependent on
the selling price of each unit
IV. Purchase of units can only be made from the variable life fund itself, which will then create new units and
add investment monies to the value of the fund

a. I & IV
b. II & IV
c. III & IV
d. II &III
16. The benefits of investing in variable life funds include ___________________
I. Policy owners have access to pooled or diversified portfolios of investment
II. Policy owners can easily change the level of the premium payments as the product design of variable life
policies have clear structures which cater separately for investment and insurance protection
III. Policy owners can gain access to variable life funds managed by professional investment managers with
proven track records
IV. Policy owners can buy a variable life insurance policy only with a high initial investment

a. I, II & IV c. I, II & III

b. I, III, & IV d. II, III & IV
17. Which of the following BEST describes the policy benefits of variable life policies?
a. The policy benefits are payable only on death or disability
b. The policy benefits will depend on the long – term performance of the life company.
c. The policy benefits are directly linked to the investment performance of the underlying assets
d. The policy benefits are guaranteed

18. Why is it important that the customer must understand the sales proposal in full?
a. Because the insurer does not guarantee any return
b. Because the impact of changes in investment condition on variable life policy is borne solely by the
customer.
c. Because the agent may give the wrong recommendations
d. Because the policyholder expects higher returns

19. Which of the following statements about rebating are TRUE?

I. Rebating is prohibited under the Insurance Code
II. Rebating deals with offering the prospect a special inducement to purchase a policy
III. Rebating will enhance the sales performance and uphold the prestige of an agent.

a. I & II
b. I & III
c. II & III

20. Which one of the following statements is FALSE?

a. Variable life insurance policies offer investors policies with values and
indirectly linked to the investment performance of the life company
b. Life company will carry out a valuation of its funds yearly and any surplus may be allocated to
participating policyholder as cash dividends
c. Both Whole Life and Endowment policies can be used as an investment media with benefits that
become payable at a future date
d. The investment element of Variable life policies varies according to underlying assets of the portfolio

21. Which of the following statements about option top – up under variable life insurance is false?
a. Policy owners may buy additional units of the variable life fund and these units will be allocated to new
variable life insurance policies
b. Further premiums at time of the top – up will be used in full, after deducting charges for top – ups, to
purchase additional units of the variable life funds
c. Top – up policy, the policy owner pays further single premium at the time of the top – up
d. Policy owners are normally allowed to top – up their policies at any time, subject to a minimum amount

22. The characteristics of a variable life insurance include ________________:

I. Its withdrawal value and protection benefits are determined by the investment performance of the
underlying assets.
II. Its protection costs are generally met by implicit charges
III. Its commission and company expenses are met by a variety of explicit charges with normally 6
months notice given by the life companies prior to any change
IV. Its withdrawal value is normally the value of units allocated to the policy owner calculated at the
bid price

a. I, II & III
b. II, III & IV
c. I, II & IV
d. I, III & IV
23. Which of the following statements about single premium variable life policies are TRUE?
I. There is no fixed term in a single premium variable life policy and therefore, they are technically
whole life insurance
II. Top – ups or single premium injections are allowed in these plans
III. Policyholders have the flexibility of varying the level cover

a. I, II & III
b. II & III
c. I & II
d. I & III

24. Investing in bonds offer the following EXCEPT

a. Must be issued with a minimum death benefit
b. Must be issued with a maximum withdrawal value
c. It allows the investor a chance for capital preservation
d. It enables the investor an opportunity for capital appreciation

25. Which of the following statements about variable life policies are TRUE?
I. The withdrawal value is not guaranteed
II. The volatility of the returns depends on the investment strategy of the fund
III. The variable life policyholder has direct control over the investment decisions of the variable life fund
a. I, II & III
b. I & II
c. I & III
d. II & III

26. Single premium variable life insurance policy:

a. Must be issued with a minimum death benefit
b. Must be issued with a maximum withdrawal value
c. Has no death benefit
d. Has no withdrawal value

27. Which of the following statements about characteristics of variable life policies are TRUE?
I. Variable policies generally have a longer exposure to equity investment than with participating and
other traditional policies
II. The protection costs are generally met by implicit charges, which vary with age and level of cover
III. The commissions and company expenses are met by a variety of explicit charges, some of which are
variable

a. I, II III
b. I & II
c. II & III
d. I & III

28. Which of the following statements about benefits in variable life fund is FALSE?
a. The fund provides a highly diversified portfolio, thus, lowering the risk of investment
b. The fund ensures definite high yield for an investor since it is managed by professionals who are well –
versed in the management of risk of investment portfolios
c. The fund relieves the investor from the hassle of administering his / her investment
d. The fund enables small investors to participate in a pool of diversified portfolio in which he / she, with a
low investment capital, is likely to have acceded to
29. The flexibility benefit of investing in variable life funds include _____________:

I. Policy owners can easily change the level of sum assured and switch their investment between funds
II. Policy owners can easily take premium holidays and add single premium to Top – ups
III . Variable life insurance policies offer the potential for higher returns
IV . Traditional participating policies aim to produce a steady return by smoothing out market fluctuation
a. All of the above
b. I, II & III
c. I, II & IV
d. I, III & IV

30. The fundamental differences between traditional participating life insurance policies and variable life
insurance policies include _____________.
I. Variable life insurance policies are less likely to offer more choices in terms of the type of investment
funds
II. The investment elements of variable life insurance policies is made known to the policy owner at the
outset and is invested in a separately identifiable fund which is made up of units of investment
III. Variable life insurance policies offer the potential for higher returns
IV. Traditional participating policies aim to produce a steady return by smoothing out market fluctuation
a. I, III & IV
b. II, III, IV
c. I, II, III
d. I, II & IV

31. The switching facility under variable life insurance policies is a very useful _____
a. For the purpose of profit planning by the life policies
b. For the purpose of assets planning by the trustee
c. For the purpose of sales planning by the fund managers
d. For the purpose of financial planning by the policy owners

32. The following statement about surrender value under traditional participating life insurance products are
TRUE?
a. Cash value is paid when yearly renewable term insurance policy is surrendered
b. When a participating insurance policy is surrendered, the surrender value is calculated by multiplying
the bid price with the number of units
c. The amount of surrender value is usually higher than the amount under non – participating policies and
it varies with the age of the assured, being lower at older ages
d. In the case of participating policies, the net cash surrender value includes the surrender value of the paid
– up addition up to the date of surrender

33. Which one of the following statements about risks of investing in variable life funds is TRUE?
a. Policy owners who are risk averse should buy life insurance policies with high equity investment
b. Investment in variable life funds which are fully invested in units of equity bonds are not suitable for
policy owners who can tolerate the risks of short term fluctuation in their cash value
c. Policy owners who invest in variable life funds with high equity investment face higher risk but can
expect to achieve higher return than the traditional life insurance product over the long term
d. Policy owners who are risk averse should not purchase life insurance policies with high protection
and guaranteed cash and maturity values
34. What should be the withdrawal values after a year?

Offer Price = Php. 16.00

Bid-Offer Spread = 4.5%
Number of units bought = 25,000
Policy Fee = 1,800
Admin and Mortality Charge = 8,750
Top-up Fee = 700
Admin for Top-up = 2000

Sum assured is 190% of single premium or the value of units, whichever is higher.

ASSUMPTIONS:
1. Charges and fees are deducted after the single premium has been invested into the account.
2. The growth rate of the unit price and bid-offer spread is maintained at 8% and 4.5% respectively.

a. Php. 432,000.00
b. Php. 420,069.20
c. Php. 401,107.58
d. Php. 412,500.00

35. The protection cost under a variable life insurance policy ___________________.
I. Are met by flat initial charges for regular premium plans
II. Are generally covered by cancellation of units in the fund
III. Are generally met by explicit charges stipulated openly in the policy terms
IV. Vary with age of policy owner and level of cover

a. I, II, & III

b. I, II, & IV
c. I, III & IV
d. II, III, & IV

36. Which of the following statements about diversification in portfolio management is FALSE?
a. A diversified portfolio provides greater security to an investor having to sacrifice return for the
portfolio.
b. Diversification can completely eliminate the risk of investing in stocks in a portfolio.
c. Diversification can involve purchasing different types of stocks and investing stocks in different
countries
d. Diversification helps to spread the portfolio risk by investing in different categories of investment
in a portfolio

37. What are the advantages of investing in preferred shares?

I. It gives shareholders the right to a fixed dividend
II. Has the priority over company assets during a dissolution
III. They enjoy benefit of capital appreciation

a. I, II, & III

b. I & II
c. I & III
d. II & III
38. With traditional participating life insurance products, the allocations to policy owners in the form of
dividends ________________________:
I. Are not directly linked to the company’s investment performance
II. Have already been smoothened by the life company
III. Do not have the highs and lows of investment return as in good investments years of life
company
IV. Are not fixed at the inception of the policy, but are greatly dependent on the investment
performance of the company.

a. I, II, & III

b. I, II & IV
c. I, III, & IV
d. II, III, & IV

39. The objective of satisfying customers need profitably can be achieved by and agent through
I. The giving of freebies to the customers
II. Extensive investment training by the company
III. The use of sales plan, where sales goals, strategies, and objectives are coordinated with the
market analysis, segmentation and training
IV. The giving of monetary assistance and discount to the customers

a. I, & III
b. II, & III
c. II, & IV
d. II, III, & IV

40. Which of the statements is true about CASH?

a. It has a high yield potential
b. Amount invested in cash depends on size of the cash flow requirement
c. Investment in cash increase when there is a bull run in the stock market
d. Investment in cash decrease when interest rates rise

41. Under a regular premium variable whole life plan _______________________

I. Premium top-ups and holidays, subject to the company’s administrative rules are usually
allowed
II. Life protection is the main objective of the plan with investment as the nominal purpose
III. Withdrawals after the payment of a few years premium are usually allowed
IV. A single premium contribution is made to the policy which uses the premium to purchase
units in a variable life fund to provide a certain level of life cover

a. II, III & IV

b. I, III & IV
c. I, II, & IV
d. I, II, & III

42. Which of the following statements about investment objectives is false?

a. People invest money in fixed deposits to produce high and guaranteed returns
b. People invest money to enhance a comfortable standard of living
c. People invest money to provide funds for higher education for their children
d. Investment in commodities has no regular income
43. Which of the following is / are the main characteristic (s) of variable life policies?
I. The policies can be used for investment, as a source of regular savings and protection
II. The withdrawal values and protection benefits are determined by the investment
III. The net cash values of the policies are the gross cash values shown in the policy that includes
dividends up to the date of surrender less and indebtedness including interest

a. II
b. I
c. I, II, & III
d. I, & II

44. Risk can be classified into two particular categories in relation to investment. They include________:
I. The risk of not losing some or all of the person’s initial investment
II. The risk of rate of return on the investment not matching up to the individual’s expectation
III. The risk of rate of return on the investment matching up to the individual’s expectation
IV. The risk of losing some or all of a person’s initial investment

a. I & III
b. I & II
c. III & IV
d. II & IV

45. The duties of the trustee of unit trust do not include:

a. Managing the portfolio of investment and administering the buying and selling of shares in
the unit trust itself
b. Ensuring that the fund manager adhere to the provision of the trust deeds
c. Acting generally to protect the unit-holders
d. Holding the pool of money and assets in trust in behalf of the investors

46. Policy fee payable by variable life insurance policy owner is to cover__________________
a. The handling charges by professional investment managers
b. The price of each unit bought under the variable life insurance policy
c. The mortality costs of the variable life insurance policy
d. The administrative expenses of setting up the variable life insurance policy

47. The selling price under a variable life insurance policy is:
a. The price at which units under the policy are bought back by the life insurance company
b. The price at which units under the policy are offered for sale by the life company
c. Also known as the bid price
d. A fixed amount throughout the life of the policy

48. Diversification in investment involves___________________:

a. Putting all the funds under management into one category of investment
b. Spreading the risk of investment by not putting the fund into several categories of investment
c. Reducing the risks of investment by putting one fund under management into several categories
of investment
d. Reducing the risks of investment by putting all one’s eggs in one basket
49. Variable life funds can be invested in any financial instruments including cash funds, bond funds, equity
funds, property funds, specialized funds, and diversified funds. Equity funds______:
a. Invest in shares of stocks and the magnitude of the change in unit prices will only depend on the
quantity of the equities held
b. Invest in shares of stocks and during market recession, such as assets are usually the last to
depreciate
c. Invest in shares of stocks which are inherently of lower risk in nature and the prices of stocks are
stable
d. Invest in shares of stocks and investors who buy such assets usually aim for capital appreciation

50. Which of the following statements describe the differences between variable life products and participating
products?
I. Variable life products allow policyholders to vary the premium payments unlike
participating products.
II. Variable life products can take the form of whole life or endowment policies with
Participating products.
III. Variable life products allow policyholders to pay future single premiums from time
to time to add more units to his account unlike participating products.

a. I, II, and III

b. I
c. I and III
d. II and III

51. Assuming no movement in the prices and charges / fees are deducted after the single premium has been
Invested into the account, how much will the policyholder lose if he surrenders the policy now?

Bid price = Ps. 13.00

Bid-offer spread = 4%
Single premium = Ps. 450,000
Policy fee = Ps. 1,800
Admin and Mortality charge = 3%

Sum assured is 200% of single premium or the value of the units, whichever is higher

a. Ps. 43,400.90
b. Ps. 33,246.78
c. Ps. 22,500.00
d. Ps. 15,299.96

52. Which of the following statements BEST describes “variable life” policies?

a. It is a fixed premium policy with returns that will not vary with the underlying value of
investments.
b. It is a fixed premium policy with returns that will vary with the underlying value of
investments.
c. It is a flexible premium policy with returns that will not vary with the underlying value
of investments.
d. It is a flexible premium policy with returns that will vary with the underlying value of
investments.
53. Which of the following factors contribute to the specific risk of an investment:

I. Rate of corporate taxes

II. Fraud by senior management
III. Financial leverage of the company

a. I and II
b. II and III
c. I and III
d. I, II and III

54. Investing in bonds offers the following advantages EXCEPT

a. It offers protection to the principal and guaranteed steady stream of income

b. It is a place of temporary refuge when the investor foresees that the market outlook
is uncertain
c. It allows the investor a chance for capital preservation
d. It enables the investor an opportunity for capital appreciation

55. Rank the following investment instruments in terms of their level of risks, from the least risky to the
most risky.

I. cash and deposit

II. derivatives
III. a well diversified investment portfolio of a company
IV. stock options

a. I, IV, III & II

b. I, III, IV & II
c. I, IV, II, & III
d. I, II, III & IV

56. In risk-return profile of cash funds, bond funds, balanced funds, managed funds and equity funds,
a risk-return graph will show that _____________

I. Higher return normally comes with lower risk

II. Higher return normally comes with higher risk
III. At the top end of the graph are the equity funds
IV. The relatively risk-less cash funds sit at the bottom end of the graph

a. I, II, & III

b. II, III, & IV
c. I, II & IV
d. I, III, & IV
57. Which of the following statements are TRUE?

I. The policy value of variable life policies is determined by the offer price at the time of
valuation.
II. The policy value of endowment policies is the cash value plus any accumulated dividends
less any outstanding loans due at the time of surrender.
III. The life company needs to maintain a separate account for variable life policies distinct
From the general account.

a. I & II
b. I, II, & III
c. I & III
d. II & III

58. Which of the following information is NOT required to be disclosed to policyholders of variable
life policies?

a. The net withdrawal value as of the statement date.

b. The premiums received and charges levied during the period
c. The basis and frequency for valuing the assets.
d. Number and value of units held at the beginning of the period; bought and sold during the
period; and held at the end of the period.
Answer Key:

1. D 51. B
2. B 52. D
3. C 53. B
4. D 54. D
5. C 55. A
6. D 56. B
7. D 57. D
8. C 58. A
9. D
10. D
11. C
12. A
13. C
14. A
15. C
16. C
17. C
18. B
19. A
20. A
21. A
22. D
23. C
24. D
25. B
26. A
27. D
28. B
29. B
30. B
31. D
32. C
33. C
34. C
35. D
36. B
37. A
38. A
39. B
40. B
41. D
42. A
43. D
44. D
45. A
46. D
47. B
48. C
49. D
50. A